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The Tax Law Weekly By Taxmann
 

The Tax Law Weekly By Taxmann

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Get all the information about tax law weekly . Taxmann is a leading legal publisher of India. Taxmann is specialize in taxation and corporate law.

Get all the information about tax law weekly . Taxmann is a leading legal publisher of India. Taxmann is specialize in taxation and corporate law.

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    The Tax Law Weekly By Taxmann The Tax Law Weekly By Taxmann Document Transcript

    • VOLUME 205 ISSUE 3I w w w . t a x m a n n . c o m Price : ` 100 MODE OF CITATION [2012] 205 TAXMAN...(...) ISSN 0972-8198 VOL.205ISSUE3MARCH10,2012nn T H E T A X L A W W E E K L Y TOTAL NO. OF PAGES INCLUDING COVER 164 Log on to www.taxmann.com FOR FULL DETAILS FOR THE WEEK OF MARCH 10 - MARCH 16, 2012 RELEASED ON MARCH 10 Cash credit Section 80-IB deduction Capital gains Search and seizure • • • • • Entire share capital cannot be added to assessee's income under section 68 only because some of shareholders did not respond to notices issued to them Deduction under section 80-IB has to be worked out from date of commencement of commercial production in industrial undertaking and not from date of grant of licence to start business operations Where subject-matter of transfer was business undertaking as a whole and said undertaking consisted not only of tangible items but other intangibles transaction involved a slump sale under section 50B Payment made by assessee to canteen owner on sale of a cinema hall to vacate said premises would be set-off against sale consideration for computation of capital gains Benefit of period of 60 days in terms of proviso to Explanation to section 153B for completing assessment under section 153A can be availed by Assessing Officer any number of times whenever situation for it occurs [61-94]MAGAZINE[9-14]STATUTES [219-322]TAX REPORTS e-Journal Soft copies/electronically downloadable version of is also available Exemption under section 10(46) to Competition Commission of India and National Skill Development Corporation 10 Search and seizure Fees for technical services Repairs Method of accounting Income-tax (Appellate Tribunal) Amendment Rules, 2012 12 Club membership Interest free loan Royalty n n n n n n n If required, search and seizure can continue for days but at same time due regard to human dignity and value cannot be ignored (Patna) 232 Subscription amount paid by a company for obtaining corporate membership in a club is revenue expenditure (Kar.) 250 Payment made by Indian company to British group company for availing general business support services is in nature of 'fees for technical services' (AAR - New Delhi) 288 Interest on interest-free loan availed by assessee from a company in which she was a director, could not be treated as her deemed income under section 2(24)(iv) (Punj. & Har.) 303 Cost of repair/reconstruction of tenanted premises is revenue in nature and allowable as deduction under section 30(a)(i) (Bom.) 309 Payment received by applicant, an Australian company, from its Indian distributor for sale of applicant's software product in India is royalty (AAR - New Delhi) 320 Assessing Officer cannot disregard method of accounting for lease followed by assessee on basis of Guidelines of ICAI (Delhi) 257 from taxmann.com 20 LATEST ORDERS
    • BREAKING NEWS IX CIT v. Tyco Electronics Tools India (P.) Ltd. [2012] 18 taxmann.com 329 (Karnataka) Profit for purpose of deduction under section 10A should be allowed without setting off of unabsorbed loss and depreciation - [SECTION 10A, READ WITH SECTION 72, OF THE INCOME-TAX ACT, 1961 - FREE TRADE ZONE] [ASSESSMENT YEARS 2001-02 AND 2002-03] [IN FAVOUR OF ASSESSEE] Link Line Enterprises v. Asstt. CIT [2012] 18 taxmann.com 332 (Kerala) Order of Chief Commissioner granting waiver of interest in ignorance of conditions of notification issued under section 119(2)(a) would be rectifiable under section 154 - [SECTION 154, READ WITH SECTION 119, OF THE INCOME-TAX ACT, 1961 - RECTIFICATION OF MISTAKES - APPARENT FROM RECORDS] [ASSESSMENT YEARS 1989- 90 TO 1995-96] [IN FAVOUR OF REVENUE] Mohanlal Punamchand (HUF) v. ITO [2012] 18 taxmann.com 336 (Karnataka) Validity of addition under section 68 vis-a-vis amount credited in books of account by assessee on sale of diamonds and gold ornaments - [SECTION 68 OF THE INCOME-TAX ACT, 1961 - CASH CREDITS] [ASSESSMENT YEAR 1998-99] [MATTER REMANDED] CIT v. Nilchem Capital Ltd. [2012] 18 taxmann.com 350 (Gujarat) Entire share capital cannot be added to assessee’s income under section 68 only because some of shareholders did not respond to notices issued to them FROM www.taxmann.com For Full Text of Orders/Judgments log on to www.taxmann.com TAXMAN MARCH 10 - MARCH 16, 2012 1
    • X BREAKING NEWS - [SECTION 68 OF THE INCOME-TAX ACT, 1961 - CASH CREDITS] [ASSESSMENT YEAR 1996-97] [IN FAVOUR OF ASSESSEE] Sterilite Industries (India) Ltd. v. Asstt. CIT [2012] 18 taxmann.com 351 (Madras) Deduction under section 80-IB has to be worked out from date of com- mencement of commercial production in industrial undertaking and not from date of grant of licence to start business operations - [SECTION 80-IB OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - PROFITS AND GAINS FROM INDUSTRIAL UNDERTAK- INGS OTHER THAN INFRASTRUCTURE DEVELOPMENT UNDERTAKINGS] [ASSESSMENT YEARS 2002-03 TO 2004-05] [IN FAVOUR OF ASSESSEE] Director of Income-tax v. Society for Development Alternatives [2012] 18 taxmann.com 364 (Delhi) Where assessee carrying on charitable work received grants for specific purposes from certain agencies, these grants could not be considered volun- tary contribution as per section 12 - [SECTION 12 OF THE INCOME-TAX ACT, 1961 - CHARITABLE OR RELIGIOUS TRUST - VOLUNTARY CONTRIBUTIONS] [IN FAVOUR OF ASSESSEE] CIT v. Luwa India Ltd. [2012] 18 taxmann.com 365 (Karnataka) Royalty paid for know-how and technology granted to assessee as licence for ‘use’ only is allowable - [SECTION 37(1) OF THE INCOME-TAX ACT, 1961 - BUSINESS EXPENDITURE - ALLOWABILITY OF] [ASSESSMENT YEAR 1997-98] [IN FAVOUR OF ASSESSEE] CIT v. Polychem Ltd. [2012] 18 taxmann.com 366 (Bombay) Where subject-matter of transfer was business undertaking as a whole and said undertaking consisted not only of tangible items but other intangibles transaction involved slump sale under section 50B -[SECTION50BOFTHEINCOME- TAXMAN MARCH 10 - MARCH 16, 2012 2
    • BREAKING NEWS XI TAX ACT, 1961 - CAPITAL GAINS - SLUMP SALE, COST OF ACQUISITION IN CASE OF] [ASSESSMENT YEAR 1994-95] [IN FAVOUR OF ASSESSEE] Anand Education Society v. DGIT (Exemptions) [2012] 18 taxmann.com 374 (Delhi) While deciding application for grant of approval under section 10(23C)(vi), prescribed authority has to keep in mind principles laid down by Supreme Court in case of American Hotel & Lodging Association, Educational Institute v. CBDT [2008] 301 ITR 86/170 Taxman 306 -[SECTION 10(23C) OF THE INCOME-TAX ACT, 1961 - CHARITABLE/RELIGIOUS INSTITUTIONS] [ASSESSMENT YEAR 2008-09 ONWARDS] [MATTER REMANDED] DIT v. Aparna Ashram [2012] 19 taxmann.com 11 (Delhi) Wheremembersofanassociationofpersonsdidnothaveanyrightorshare in income or assets of said association either on date of its formation or at any time thereafter, association of persons was not liable to wealth-tax under provisions of section 21AA - [SECTION 21AA READ WITH SECTION 3, OF THE WEALTH- TAX ACT, 1957 - ASSESSMENT - WHEN ASSETS ARE HELD BY CERTAIN ASSOCIATION OF PERSONS] [ASSESSMENT YEARS 1988-89 AND 1989-90] [IN FAVOUR OF ASSESSEE] CIT v. Eagle Theatres [2012] 19 taxmann.com 7 (Delhi) Payment made by assessee to canteen owner on sale of a cinema hall to vacate said premises would be set-off against sale consideration for compu- tation of capital gains - [SECTION 48 OF THE INCOME-TAX ACT, 1961 - CAPITAL GAINS - COMPUTATION OF] [ASSESSMENT YEAR 2007-08] [IN FAVOUR OF ASSESSEE] CIT v. Ulike Promoters (P.) Ltd. [2012] 19 taxmann.com 8 (Delhi) Benefit of period of 60 days in terms of proviso to Explanation to section 153B for completing assessment under section 153A can be availed by TAXMAN MARCH 10 - MARCH 16, 2012 3
    • XII BREAKING NEWS Assessing Officer any number of times whenever situation for it occurs - [SECTION 153B, READ WITH SECTION 142, OF THE INCOME-TAX ACT, 1961 ASSESSMENT IN CASE OF SEARCH - TIME-LIMIT FOR COMPLETION OF ASSESSMENT] [ASSESSMENT YEARS 1998- 99 TO 2001-02] [IN FAVOUR OF REVENUE] CIT v. Sambhav Media Ltd. [2012] 19 taxmann.com 12 (Gujarat) Dismissing of appeal of revenue by Tribunal on ground of low tax effect not justified where notional tax effect exceeded monetary limit prescribed by Board - [SECTION 268A OF THE INCOME-TAX ACT, 1961 - APPEALS - FILING OF APPEALS OR APPLICATION FOR REFERENCE BY INCOME-TAX AUTHORITY] [ASSESSMENT YEAR 2004-05] [MATTER REMANDED] CIT v. Bangalore Leather & Leather Crafts Ltd. [2012] 19 taxmann.com 21 (Karnataka) Where to tide over financial crisis, assessee received excess cash in several instalments less than Rs. 20000 each from sister concern for which only it was manufacturing, such excess cash cannot be treated as loan under section 269SS - [SECTION 269SS OF THE INCOME-TAX ACT, 1961 - DEPOSITS - MODE OF TAKING/ACCEPTING] [ASSESSMENT YEAR 1997-98] [IN FAVOUR OF ASSESSEE] Pramod Mittal v. CIT [2012] 19 taxmann.com 24 (Delhi) In view of provisions of section 78(2), loss suffered by an erstwhile partner- ship firm in which assessee was a partner, could not be set off against his individual income - [SECTION 78 OF THE INCOME-TAX ACT, 1961 - LOSSES - CARRY FORWARD AND SET OFF OF, IN CASE OF CHANGE IN CONSTITUTION OF FIRM OR ON SUCCESSION] [ASSESSMENT YEAR 2005-06] [IN FAVOUR OF REVENUE] Vikas Kalra v. CIT [2012] 19 taxmann.com 25 (SC) Sale value less face value of DEPB would be profit on transfer of DEPB and would fall under section 28(iiid) for purposes of section 80HHC - [SECTION TAXMAN MARCH 10 - MARCH 16, 2012 4
    • BREAKING NEWS XIII 80HHC, READ WITH SECTION 28(iiid), OF THE INCOME-TAX ACT, 1961 - DEDUCTIONS - EXPORTERS] [ASSESSMENT YEARS 2001-02 AND 2004-05] [IN FAVOUR OF ASSESSEE] CIT v. Kamdhenu Steel & Alloys Ltd. [2012] 19 taxmann.com 26 (Delhi) Once assessee has prima facie discharged its burden of proving identity of shareholders, genuineness of transaction and creditworthiness of sharehold- ers, revenue cannot invoke section 68 without any additional material to support such a move - [SECTION 68 OF THE INCOME-TAX ACT, 1961 - CASH CREDITS] [ASSESSMENT YEAR 2004-05] [IN FAVOUR OF ASSESSEE] CWT v. Sohna Forge (P.) Ltd. [2012] 19 taxmann.com 29 (Delhi) Property used in business, would be exempt from wealth-tax -[SECTION 2(ea) OF THE WEALTH-TAX ACT, 1957 - ASSETS] [IN FAVOUR OF ASSESSEE] Manohar Dairy & Restaurant v. ITO [2012] 19 taxmann.com 30 (Madhya Pradesh) Rejection of books of account in case of incorrect and incomplete details regarding stock, cash sales, production yield, etc., is justified - [SECTION 145 OF THE INCOME-TAX ACT, 1961 - METHOD OF ACCOUNTING - REJECTION OF ACCOUNTS] [ASSESSMENT YEAR 2006-07] [IN FAVOUR OF REVENUE] CIT v. Mulberry Silk International Ltd. [2012] 19 taxmann.com 31 (Karnataka) Amount of share capital contributed by sister concern of assessee could not betreatedasassessee’sundisclosedincomeundersection68whenassessee’s sister concern had accepted to have contributed said amount - [SECTION 68 OF THE INCOME-TAX ACT, 1961 - CASH CREDIT] [BLOCK PERIOD 1989-90 TO 1999-2000] [IN FAVOUR OF ASSESSEE] TAXMAN MARCH 10 - MARCH 16, 2012 5
    • Contents A-1 COntents STATUTES NOTIFICATIONS - Section 10(46) of the Income-tax Act, 1961 - Exemptions - Statutory Body/Authority/ Board/Commission - Notified body or authority - Competition Commission of India 10 - Section 10(46) of the Income-tax Act, 1961 - Exemptions - Statutory Body/Authority/ Board/Commission - Notified body or authority - National Skill Development Corporation 10 RULES/AMENDMENT RULES - Income-tax (Appellate Tribunal) Amendment Rules, 2012 - Amendment in rules 2, 4A, 9, 26 & 34A; deletion of proviso to rule 35A and substitution of words ‘Income Tax Officer’ and “Appellate Assistant Commissioner” 12 TAX REPORTS TABLE OF CASES Airport Authority of India v. CIT (Delhi)(FB)(Mag.) 84 CTCI Overseas Corporation Ltd., In re (AAR - New Delhi) 297 Citrix Systems Asia Pacific Pty. Ltd., In re (AAR - New Delhi) 320 CIT v. Century Flour Mills Ltd. (Mad.)(Mag.) 93 CIT v. Duroflex Coir Industries Ltd. (Ker.)(Mag.) 75 CIT v. Gokuldas Exports (Kar.)(Mag.) 77 CIT v. Hotel Hilltop (Raj.)(Mag.) 91 CIT v. Hotline Electronics Ltd. (Delhi) 245 CIT v. Infosys Technologies Ltd. (Kar.) 250 CIT v. Madhu Gupta (Punj. & Har.) 303 CIT v. Modipon Ltd. (No. 1) (Delhi)(Mag.) 89 CIT v. Modipon Ltd. (No. 2) (Delhi)(Mag.) 79 CIT v. Talathi and Panthaky Associated (P.) Ltd. (Bom.) 309 CIT v. Tidel Park Ltd. (Mad.)(Mag.) 71 CIT v. Virtual Soft Systems Ltd. (Delhi) 257 CIT v. Wipro Finance Ltd. (Kar.) 317 CCIT v. State of Bihar Through The Chief Secretary (Patna) 232 Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) 273 Indian Additives Ltd. v. Dy. CIT (Mad.)(Mag.) 72 Minda HUF Ltd. v. Union of India (Delhi)(Mag.) 81 SDB Cisco (India) Ltd. v. Asstt. CIT (Mad.)(Mag.) 70 Shell India Markets (P.) Ltd., In re (AAR - New Delhi) 288 TAXMAN MARCH 10 - MARCH 16, 2012 7
    • A-2 Contents SUBJECT INDEX Business disallowance Certain deductions to be allowed only on actual payment - Assessment year 1989-90 - Whether an assessee is entitled to claim deduction on account of excise duty paid in advance as business expenditure - Held, yes - Whether, therefore, revenue’s objection that it was only on removal of goods that amount credited to personal ledger account could be claimed as deductible under section 43B, could not be accepted - Held, yes - CIT v. Modipon Ltd. (No. 2) (Delhi)(Mag.) 79 Business expenditure Allowability of - Assessment year 1999-2000 - Whether amount paid by assessee-company towards sub- scription for obtaining corporate membership in club was allowable as revenue expendi- ture - Held, yes - CIT v. Infosys Technologies Ltd. (Kar.) 250 - Assessment year 1999-2000 - Assessee-company made provision for post sale customer service and claimed same as expenditure - Assessing Officer disallowed claim of assessee as actual expenses had not been incurred by assessee during relevant assessment year - However, on appeal, Tribunal allowed assessee’s claim - It was found that Supreme Court in case of Rotork Controls India (P.) Ltd. v.CIT [2009] 314 ITR 62/180 Taxman 422 had laid down conditions which are required to be satisfied for making claim in respect of post sale customer service and had laid down principles relating to same - Benefit of said decision ofSupremeCourtwasnotavailabletoTribunalondatewhenitpassedimpugnedorderand Tribunal had only considered past experience and expenses incurred in previous year, on basis of which claim was made - Whether matter should be remanded to Tribunal to pass fresh orders in accordance with law laid down in Rotork Controls India (P.) Ltd.’s case (supra) - Held, yes - CIT v. Infosys Technologies Ltd. (Kar.) 250 - Assessment year 2003-04 - Assessee claimed royalty payment as revenue expenditure which, Assessing Officer observed, was allowable as capital expenditure - Assessing Officer initiated reassessment under section 147 - It was found that nature of expenditure had already been discussed during original assessment - Whether since Assessing Officer had not verified facts, and there was no specific denial of fact that during course of original assessment proceedings, assessee had filed reply before Assessing Officer on whether or not payment of royalty were revenue expenditure in nature, it was to be held that there was only change of opinion subsequently and, hence, reassessment proceedings were not valid - Held, yes - Minda HUF Ltd. v. Union of India (Delhi)(Mag.) 81 - Assessment years 1996-97 onwards - Assessee-authority, engaged in management of certain airports and allied services, had been making provisions for incurring expenditure towards removal of illegal encroachments in and around security area of airports and towards rehabilitation of encroachers - Assessing Officer disallowed said provision holding that expenditure, if any incurred, was of capital nature - Whether expenditure so incurred was to facilitate smooth functioning of assessee’s business, i.e., in relation to carrying on business in a profitable manner, and, therefore, it was revenue in nature - Held, yes - Whether, however, deduction was to be allowed on actual payment basis only - Held, yes - Airport Authority of India v. CIT (Delhi)(FB)(Mag.) 84 Year in which deductible - Assessment year 2004-05 - During relevant assessment year, assessee claimed certain expenses as business expenditure - Assessing Officer was of view that a part of expenses claimed related to prior period and as assessee-company was following mercantile system of accounting, said expenses should have been claimed in previous year - On appeal before Tribunal, assessee’s case was that those expenses were not booked earlier due to non- receipt of details and information thereof on time which was beyond its control - It was TAXMAN MARCH 10 - MARCH 16, 2012 8
    • Contents A-3 further submitted that as per accounting policy followed by assessee, such expenses were booked in year in which they were settled for payment - Tribunal having gone into details of each and every such expense, recorded a finding of fact that all those expenses were settled during relevant year - Accordingly, Tribunal allowed assessee’s claim - Whether on facts,nosubstantialquestionoflawarosefromTribunal’sorderand,thus,revenue’sappeal was to be dismissed - Held, yes - CIT v. Modipon Ltd. (No. 1) (Delhi)(Mag.) 89 Capital gains Chargeable as - Assessment year 1995-96 - Assessee-firm, by making a book entry on 29-3-1995 allowed its partners to withdraw individual properties contributed by them and, thereafter, firm was converted into joint stock company on 3-4-1995 - Assessing Officer held that transaction would amount to transfer of capital assets which would attract capital gain under section 45(4) - Commissioner(Appeals) upheld order of Assessing Officer - However, on second appeal, Tribunal, relying upon decision rendered by Tribunal in Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.), held that there was no transfer of capital asset and, therefore, provisions of section 45(4) would not be attracted - Whether facts in Unity Care and Health Services case were entirely different from one in instant case and, therefore, Tribunal was not at all justified in relying upon said decision -Held, yes - Whether sincequestionastowhethertherewastransferofimmovablepropertywhichwouldattract capital gain under section 45(4) was a pure question of fact and same was to be decided by Tribunal, matter was to be remitted to Tribunal for fresh disposal in accordance with law - Held, yes - CIT v. Gokuldas Exports (Kar.)(Mag.) 77 Circulars & Notifications - Circular No. 621, dated 19-12-1991 321 Deductions Profits and gains from export of computer software - Assessment year 1999-2000 - Whether exchange rate variation gain has to be excluded from total turnover and export turnover for computation of deduction under section 80HHE - Held, no - CIT v. Infosys Technologies Ltd. (Kar.) 250 Profits and gains from hotel or industrial undertakings, etc., in backward areas - Whether deductions under section 80HH and section 80-I have to be granted with reference to gross total income arrived at after allowing deduction under section 35(2) - Held, yes - CIT v. Duroflex Coir Industries Ltd. (Ker.)(Mag.) 75 Profits and gains from industrial undertakings other than infrastructure development undertakings - Whether assessee, engaged in manufacture and selling of additives on commission basis, was not entitled to deduction under section 80-IB in respect of service income and commission because those incomes were not derived from activity of industrial undertak- ing - Held, yes - Indian Additives Ltd. v. Dy. CIT (Mad.)(Mag.) 72 Deemed dividend - Assessee-firm had received certain amount as an advance from a company under an agreement to handover management of firm’s hotel to said company - Partners of assessee- firm were also shareholders in said company - Assessing Officer treated said amount received by assessee-firm as deemed dividend under section 2(22)(e) in hands of assessee and assessed same to tax - Whether it was not assessee-firm which was shown to be shareholder of company but in fact it was its partners who were holding more than requisite amount of shareholding in company and were having requisite interest in firm - Held, yes - Whether, therefore, aforesaid amount received by assessee would not be deemed dividend in hands of assessee-firm, rather it would obviously be deemed dividend in hands of individuals (partners), on whose behalf, or on whose individual benefit, being TAXMAN MARCH 10 - MARCH 16, 2012 9
    • A-4 Contents such shareholders, amount was paid by company to concern -Held, yes -CITv. Hotel Hilltop (Raj.)(Mag.) 91 Depreciation Allowance/rate of - Assessment year 1998-99 - There was a search and on basis of material found during search assessment was made for block period - Said block assessment order was now pending for consideration in appeal before Commissioner (Appeals) - In regular assessment for assessment year 1998-99, assessee had claimed depreciation in respect of plant and machinery, which had been leased out by assessee - Assessing Officer as well as Commis- sioner (Appeals) rejected assessee’s claim - However, Tribunal held that claim now made was for year 1997-98, which was beyond block period; that depreciation had been claimed in regular assessment and, thus disallowance of depreciation for relevant assessment year was erroneous - Whether Tribunal could not have jumped into conclusion that deprecia- tion which was now sought for was beyond period of search as even according to assessee year of acquisition was 1997-98 and in absence of any material to show date of acquisition of property and fact that said acquisition was made beyond block period - Held, yes - Whether, therefore, order of Tribunal could not be sustained - Held, yes - Whether since block assessment order is pending for consideration before first appellate authority, matter regarding claim of depreciation on leased assets should be remanded to first appellate authority - Held, yes - Whether contention as to whether acquisition of leased asset in respect of which depreciation was claimed for assessment year 1998-99 would be covered in block assessment or should be in regular assessment was kept open to be urged before first appellate authority as assessee had to produce relevant material in that behalf - Held, yes - CIT v. Wipro Finance Ltd. (Kar.) 317 High Court, appeal to - Whether when Court is satisfied that case involves not only the substantial question of law formulated, but also other substantial question of law not formulated by it, it can hear such questions on reasons to be recorded - Held, yes - Indian Additives Ltd. v. Dy. CIT (Mad.)(Mag.) 72 Income Concept of real income - Assessment years 1996-97 onwards - Whether if income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a hypothetical income which is not materialized - Held, yes - Assessee-authority had been providing space at airports managed by it to various Government agencies like Customs, Immigration, Meteorological Department, Post Office, Police Agencies, etc., for performance of their duties - No payment was made by those Government agencies for space occupied by them - However, on advice of CAG assessee had been raising proforma invoices - Assessing Officer treated amount of those invoices to be income of assessee on ground that assessee was following mercantile system of accounting - Whether on application of ‘real income’ theory no income had accrued to assessee in respect of Government agencies, like Police, Customs, etc., who had never paid any amount to assessee - Held, yes - Airport Authority of India v. CIT (Delhi)(FB)(Mag.) 84 Deemed to accrue or arise in India - Applicant is a Singaporean company - It entered into a contract with IOCL to execute work of ‘Residual offshore construction work at Paradip, in east coast of India Installation of SPM Including anchor chains, floating and subsea hoses’ - For undertaking above opera- tions resources including vessels were mobilized to India - Character of amount payable under contract is linked to nature of work and amount is not lump sum for whole contract - Lump sum amount is fixed only for mobilization and demobilization - Whether parties can enter into a contract which provides for mobilization and demobilization for a separate consideration though they are meant to be utilized in process of installation of SPM buoy TAXMAN MARCH 10 - MARCH 16, 2012 10
    • Contents A-5 and would be taxable in India under section 44BB -Held, yes - Whether if during activities of installation, income in nature of royalty or fees for technical services or interest or of any other nature arises, then such an income has to be assessed under that head of income - Held, yes - Whether payment for mobilization and demobilization relates to use of equipment for undertaking installation work and falls under definition of royalty under article 12.3(b) of DTAA -Held, yes - Whether as installation is ancillary and subsidiary to use of equipment or enjoyment of right for such use, payment for installation would fall under definition of ‘fees for technical services’ as per article 12.4(a) of DTAA - Held, yes - Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) 273 - Applicant is an Indian company having network of retail fuel stations in India - SIPCL is group company of applicant which is incorporated in UK and is in business of providing consultancy services to various group companies - Applicant has entered into Cost Contribution Agreement (CCA) with SIPCL for provision of General Business Support Services (BSS) - Though applicant construes General BSS as management support services of advisory nature, it appears from CCA that applicant receives services in form of general finance advice, taxation advice, legal advice, advice on information technology, media advice, assistance in contract and procurement and assistance in marketing - Whether nature of General BSS, viewed as such, is of consultancy services and since while providing General BSS, SIPCL works closely with employees of applicant and supports/advises them, it is clear that General BSS is made available to applicant - Held, yes - Whether on facts payment made by applicant to SIPCL for availing General BSS under CCA would constitute income in hands of SIPCL and is in nature of fees for technical services within meaning of Article 13.4(c) of DTAC between India and UK -Held, yes - Whether, on facts, such payment can be said to be in nature of royalty within meaning of term inExplanation 2 to clause (vi) of section 9(1) and under Article 13 of DTAC - Held, no - Shell India Markets (P.) Ltd., In re (AAR - New Delhi) 288 - Applicant is a Hong Kong company and is in business of engineering, procurement and construction of petroleum, petro-chemical and power plants - With a view to execute a project awarded by Petronet, it has formed a consortium with CINDA, an Indian company, to develop a terminal for receipt and storage of liquefied natural gas at Kochi - As per terms of contract, applicant is responsible for offshore supplies and services and CINDA is responsible for onshore supplies and services - Whether under section 2(31), consortium of CINDA and applicant forms an Association of Persons (AOP) to carry out the project awarded by Petronet and applicant can be said to have a business connection in India for purpose of application of section 9(1) -Held, yes - Whether however, since applicant has not carriedoutanypartofbusinessrelatingtooffshoresuppliesinIndiainasmuchasright,title, payments, etc., in supplies have passed on to Petronet, which is importing these supplies, outside India, amount received by applicant from Petronet for offshore supplies in terms of aforesaid contract is not taxable in India - Held, yes - CTCI Overseas Corporation Ltd.,In re (AAR - New Delhi) 297 - Applicant is an Australian Company engaged in business of providing software services - It has appointed ‘I’, an Indian company, as non-exclusive distributor for sale of its software products in India - It is contended by applicant that under agreement, software products are purchased by distributor from applicant and sold by distributor - In respect of certain software products such as Citrix XenApp, distributor places order of purchase with applicant and makes payment for same to applicant and thereafter applicant transmits a Key to end-user customer and on receipt of said Key, end-user customer downloads software from applicant’s server - Applicant submits that right acquired by purchaser from sale is only to use copyrighted article and not right to use copyright embedded in software and, therefore, sum received by applicant from distributor from sale of software is nature of sale revenue and cannot be classified as royalty as defined in section 9(1)(vi) and/or under Article 12 of Indo-Australian tax treaty - Whether whenever a software is assigned or licensed for use, there is involved an assignment of right to use embedded copyright in software or a license to use embedded copyright, the intellectual property right in software TAXMAN MARCH 10 - MARCH 16, 2012 11
    • A-6 Contents - Held, yes - Whether, therefore, it is not possible to divorce software from intellectual property right of creator of software embedded therein - Held, yes - Whether, therefore, applicant’s argument that licensing of a software for use by end-use customer, is mere sale of a copyrighted article and does not involve grant of a right to use copyright in software, cannot be accepted -Held, yes - Whether in view of above, it has to be ruled that payments received by applicant from distributor for sale of software product is in nature of royalty within meaning of section 9(1)(vi) -Held, yes - Whether since Article 12.3 of DTAA between India and Australia defining royalties also ropes in payment of consideration for use of a copyright in addition to consideration paid for right to use a copyright, covered by definition in Income-tax Act, payment received by applicant from distributor is to be treated as royalty within meaning of Article 12 - Held, yes - Citrix Systems Asia Pacific Pty. Ltd., In re (AAR - New Delhi) 320 Definition of - Assessment years 1990-91 to 1995-96 - Whether interest on interest-free loans availed by assessee from two companies in which she was a director, could not be treated as her deemed income in terms of section 2(24)(iv) -Held, yes -CITv. Madhu Gupta (Punj. & Har.) 303 Income from house property Deductions - Assessment years 1996-97 to 2000-01 - Whether ICAI is, recognized as body vested with authority to recommend ASs for ultimate prescription by Central Government in consul- tation with National Advisory Committee of Accounting Standards, for presentation of financial statements and fact that opinion of ICAI regarding accounting for lease was expressed in a Guidance Note which had not attained a mandatory status, would not provide a basis to Assessing Officer to disregard books of account of assessee and in effect method of accounting for leases followed by assessee on basis of guideline recommended for adoption by ICAI -Held, yes - Whether lease equalization charge is result of adjustment, which assessee has to make whenever amount put aside towards capital recovery is not equivalent to depreciation claimed by assessee and in effect debits or credits its profit and loss account with a lease equalization charge depending on whether or not depreciation claimed is less or more than capital recovery - Held, yes - Whether thus, lease equalization charges is a method of re-calibrating depreciation claimed by assessee in a given account- ing period and method employed over full term of lease period would result in lease equalization amount being reduced to a naught, as debit and credits in profit and loss account would square off with each other - Held, yes - Whether, therefore, lease equaliza- tion charges debited to profit and loss account could not be disallowed while computing taxable income of assessee - Held, yes - CIT v. Virtual Soft Systems Ltd. (Delhi) 257 Income-tax Act, 1961 - Section 2(22) 91 - Section 2(24) 303 - Section 5 85 - Section 9 273, 288, 297, 320 - Section 24 257 - Section 30 309 - Section 32 317 - Section 36(1)(iii) 93 - Section 37(1) 250, 251, 81, 84, 89 - Section 41(1) 245, 81 - Section 43B 79 TAXMAN MARCH 10 - MARCH 16, 2012 12
    • Contents A-7 - Section 44BB 273 - Section 45 77 - Section 80HH 75 - Section 80HHE 251 - Section 80-IB 72 - Section 115JB 71 - Section 132 232 - Section 145 70 - Section 260A 73 Interest on borrowed capital - Assessment year 1991-92 - Assessee-company entered into an agreement for purchase of land owned jointly by ‘P’, managing director of assessee-company, and also ‘N’ - As per agreement, a sum of Rs. 20 lakhs was given as advance to managing director - Said agreement was renewed year after year - Due to some unavoidable reasons, sale could not be effected - Accordingly, managing director refunded amount of advance received from assessee-company - Assessee’s claim for deduction under section 36(1)(iii) in respect of interest paid on money borrowed was rejected by Assessing Officer holding that assessee had given said amount as advance to managing director - On second appeal, Tribunal held that revenue had not established nexus between borrowed funds and advanced money with managing director - Tribunal accordingly allowed assesee’s claim - Whether since amount was given only for purchase of land and it was for benefit of business, it could not be concluded that payment in question was for non-business purpose -Held, yes - Whether, therefore, Tribunal was justified in allowing assessee’s claim - Held, yes - CIT v. Century Flour Mills Ltd. (Mad.)(Mag.) 93 Method of accounting Change of - Assessment year 1991-92 - Assessee was following cash system of accounting - However, for purpose of preparing annual return for submission to members in Annual General Meeting and for filing necessary returns under Companies Act, 1956, mercantile system was adopted - Took a view that assessee had to compute its income for purpose of Act on accrual basis - Whether, on facts, impugned order passed by Tribunal was to be upheld - Held, yes - SDB Cisco (India) Ltd. v. Asstt. CIT (Mad.)(Mag.) 70 Minimum alternate tax - Assessment year 2002-03 - While computing book profits under section 115JB, assessee- company changed its method of computing depreciation from straight line method to written down value method - There was also a resolution passed by board of directors for changing existing rates of depreciation for purpose of books depreciation - Excess amount of depreciation so calculated was debited in profit and loss account, which was audited, certified and filed with registering authority - Whether so long as compliance in regard to submission of accounts had not suffered any statutory defect, revenue authorities had to accept authenticity of accounts submitted in accordance with provisions of Companies Act, 1956 - Held, yes - Whether therefore, impugned change in method of computing depreciation was to be allowed - Held, yes - CIT v. Tidel Park Ltd. (Mad.)(Mag.) 71 Non-residents Mineral oil, business for prospecting /exploration, etc., in case of - Applicant is a Singapore company - On 23-4-2008, it was awarded a sub-contract by Larsen & Toubro (L&T) to execute work of installation and construction services for Single Point Mooring (SPM) in waters of Mumbai High South field - For undertaking construction work vessels were mobilized to India - Applicant accepts that receipts under contract are taxable TAXMAN MARCH 10 - MARCH 16, 2012 13
    • A-8 Contents under section 44BB, but contends that since its vessels were not in India for more than 183 days, it would not have a PE in India in view of article 5.5 of DTAA and, therefore, liability is attracted under section 44BB - Whether article 5.5 is a deeming provision and its import is such that said article can be attracted even on provision of services simpliciter without presence of an office building in country where services are being provided - Held, yes - Whether since services and facilities being rendered by applicant go beyond installation and include pre-installation services, post-installation services, procurement and transpor- tation, duration of those of services cannot be excluded while calculating duration of provision of services or facilities under article 5.5 - Held, yes - Whether therefore, even if applicant was not mobilizing any vessel, it has a PE in terms of article 5.5 as it has provided services or facilities in connection with exploration, exploitation or extraction of mineral oils for more than 183 days during fiscal year - Held, yes - Whether therefore, income derived by applicant in respect of contract with L&T is taxable in India under section 44BB - Held, yes - Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) 273 Remission or cessation of trading liability - Assessment year 2005-06 - Whether unpaid liabilities cannot be added to assessee’s income under section 41(1) merely because they remained unpaid for a sufficiently long time and it is required of revenue authorities to show that liability to pay creditors has ceased or has been remitted by creditors - Held, yes - CIT v. Hotline Electronics Ltd. (Delhi) 245 - Assessment year 2003-04 - Assessing Officer reopened assessment observing that assessee had, in its computation of income, deducted Rs. 42,73,617 being amount written back credited to profit and loss account and out of said sum assessee had considered only Rs. 32,29,341 as income under section 41(1) while excess deduction of Rs. 10,44,276 had escaped assessment - Assessee had already explained that excess of Rs. 10,44,276 had already been added back in computation of income of two preceding assessment years 2001-02 and 2002-03 - In these years Rs. 5,87,617 and Rs. 17,19,837 were added back as bad and doubtful debts - On other hand, revenue failed to show and establish whether Rs. 10,44,276 was in fact not added back in earlier years - Whether since there was no material and ground to reopen assessment on account of reason in respect of taxability of profit under section 41(1) and reason recorded was a mere suspicion, it had no foundation or prima facie basis - Held, yes - Minda HUF Ltd. v. Union of India (Delhi)(Mag.) 81 Rent, rates, taxes, repairs and insurance for buildings - Assessment year 2003-04 - Assessee-company was carrying on its business in a building takenonrent-BuildingwasdeclaredtobeunsafeforoccupationbyMunicipalCorporation - Consequently, an agreement was entered into between owners, tenant, other occupants and a developer, under which developer was to repair and reconstruct building at its own cost, and, after that certain area was to be handed over to co-owners - Assessee was also given its equivalent portion on condition that it would contribute towards cost incurred on repair and reconstruction - Assessee’s share of cost was arrived at Rs. 1.50 crores; said agreement also provided that there would be no increase in rent payable by assessee - On above facts, Assessing Officer held that assessee had secured rights over portion of building on payment of Rs. 1.50 crores which constituted deemed ownership of building - Accord- ingly, Assessing Officer held expenditure of Rs. 1.50 crores to be capital in nature and disallowed it - Commissioner (Appeals) and Tribunal reversed order of Assessing Officer - Whether by contributing an amount of Rs. 1.50 crores towards re-construction, assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on same rent as before -Held, yes - Whether since there was no acquisition of a capital asset and occupation of assessee continued in character of a tenancy, expenditure of Rs. 1.50 crores could not be regarded as capital in nature but revenue to be allowable by way of deduction - Held, yes CIT v. Talathi and Panthaky Associated (P.) Ltd. (Bom.) 309 Search and seizure - Whether if required, search and seizure can continue for days, but at same time due regard to human dignity and value cannot be ignored - Held, yes - During search conducted at TAXMAN MARCH 10 - MARCH 16, 2012 14
    • Contents A-9 premises of respondent No. 3 there was interrogation carried out for 42 hours commencing at 9.30 a.m. on 8-9-2010 till 3.30 a.m. on 10-9-2010; respondent No. 3 and his family members were made to remain awake when it was time for sleep - Respondent No. 3 made a complaint before Human Rights Commission alleging that during search and seizure operation raiding party committed various acts of omission and commission including violation of his human rights - Commission allowed complaint of respondent and held that respondent/complainant would be entitled to monetary compensation and asked depart- ment to submit its response as to why monetary compensation be not awarded to complainant recoverable from salary of concerned officials of department - Whether since there was no possible justification to continue interrogation and keep respondent No. 3 awake till 3.30 a.m. on second night of search; and since no reason had been assigned as to why interrogations could not have been deferred till morning of next day, order passed by Human Rights Commission as to violation of human rights of respondent No. 3 was to be upheld - Held, yes - Whether however, since no opportunity was given to officials to countenance charge of violation of human rights, in absence of an opportunity to defend themselves against such charge in an enquiry, Commission erred in issuing notice to officials to show cause or respond as to why penalty may not be levied for awarding compensation to complainant - Held, yes - CCIT v. State of Bihar Through The Chief Secretary (Patna) 232 MAGAZINE FEATURES - Non-compete fee receipt - Whether 2003 amendment in section 28(va) is clarificatory// GOPAL NATHANI, Chartered Accountant 61 - Vodafone’s case - No capital punishment for capital investment//DINDYAL DHANDARIA, Chartered Accountant 65 Back years’ volume Rs. 500 per volume for paper back and add Rs. 75 per volume for Hard case binding. Taxman weekly is published on every Saturday.NON-RECEIPT OF PART MUST BE NOTIFIED WITHIN 60 DAYS OF THE DUE DATE. Editor does not necessarily agree with the views expressed in magazine section of Taxman weekly. Material published in this part is the exclusive copyrighted property of Taxman and cannot be reproduced or copied in any form or by any means without written permission of publisher. This publication is sold with the understanding that authors/editors and publishers are not re- sponsiblefortheresultofanyactiontakenonthe basis of this work nor for any error or omission to any person, whether a purchaser of this publica- tion or not. All disputes are subject to jurisdiction of the Delhi High Court. Address your editorial and subscription correspondence to Taxmann Allied Services (P.)Ltd.,59/32,NewRohtakRoad,NewDelhi- 110005 Printed and Published by Amit Bhargava on behalf of Taxmann Allied Services (P.) Ltd. and Printed at Tan Prints (India) Pvt. Ltd., 44 Km. Mile Stone, National Highway, Rohtak Road, Village Rohad, Distt. Jhajjar (Haryana) and Published at 59/32, New Rohtak Road, New Delhi-110 005 Editor : Rakesh Bhargava Phone : 91-11-45562222 Fax : 91-11-45577111 Email:sales@taxmann.com ISSN : 0972-8198 MODE OF CITATION [2012] 205 Taxman...(...) TOTAL PAGES INCLUDING COVER [164] FOUNDER EDITOR U.K. BHARGAVA EDITOR RAKESH BHARGAVA HONY. COORDINATING EDITORS Dr. Ashok Bhargava, Dr. Vinod K. Singhania and Vinay Jain REPORTERS Amit Negi, Indira Bali, Niyati K. Shah, Ram Kumar Mishra, Ranka (J.K.), Sahasranaman (P.B.), Sanjay Bansal, Prabha Murthy (Mrs.), Dilip Shah, Gopi Kishore (J.). Taxman weekly comes in Eight volumes. Annual Subscription : Rs. 5,975 for Eight volumes for the year 2012. Single copy is Rs. 100 only. TAXMAN MARCH 10 - MARCH 16, 2012 15
    • 2012] 9Notification (ix) Investment on built up space for : Rs. 8,26,67,565 Industrial use (Amount in Rupees) (x) Investment on Infrastructure Deve- : Rs. 10,52,24,434 lopment including investment on built up space for industrial use (Amount in Rupees) (xi) Proposed date of commencement of : 30-11-2005 the Industrial Park 2. Necessary approvals, including that for foreign direct investment or non-resident Indian investment by the Foreign Investment Promotion Board or Reserve Bank of India or any authority specified under any law for the time being in force, shall be taken separately as per the policy and procedures in force. 3. The tax benefits under the Act can be availed of only after the number of units indicated in Para 1 (vii) of this Notification, are located in the Industrial Park. 4. M/s. Prasad Technology Park Pvt. Ltd., Bangalore, shall continue to operate the Industrial Park during the period in which the benefits under clause (iii) of sub-section (4) of section 80- IA of the Income-tax Act, 1961 are to be availed. 5. In case the Industrial Park did not commence by 31-3-2006, fresh approval will be required under the Industrial Park Scheme, 2008 subject to the applicability under that Scheme for availing benefits under sub-section 4(iii) of section 80-IA of the Income-tax Act, 1961. 6. The approval will be invalid and M/s. Prasad Technology Park Pvt. Ltd., Bangalore shall be solely responsible for any repercussions of such invalidity, if (i) the application on the basis of which the approval is accorded by the Central Govern- ment contains wrong information/misinformation or some material information has not been provided in it. (ii) it is for the location of the industrial park for which approval has already been accorded in the name of another undertaking. 7. In case M/s. Prasad Technology Park Pvt. Ltd., Bangalore, transfers the operation and maintenance of the industrial park (i.e., transferor undertaking) to another undertaking (i.e., the transferee undertaking), the transferor and transferee shall jointly intimate to the Entrepreneurial Assistance Unit of the Secretariat for Industrial Assistance, Department of Industrial Policy and Promotion, Udyog Bhawan, New Delhi-11 along with a copy of the agreement executed between the transferor and transferee undertaking for the aforesaid transfer. 8. The conditions mentioned in this notification as well as those included in the Industrial Park Scheme, 2002 should be adhered to during the period for which benefits under this scheme are to be availed. The Central Government may withdraw the above approval in case M/s. Prasad Technology Park Pvt. Ltd., Bangalore, fails to comply with any of the conditions. 9. Any amendment of the project plan without the approval of the Central Government or detection in future, or failure on the part of the applicant to disclose any material fact, will invalidate the approval of the industrial park. TAXMAN MARCH 10 - MARCH 16, 2012 17
    • 10 Taxman - Statutes [Vol. 205 NOTIFICATION Section 10(46) of the Income-tax Act, 1961 - Exemptions - Statutory body/ Authority/Board/Commission - Notified body or authority - Competition Commission of India NOTIFICATION NO. 12/2012 [F.NO.142/15/2011-SO (TPL)]/S.O. 344(E), DATED 28-2-2012 In exercise of the powers conferred by clause (46) of section 10 of the Income- tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, the Competition Commission of India, a Commis- sion established under sub-section (1) of section 7 of the Competition Act, 2002 (Act 12 of 2003), in respect of the specified income arising to the said Commis- sion, as follows:- (a) amount received in the form of Government grants; (b) fee received under the Competition Act, 2002; and (c) interest income accrued on Government grants and interest accrued on fee received under the Competition Act, 2002. 2. This Notification shall be applicable for the specified income of the Compe- tition Commission of India for the financial year 2011-12 to financial year 2015- 16. 3. The Notification shall be effective where- (i) the activities and the nature of the specified income of the Competition Commission of India remain unchanged throughout the financial year, and (ii) the Competition Commission of India files return of income in accordance with clause (g) of sub-section (4C) section 139 of the Act. NOTIFICATION Section 10(46) of the Income-tax Act, 1961 - Exemptions - Statutory Body/ Authority/Board/Commission - Notified body or authority - National Skill Development Corporation NOTIFICATION NO. 11/2012 [F.NO.142/15/2011-SO (TPL)]/S.O. 343(E), DATED 28-2-2012 In exercise of the powers conferred by clause (46) of section 10 of the Income- tax Act, 1961 (43 of 1961), the Central Government hereby notifies for the purposes of the said clause, the National Skill Development Corporation, a body constituted by the Central Government, in respect of the specified income arising to the said Corporation, as follows:- TAXMAN MARCH 10 - MARCH 16, 2012 18
    • 2012] 11 (a) long-term or short-term capital gain out of investment in an organisation for skill development; (b) dividend and royalty from skill development venture supported or funded by National Skill Development Corporation; (c) interest on loans to Institutions for skill development; (d) interest earned on fixed deposits with banks; and (e) amount received in the form of Government grants. 2. This Notification shall be applicable for the specified income of the National Skill Development Corporation for the financial year 2011-12 to financial year 2015-16. 3. This notification shall be effective where- (i) the activities and the nature of the specified income of the National Skill Development Corporation remain unchanged throughout the financial year; and (ii) the National Skill Development Corporation files return of income in accordance with clause (g) of sub-section (4C) section 139 of the Act. Notification TAXMAN MARCH 10 - MARCH 16, 2012 19
    • 12 Taxman - Statutes [Vol. 205 RULES/AMENDMENT RULES Income-tax (Appellate Tribunal) Amendment Rules, 2012 - Amendment in rules 2, 4A, 9, 26 & 34A; deletion of proviso to rule 35A and substitution of words ‘Income Tax Officer’ and “Appellate Assistant Commissioner” NOTIFICATION NO. F. 71-AD(AT)/2012, DATED 7-2-2012 In exercise of the powers conferred by sub-section (5) of section 255 of the Income Tax Act, 1961, the Appellate Tribunal hereby makes the following rules further to amend the Income Tax (Appellate Tribunal) Rules, 1963, namely :- Short title and Commencement (1) These rules may be called the Income Tax (Appel- late Tribunal) Amendment Rules, 2012. (2) These rules shall come into force with effect from the date of their publication in the official Gazette. Amendment in Rule 2 Definitions. For the existing Rule 2(ii)(b), the following shall be substituted:- “(b) in relation to an income-tax authority who is a party to any proceedings before the Tribunal - (i) a person duly appointed by the Central Board of Direct Taxes as “authorised representative” to appear, plead and act on behalf of the income- tax department; and (ii) a person duly authorised by the Chief Commis- sioner of Income-tax to appear, plead and act on behalf of the income-tax department.” Amendment in Rule 4A Powers and functions of the Registrar. For the existing Rule 4A(2)(i), the following shall be substituted:- “to receive all appeals, miscellaneous applications, stay petitions as well as other documents including applica- tions for early hearing, transfer of appeals, applications for adjournment;” Amendment in Rule 9 What to accompany memorandum of appeal? In Rule 9, the words “Income Tax Officer” may be substituted by the words “Assessing Officer.” After existing Rule 9, the following shall be inserted as Rule 9A :- “9A (1) In the event of change in the address of the parties to the appeal as provided in column Nos. 10 & 11 of Form No. 36, the appellant should file a revised Form No. 36 duly filled up giving the new address of the party, duly verified in the same manner as required by Rule 47 of the Income Tax Rules, 1962. (2) The revised Form No. 36 shall specify the appeal No. asoriginallyassignedor,intheeventofnon-availability TAXMAN MARCH 10 - MARCH 16, 2012 20
    • 2012] 13 of such No., the date of filing of the appeal shall be mentioned in the covering letter. (3) No cognizance of change of address of the parties shall be taken for any purpose, unless a revised form as per sub-rules (1) and (2) is filed. (4) The address furnished in the revised Form No. 36 shall be deemed to be the address of the parties for the purpose of service of all notices/orders.” Amendment in Rule 26 Continuation of proceedings after the death or insol- vency of a party to the appeal. For the existing Rule 26, the following rule shall be substituted:- “Where an assessee whether he be an appellant or the respondent to an appeal dies or is adjudicated insol- vent or in the case of a company being wound up, the appeal shall not abate and may, if the assessee was the appellant, be continued by, and if he was the respon- dent be continued against, the executor, administrator or other legal representative of the assessee or by or against the assignee, receiver or liquidator, as the case may be: Provided that: (i) The assessee files a revised Form No. 36 duly filled up giving revised name of the party duly verified in the same manner as required by Rule 47 of Income Tax Rules, 1962; (ii) The revised Form No. 36 shall specify the appeal number as originally assigned or, in the event of non-availability of such number on the date of filing the appeal shall be mentioned in the cover- ing letter to enable the Registrar to place fresh Form No. 36 in the original file.” Amendment in Rule 34A Procedure for dealing with applications under section 254(2). For the existing Rule 34A(2), the following shall be substituted:- “Every application made under sub-rule (1) shall be in triplicate and the procedure for filing of appeals in these rules will apply mutatis mutandis to such appli- cations. The Applicant shall also state whether any Miscella- neous Application under section 254(2) was filed ear- lier before the Tribunal against the same order and if so, the fate of such application. Copies of the orders passed by the Tribunal on such applications shall also be filed before the Tribunal in triplicate along with the Miscellaneous Application.” Rules/Amdt. Rules TAXMAN MARCH 10 - MARCH 16, 2012 21
    • 14 Taxman - Statutes [Vol. 205 The existing proviso to Rule 34A(3) is deleted. Deletion of proviso to Rule 35A Procedure for filing and disposal of stay petition. The existing Rule 35A(3) is deleted. Further amendments Wherever the words“Income Tax Officer”exist in the ITAT Rules, the same shall be substituted by the words “Assessing Officer.” Likewise, wherever the words “Appellate Assistant Commissioner” exist in the ITAT Rules, the same be substituted by the words “CIT(Appeals)”. TAXMAN MARCH 10 - MARCH 16, 2012 22
    • 2012] 219 Subsequent to the search proceedings, the respondents-assessees filed revised returns twice surrendering the income brought to tax, during the course of search. After assessment of revised returns, the assessing authority proceeded with the assessment and passed orders in the year 2005. Subsequently penalty proceedings came to be initiated. The Assistant Commissioner of Income Tax rejecting the defence taken by the respondents-assessees proceeded to impose of penalty on all the assessees under Sec. 271(1)(c). 4. Aggrieved by the order of imposing penalty, appeals came to be filed before the Commissioner of Income Tax (Appeals) for the above assessment years and the first appellate authority by common order dated 16.5.2006 held that as the assessees proceeded to declare the entire amount as their income pursuant to search in order to buy peace with the department and for the reasons stated in the order, held levying of penalty was not justified. All the appeals filed by different assessees came to be allowed and penalty order came to be set aside. 5. Aggrieved by the same, the Revenue went in appeal before the Income Tax Appellate Tribunal in ITA Nos. 659-666/B/06. The Tribunal held that penalty in respect of commission paid by the assessees for securing the gifts was leviable. However in respect of the gift amounts, which were found to be the income of the assessees pursuant to the search, the Tribunal upheld the finding of the AppellateCommissionerbyacommonorderdated13.12.2007.Aggrievedbythe said order, the Revenue is before us raising the above substantial questions of law. 6. According to the learned counsel for the Revenue Mr. Sheshachala, once the amount shown as gift received in the original return was found to be incorrect as per material detected in the search and which was undisclosed by the assessee in their return of income, the Assessing Officer was justified in levying penalty under Section 271(1)(c) of the Act. According to the learned counsel, after insertion of Explanation to Section 271(1)(c) of the Act in the light of the judgment of the Apex Court in K.P. Madhusudhanan v. CIT [2001] 251 ITR 99/ 118 Taxman 324, the law relied upon by the Tribunal and the Appellate Authority in CIT v. Sureshchandra Mittal [2001] 251 ITR 9/119 Taxman 433 (SC),CIT v.Suresh Chandra Mittal [2000] 241 ITR 124/[2002] 123 Taxman 1052 (MP) andSir Shadi Lal Sugar & General Mills Ltd. v. CIT [1987] 168 ITR 705/33 Taxman 460A (SC) is not good law. According to Mr. Sheshachala, the appellate authority committed an error by accepting the explanation offered by the assessees that the entire income detected was declared in the revised return, which was factually incorrect. According to the learned counsel, the defence of the respondents-assessees was different from time to time, which is evident from the defence raised before the first appellate authority and the new defence raised by them before the Tribunal. Once theExplanation 5 to Section 271(1)(c) is not to the satisfaction of the Assessing Officer, question of extending the benefit would not arise. Therefore the orders of the Commissioner of Income Tax (Appeals) and, the order of the Tribunal deserves to be set aside confirming the order of the Assessing Officer. CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 23
    • 220 Taxman - Tax Reports [Vol. 205 7. As against this, the learned counsel Mr. Chaitanya appealing for the respon- dents-assessees contends that once statement is recorded while conducting search as provided under sub-section (4) of Section-132 and when all the questions were answered and when the letter dated 26.2.2004 given by all the assessees is referred to in the statement, the object and the purpose with which Explanation-5(2) of Section 271(1)(c) giving immunity to such persons has to be extended and object cannot be frustrated. When perversity in appreciating the material on record by the appellate authorities being not the ground of challenge, the Revenue cannot question the same is his contention. According to him, application of Explanation (5) is not a question of law, which entirely depends on question of fact and the same is dealt with by a final fact finding authority and Revenue cannot agitate the same again and again. According to him, search team having chosen to take the statement in the format or fashion which they have takeni.e. by putting question and answer, it is binding on all the members who have signed confirming that they abide by the same. The questionsandanswersdonotrelatetoanyindividualpersoni.e.Mr.Sridharand all the questions were answered for the entire amount disclosed during the searchrelatingtoentirefamily.TheentireamountdisclosedbyMr.Sridharwas accepted and subjected to tax. Therefore there is no ground available to the appellant-Revenue to challenge the same in the present appeals. 8. In reply, the learned counsel for the Revenue Mr. Sheshachala has taken us through paragraphs 21, 26 and 27 of the order of the Tribunal to contend that derival or origin of undisclosed income explained by one individual Mr. Sridhar could be at the most accepted for himself and it cannot be an explanation or answer in respect of others. Therefore there is non-compliance of Section 132(4) of the Act so far as all other assessees except Mr. Sridhar. He strenuously contends that Explanation 5(2) of Section 271(c) is not applicable to other assessees except Sridhar if no reason is disclosed. The statement of the party relating to the business affair is part of return of income. Till revised returns filed, income was not shown as income, but they were purposely shown as gift. Therefore the appeals deserve to be allowed. 9.Learned counsel for the respondents-assessees in reply further contends that as notice was given to Prakash Tea Agency Group, Mr. Sridhar on behalf of all the persons of group has given the statement on 27.2.2004 after oath being administered to him. Therefore it is as good as explanation on behalf of all the persons pertaining to Prakash Tea Agency group. He further contends that Mr. N. Shashindra, Smt. Vani Shashindra, Mr. Muktha Sridhar have stated that statement given by Mr. V.N. Sridhar was in their absence and they abide by what has been stated by Mr. V.N. Sridhar. Therefore according to him, the statement recorded under section 132(4) of the Act is as good as statement of others and even otherwise letter dated 26.2.2004 has been signed by all the assessees and as such Expln. (5) is applicable to them also. 10. From the material placed before the Court and also the submissions of the learned counsel appearing for the Revenue and the respondents-assessees, two TAXMAN MARCH 10 - MARCH 16, 2012 24
    • 2012] 221 provisions of the Act are relevant for considering the substantial questions of law raised in the above appeals. They are sections-132(4) and 271(1)(c) Expla- nation-(5). It is useful to extract the said provisions here: Section-132: (1) Where the [Director General or Director] or the [Chief Commissioner or Commissioner] [or Additional Director or Additional Commissioner] [or Joint Director or Joint Commissioner] in consequence of information in his possession, has reason to believe that - (a) & (b)** ** ** (c) any person is in possession of any money, bullion, jewellery or other valuable article or thing and such money, bullion, jewellery or other valuable article or thing represents either wholly or partly income or property [which has not been, or would not be, disclosed] for the purposes of the Indian Income-tax Act, 1922 (11 of 1922), or this Act (hereinafter in this section referred to as the undisclosed income or property). (4) The authorised officer may, during the course of the search or seizure, examine on oath any person, who is found to be in possession or control of any books of account,documents,money,bullion,jewelleryorothervaluablearticleorthingand any statement made by such person during such examination may thereafter be used in evidence in any proceeding under the Indian Income tax Act, 1922 (11 of 1922), or under this Act. [Explanation.-For the removal of doubts, it is hereby declared that the examination of any person under this sub-section may be not merely in respect of any books of account, other documents or assets found as a result of the search, but also in respect of all matters relevant for the purposes of any investigation connected with any proceeding under the Indian Income-tax Act, 1922 (11 of 1922), or under this Act.] 271. (1) If the [Assessing] Officer or the [***] [Commissioner (Appeals)] [or the Commissioner] in the course of any proceedings under this Act, is satisfied that any person - (a) & (b)** ** ** (c) has concealed the particulars of his income or [***] furnished inaccurate particulars of such income, (d) ** ** ** he may direct that such person shall pay by way of penalty- [Explanation 5. - Where in the course of a [search initiated under section 132 before the 1st day of June, 2007], the assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing (hereafter in this Explanation referred to as assets) and the assessee claims that such assets have been acquired by him by utilising (wholly or in part) his income - (a) for any previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared therein; or CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 25
    • 222 Taxman - Tax Reports [Vol. 205 (b) for any previous year which is to end on or after the date of the search, then, notwithstanding that such income is declared by him in any return of income furnished on or after the date of the search, he shall, for the purposes of imposition of a penalty under clause (c) of sub-section (1) of this section, be deemed to have concealed the particulars of his income or furnished inaccurate particulars of such income, [unless,- (1) such income is, or the transactions resulting in such income are recorded, - (i) in a case falling under clause (a), before the date of the search; and (ii) in a case falling under clause (b), on or before such date, in the books of account, if any, maintained by him for any source of income or such income is otherwise disclosed to the [Chief Commissioner or Commissioner] before the said date; or (2)he,inthecourseofthesearch,makesastatementundersub-section(4)ofsection 132 that any money, bullion, jewellery or other valuable article or thing found in his possession or under his control, has been acquired out of his income which has not been disclosed so far in his return of income to be furnished before the expiry of time specified in [***] sub-section (1) of section 139, and also specifies in the statement the manner in which such income has been derived and pays the tax, together with interest, if any, in respect of such income.] 11. The department launched action against Prakash Tea Agency group of cases in pursuance of search conducted under Section-132 of the Act between 6.1.2004 and 27.2.2004. The abovementioned respondents-assessees filed re- vised return of income once and again another revised return of income was filed. Some of the assessees had filed returns in their individual capacity and also as members of Hindu Undivided Family. Assessment orders in favour of the above respondents-assessees also came to be passed. Amounts represent credits in the capital account of assessees during the previous year alleged to have been received by way of gifts. During the course of search, it was established that such gifts are not genuine and the assessees agreed to offer the same for tax by treating them as income. As already stated above, additional income also came to be declared by revised returns. 12. During the course of hearing before the Assessing Officer, the main person of Prakash Tea Agency group by name Sri V.N. Sridhar had admitted paying commission for organizing the gifts. Therefore in the returns subsequently filed,theexpenditureinthenatureofcommissiontoanextentof3%inobtaining such gifts was also revealed. Taking into consideration all these facts, assess- ment orders came to be passed and these gifts were treated as undisclosed income of the assessee and it was brought to tax. Quantum proceeding has reached finality and same has been accepted by the assessees. 13. Subsequently, penalty proceedings under Section 271(1)(c) of the Act came to be initiated against the respondents-assessees. Before the authority con- cerned, the assessees denied furnishing of inaccurate particulars or conceal- ment of income and further contended that though the donors of the gifts are all identifiable and available to confirm the gifts, only with a view to buy peace TAXMAN MARCH 10 - MARCH 16, 2012 26
    • 2012] 223 with the department, the same was declared as undisclosed income. According to the representatives of the respondents-assessees, imposition of penalty cannot be automatic as there being no mens rea or guilty mind on the part of the respondents conceal the income. 14. Ultimately rejecting all the contentions, the authority concerned passed an order holding that statements recorded during the course of search reveal that gifts were agreed as not genuine and therefore the income has been offered to tax. It was further opined that the assessee group has neither established the existence of the donors or their creditworthiness. It was also opined that the assessee group has organized non-genuine gifts for the purpose of converting unaccounted income and bringing the same into the books without payment of tax only with an intention of avoiding payment of tax. The authority opined that the material confirms the state of mind, which is guilty of evasion of tax. 15. The respondents-assessees went up in appeal before the Commissioner of Income Tax (Appeals). The respondents-assessees contended that gift amounts were already disclosed to the department in the respective returns filed before the date of search and during the assessment proceedings and with a view to end the proceedings and on the understanding that no penalty will be levied, they agreed for subjecting all the amounts to tax. By placing reliance onSuresh Chandra Mittal case (supra) and also CIT v. Shyamlal M. Soni [2005] 276 ITR 156/144 Taxman 666 (MP), the appellate authority held that no penalty under Section 271(1)(c) could be levied in a case where income returned in revised return is accepted even though revised returns were filed after search and subsequent to inquiries. The material for this conclusion was disclosure of gifts to the department in the returns filed before the date of search and appellate authority accepted the defence that only in order to buy peace and with an understanding that no penalty would be levied, the assessees had agreed to file revised returns. According to the first appellate authority, no enquiries were conducted by the department and it was due to candid admission on the part of the respondents-assessees these gifts were brought to tax as income. The Appellate Authority opined that all the particulars are available in the return and to buy peace, the respondents filed revised returns of income and therefore in the light of the observations made in the above decisions, it held that the imposition of penalty was not justified. 16. Challenging the order of the first appellate authority, the Revenue went in appeal before the Appellate Tribunal. The Appellate Tribunal has gone into all the material facts with reference to several precedents relied upon by both Revenue and respondents-assessees and ultimately opined that unexplained gifts have been found to be recorded in the regular books of account and such gifts were disclosed in the returns filed, therefore Explanation 5(2) to Section- 271(1)(c) is complied with and hence there cannot be imposition of penalty on the gifts. It further opined that commission for arranging gifts was also surrendered in the revised returns and same is subject to penalty as per Explanation (5). CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 27
    • 224 Taxman - Tax Reports [Vol. 205 17. So far as imposition of penalty on the amount surrendered as commission, therespondents-assesseeshavenotchallengedandthesaidfindinghasreached finality. So far as the other finding that no penalty could be imposed on the unexplained gifts in view of surrendering the same in the revised returns which was already recorded in the books of account, the Revenue has come up in these appeals. 18.Explanation-5 to Section-271(1)(c) depends upon the particulars found with the assessee at the time of search under Section-132 of the Act. As a matter of fact, Explanation-5 to sub-section (1) of Section-271 was inserted by amend- ment. This new explanation is a special provision applicable to cases when assessee is found to be the owner of any money, bullion, jewellery or other valuable article or thing revealed in the course of a search under Section-132 of the Act. If the assessee asserts and claims that the abovementioned assets were acquired by him by utilising (wholly or in part) his income for the previous year which has ended before the date of the search, but the return of income for such year has not been furnished before the said date or, where such return has been furnished before the said date, such income has not been declared in the return, the assessee shall be liable for payment of penalty under section 271(1)(c) of the Act and such income is deemed to have been concealed or inaccurately furnished. However the income referred to above if declared by the assessee in any return of income furnished by him, on or after the date of search will not provide any immunity to the assessee unless the conditions indicated in clause-(2) of Explanation-5 are fulfilled. 19. Learned counsel for the Revenue emphasises that in the present case, the conditions in Clause-2 to Explanation-5 of Section 271(1)(c) of the Act are not completely fulfilled. Therefore both the appellate authorities were not justified in setting aside the order of imposition of penalty. 20. Learned counsel for the Revenues relied upon the decision of the Apex Court in the case of K.P. Madhusudhanan (supra) to contend that when the assessee is put to notice under Section-271 of the Act that if he does not prove, in the circumstances stated in the Explanation, that his failure to return his correct income was not due to fraud or neglect, then deemed provision regarding concealing the particulars of his income or furnishing inaccurate particulars of income could be drawn. In the said case. Their Lordships opined that after the introduction of Explanation-5, there is no question of proof of mens rea. He also places reliance on the decision of the Hon’ble Supreme Court in the case ofUnion of India v. Dharamendra Textile Processors [2008] 306 ITR 277/174 Taxman 571 to contend that provisions of Section-11AC inserted with the intention of imposing mandatory penalty on persons who evaded payment of tax cannot be read to contain mens rea as an essential ingredient and there is no discretion with the authority competent to impose penalty to levy penalty below the prescribed minimum. Their Lordships further opined that the object behind enactment of Section 271(1)(c) read with Explanation indicate that the said section has been enacted to provide for a remedy for loss of revenue and TAXMAN MARCH 10 - MARCH 16, 2012 28
    • 2012] 225 penalty under that provision is a civil liability They further opined that wilful concealment is not an essential ingredient for attracting civil liability as is the case in the matter of prosecution under section-276C of the Act. In this context, they proceeded to hold that in the case of Dilip N. Shroff v. Jt. CIT [2007] 161 Taxman 218 (SC) the conceptual and contextual difference between Section 271(1)(c) and section 276-C of the Act was lost sight of. He places reliance on the decision in the case of Ashok Kumar Gupta v. CIT [2006] 287 ITR 376/157 Taxman 339 (Punj. & Har.) to contend that concession given in Explanation-5 to Section 271(1)(c) is meant for the persons who after surrendering the undisclosed income pay the amount of tax along with interest, if any, on such income before the due date and such benefit cannot be extended to an assessee where he comes up with a plea of non-availability of funds for payment of tax on surrendered income. Their Lordships further opined that only circum- stances that could be explained for absolving the payment of penalty are indicated in Explanation-5 itself. He also relies on the decision in the case of P. K. Metrani v.CIT AIR 2007 SC 386 to contend that Section-132 being a complete code by itself, it cannot intrude into any other provisions of the Act. Similarly, other provisions of the Act cannot interfere with the scheme or the working of Section-132 or its provisions. The learned counsel places reliance on this decision to contend that the statement given by Mr. V.N. Sridhar if accepted could be accepted only as a statement given by him and it cannot be held as a valid statement in so far as other members of his family. In that context, learned counsel contends that there has to be strict compliance of Section-132 of the Act. He places reliance on the unreported decision of this Court in the case of CIT v.J. Alexanderin ITRC No. 64/1999 disposed of on 19.6.2008. In this case, the oath was not administered as required under Section-6 of the Oaths Act. Therefore Their Lordships held that the statement of the Officer concerned, which is recorded without administering oath has no evidentiary value and in the eye of law, it is not at all an evidence and hence there is no evidence to conclude that the amount of the fixed deposits belonged to the assessee therein. He also places reliance on another unreported decision of this Court in the case of CIT v. Sunrise Industrial Syndicate in ITRC No. 246/1998 disposed of on 14.2.2005 to contend that if an addition is made and if there is no proper explanation for such addition, it would amount to concealment of income and the authorities under the Act are justified in levying penalty. 21. According to the learned counsel for Revenue Mr. Sheshachala, after the decision in K.P. Madhusudhanan’s case (supra) the Supreme Court has clearly distinguished and has in fact observed that the observations made in the case ofSir Shadi Lal Sugar & General Mills Ltd. (supra) was prior to the introduction ofExplanationtoSection-271oftheAct,thereforethesaiddecisiondonotcome totheaidofassesseeafterintroductionofExplanationtoSection-271oftheAct. From K.P. Madhusudhanan’s case (supra), what we notice is after sirShadi Lal Sugar & General Mills Ltd.'s case (supra), Explanation to Section-271 was introduced and therefore the Revenue was no longer required to prove the CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 29
    • 226 Taxman - Tax Reports [Vol. 205 mens rea of a quasi-criminal offence regarding the intentional or deliberate concealment of the amount. As a matter of fact, the word, ‘deliberately’ is removed from sub-section (c) of Section-271(1). It only says, concealing the particulars of his income or furnishing inaccurate particulars of such income. The assessee would get the immunity from paying the penalty if he is able to explain the causes as stated in clause (1) or (2) of Explanation-5. 22. The respondent’s counsel relied on various decisions so far as Clause-2 of Explanation-5 to Section-271 of the Act. 23. He places reliance on the decision in the case ofCIT v.MishrimalSoni [2007] 289 ITR 77/162 Taxman 53 (Raj.) to contend that expression ‘possession’ used in clause (2) of Explanation 5 to Section 271 is not confined to physical possession, but extends to other type of possession which is capable of being held. It was further held that as long as the assessee comes with a clean breast of his undisclosed income represented by assets found to be in possession of the assessee, he is not deemed to have concealed his income or concealed particu- lars thereof. 24.He also places reliance on the decision in the ofCIT v.E.V.Balashanmugham [2006] 286 ITR 626 (Mad.) to contend that the statements made by the assessee during the course of search under Section-132 of the Act can be taken note of and the explanation offered by the assessee in such statement in the opinion of the officer concerned is acceptable, question of imposing of penalty would not arise. In other words, it means in the opinion of the officer, if the explanation is acceptable, imposition of penalty is not justified. 25. He also places reliance on the decision in the case of CIT v. S.D.V. Chandru [2004] 136 Taxman 537 (Mad.) to contend that the statement of the assessee recorded under Section 132(4) of the Act followed by filing of Returns by the assessee for the earlier assessment year admitting large income and also paying the tax together with interest, such income will get immunised from the levy of penalty. 26. He also places reliance on the decision in the case of CIT v. Radha Kishan Goel [2005] 278 ITR 454/[2006] 152 Taxman 290 (All.). In this case, Revenue contended that though the assessee made the statement recorded under Section 132(4) that unexplained cash and unexplained jewellery were undis- closed income, the manner in which such income was derived has not been disclosed in the statement and therefore immunity under Explanation 5 to Section 271(1)(c) was not applicable. Their Lordships held that in case there is nothing to the contrary in the statement recorded under Section 132(4) of the Act, in the absence of any specific statement about the manner in which such income has been derived, it can be inferred that such undisclosed income was derived from the business which the assessee was carrying on or from other sources. They further opined that much importance should not be attached to the statement about the manner in which such income has been derived. TAXMAN MARCH 10 - MARCH 16, 2012 30
    • 2012] 227 27. He also places reliance on the decision in the case of Gebilal Kanhaialal (HUF) v. Asstt. CIT [2004] 270 ITR 523/[2005] 143 Taxman 42 (Raj.). In this case it was held that when once in the statement under Section 132(4), the assessee has disclosed particulars of concealed income and surrendered it for tax and tax has been paid along with interest, imposition of penalty was not warranted. 28. He places reliance on the decision in the case of CIT v. Mahendra C. Shah [2008] 299 ITR 305/172 Taxman 58 (Guj.). It was held in this case that there is noprescriptionastopointoftimewhentaxhastobepaidquaamountofincome declared in statement made under Section 132(4) of the Act. It was held that it would be sufficient compliance of provision if tax is shown to have been paid before assessment was completed. It was further held that Explanation -2 of Explanation 5 itself specifies payment of tax together with interest, if any indicatingthatLegislaturedidnotstipulateanyspecifiedtimelimitforpayment of tax. Referring to Radha Kishan Goel’s case (supra). Their Lordships pro- ceeded to hold that once income is declared and tax thereon is paid, it would amount to substantial compliance not warranting any denial of benefit under Explanation 5 of Section 271(1)(c) of the Act. 29. He further places reliance on the decision in the case of CIT v. Manmohan Goel [2005] 149 Taxman 578 (All.). In this case, a search was conducted in the residential as well as business premises of the assessee in which cash, jewellery and other valuable articles and things were found and seized and subsequently, assessee declared his income under Section 132(4) and moved application for settlement. Assessment was completed on disclosed income of the assessee and thereafter penalty proceedings were initiated. Held on facts conditions laid down inExplanation 5(2) to Section 271(1)(c) were fulfilled and no penalty was leviable. Their Lordships held that the basic idea or intention behind providing Explanation 5(2) of Section 271(1)(c) is to avoid litigation by the Department and to get the maximum tax at the earliest from the person whose business as well as residential premises are searched. This was also a case of whole group which had made an application for settlement, a little more than the original surrender and far less than the subsequent surrender. In that context, Their Lordships held that imposition of penalty was not justified. 30. He also places reliance on the decision in the case of CIT v. Mahesh Chand Agrawal [2006] 157 Taxman 539 (All.) wherein relying on the earlier decision in Radha Kishan Goel’s case (supra) held that no penalty was leviable. 31. He places reliance on the decision in the case of Sudarshan Silks & Sarees v. CIT [2008] 300 ITR 205/169 Taxman 321 (SC). In this case, Their Lordships held that Tribunal being the final Court of fact, decision of the Tribunal on facts can be gone into by the High Court only if a question has been referred to it which says that findings arrived at by the Tribunal on facts are perverse, in sense that no reasonable person could have taken such a view. 32. A reference is also made to the decision in the case ofDilip N. Shroff (supra) on the aspect of concealment of income and furnishing of inaccurate particu- lars, wherein it is held as under: CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 31
    • 228 Taxman - Tax Reports [Vol. 205 67. ‘Concealment of income’ and ‘furnishing of inaccurate particulars’ are different. Both concealment and furnishing inaccurate particulars refer to deliberate act on the part of the assessee. A mere omission or negligence would not constitute a deliberate act of suppressio veri or suggestio falsi. Although it may not be very accurate or apt but suppressio veri would amount to concealment, suggestio falsi would amount to furnishing of inaccurate particulars. 83. It is of some significance that in the standard proforma used by the Assessing Officer in issuing a notice despite the fact that the same postulates that inappropriate words and paragraphs were to be deleted, but the same had not been done. Thus, the Assessing Officer himself was not sure as to whether he had proceeded on the basis that the assessee had concealed his income or he had furnished inaccurate particulars. Even before us, the learned Additional Solicitor General while placing the order of assessment laid emphasis that he had dealt with both the situations. 84. The impugned order, therefore, suffers from non-application of mind. It was also bound to comply with the principles of natural justice. [See Malabar Industrial Co. Ltd. v. CIT [2000] 2 SCC 718]. 33. He also places reliance on the decision in the case of CIT v. Reliance Petroproducts (P.) Ltd. [2010] 322 ITR 158/189 Taxman 322 (SC) wherein it is held as under: 8. ...... The basic reason why decision in Dilip N. Shroff’s case (supra) was overruled by this Court in Dharamendra Textile Processors’ case (supra), was that according to this Court the effect and difference between section 271(1)(c) and section 276C of the Act was lost sight of in case of Dilip N. Shroff (supra). However, it must be pointed out that in Dharamendra Textile Processors’ case (supra), no fault was found with the reasoning in the decision inDilip N. Shroff’scase (supra), where the Court explained the meaning of the terms “conceal” and “inaccurate”. It was only the ultimate inference in Dilip N. Shroff’s case (supra) to the effect that mens rea was an essential ingredient for the penalty under section 271(1)(c) that the decision in Dilip N. Shroff’s case (supra) was overruled. 34.He also places reliance on the decision in the case ofNew Sorathia Engg. Co. v.CIT [2006] 282 ITR 642/155 Taxman 513 (Guj.) wherein when the order of the authority concerned showed that no clear-cut finding had been reached as to whether penalty under section 271(1)(c) was being levied for concealment of particulars of income by assessee or whether any inaccurate particulars of income had been furnished, order of penalty could not be sustained. 35.According to the learned counsel for the Revenue, clause (2) toExplanation 5 of Section-271(1)(c) can be divided into five parts as mentioned below: 1. He (assessee) in the course of search makes a statement under sub-section (4) of section-132, TAXMAN MARCH 10 - MARCH 16, 2012 32
    • 2012] 229 2. That any money, bullion, jewellery or other valuable article or thing found in his possession or under his control has been acquired out of his income. 3. Which (income) has not been disclosed so far in the return of income to be furnished before the expiry of time specified in sub-section (1) of Section 139. 4. And also specifies in the statement the manner in which such income has been derived. 5. And pays the tax together with interest if any in respect of such income. 36.Learned counsel for the Revenue contends that if tax together with interest, if any in respect of such income is not paid, as stated above, no benefit could be extended. In order to understand what exactly explanation given by the assessee, one has to see 132(4) statement given by the assessee. According to the learned counsel, 132 statement was given by one Mr. V.N. Sridhar is applicable only to him and not to other family members as the said statement does not cover the statement of other family members. 37. On perusal of this statement recorded under section-132(4), we note that oath was administered to the deponent Mr. V.N. Sridhar on 27.2.2004. It is in the formofquestionsandanswers.Theofficerputsaquestiontohiminaparticular way and the deponent gives the answer. The statement, of Mr. V.N. Sridhar dated 27.2.2004 is placed on record. The notice for recording this statement is dated 27.2.2004 wherein it is stated that Mr. V.M. Sridhar was required to personally attend in respect of proceedings in the case of M/s Prakash Tea Agency Group. Question No.4 in the statement pertains to undisclosed income of Sri V.N. Sridhar, his business and his family members. He has given the details not only relating to himself, but also other family members. He also refers to a joint letter dated 26.2.2004 signed by all the family members which was already submitted to the concerned authorities indicating that all the details are already mentioned. He has stated in the statement the manner in which the income was derived i.e. the tea business of the family. He has also disclosed the details of the income were shown in the respective returns and it is offered for taxation in the respective years in the hands of the concerned persons. He also answers the question No.6 saying that the amount shown against M/s Prakash Tea Agency is out of the income of the tea business of the firm and the income shown by him and Mr. Shashindra is the professional income of tea testing and similarly the income received by others is on account of undisclosed income earned by them. 38. Apparently the oath would be administered to the deponent by the officer concerned from the department. It is at the option of the concerned officer such statement would be recorded. If no statement is recorded under section 132(4) of other persons, there is no procedure to compel the officer to record statements of all other persons. Though learned counsel for Revenue contends that individual notices were sent, we do not have such records before us. The very questions and answers under section 132(4) indicate the deponent was CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 33
    • 230 Taxman - Tax Reports [Vol. 205 asked details pertaining not only to himself but also all other family members. It is not the case of the department that other than the statement of Mr. V.N. Sridhar, any other statement was recorded under Section 132(4) and it is in existence. There is only one statement of Mr. V.N. Sridhar recorded under Section 132(4) and endorsed by 3 other assessees. As a matter of fact, Mr. N. Shashindra, Smt. Vani Shashindra and Smt. Muktha Sridhar at the end of the statement of Mr. V.N. Sridhar have also stated that the said statement was given in their presence and they abide by what has been stated by Mr. V.N. Sridhar. During the search proceedings between 6.1.2004 and 27.2.2004, the statement of V.N. Sridhar was recorded. The manner in which the questions were put to this deponent indicates that he was expected to answer for himself and all his family members. It would be at the option of the officer what has to be asked by way of question and it would be at the option of the deponent what should be deposed. If the deponent had made clear that statement was only on his behalf and not for other family members, he would not have made statement explaining the details of others. Once the concerned officer of the department chose to record the statement in the above fashion indicating that Mr. V.N. Sridhar had to answer all the questions on behalf or Prakash Tea Agency Group now they cannot turn round and say the details given in the statement of Mr. V.N. Sridhar under section 132(4) holds good only for Mr. V.N. Sridhar and not for others. It was the concerned officer who recorded this statement who has to explain why he did not choose to record the statement of others. Having chosen to discharge the duty of recording the statement under section 132(4) in the above fashion, now the Revenue cannot find fault with the respondents-assessees contending, it would not bind others. Even otherwise, letter submitted on 26.2.2004 by all the assessees which has been referred to in the statement is signed by all the family members and a reference is made to this letter not at one place but at several places in the statement recorded under section 132(4). 39.It is now well-settled that themens rea regarding concealing and inaccurate particulars need not be established by the department. It is also not in dispute that the immunity from imposing penalty available under two clauses of Explanation (5) can be extended to the respondents - assessees depending upon the facts and circumstances of each case if the explanation offered is to the satisfaction of the officer concerned. This Court can refer to the facts only if the Tribunal on facts has proceeded to give a perverse finding. In the present case, we are not faced with such a situation. The facts have to be referred because of the stand of the Revenue in these appeals contending that the benefit of statement of Mr. V.N. Sridhar cannot be extended to other respondents- assessees. Before concluding the search, a declaration was obtained from this group on 26.2.2004 and surrender of undisclosed income was made vide the statement dated 27.2.2004 recorded under section 132(4) of the Act. The search commenced on 6.1.2004 and the statement under section 132(4) of the Act was obtained. Under these circumstances, naturally the assessee would start think- TAXMAN MARCH 10 - MARCH 16, 2012 34
    • 2012] 231 ing that if a declaration is made under section 132(4) along with the taxes together with interest payable is paid, no penalty would be imposed. The department would also be keen to get declaration under section 132(4) so as to collect tax and avoid litigation. Only with this view, the exception was created in Explanation 5 to Section 271(1)(c) under clauses (1) and (2) to give immunity to assessee from levy of penalty. During the course of search, if the assessee surrendered the income agreeing to pay the tax and interest and if explanation is given to the satisfaction of the officer concerned, assessee would be under the impression that no penalty would be levied which would be subject to explana- tion offered. In the present case, records reveal that the unexplained gifts were treated as income and reference of such gifts is recorded in the regular books of account which were disclosed in the returns filed. As a matter of fact, after surrendering the income, they offered the said income to tax along with interest and in fact they have paid the tax and interest on such income. We also note that apart from surrendering the gifts so received as income, the assessees have surrendered the expenditure incurred in the form of commission for arranging such gifts. This resulted in imposition of penalty on the amount surrendered as commission and the assessees have not challenged the same. 40. In view of the above discussion and reasoning, we are of the opinion that all the amounts referred to as gifts were surrendered by assessees offering to pay tax. Subsequently tax was also paid alongwith interest and the revised returns were filed. In that view of the matter, we are of the opinion the substantial questions have to be answered against the Revenue and in favour of the respondents - assessees. Accordingly, appeals are dismissed. CIT v. Smt. Mukta Sridhar (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 35
    • 232 Taxman - Tax Reports [Vol. 205 [2012] 205 TAXMAN 232/18 taxmann.com 70 (Patna) HIGH COURT OF PATNA Chief Commissioner of Income-tax (CCA) v. State of Bihar Through The Chief Secretary SAMARENDRA PRATAP SINGH, J. CIVIL WRIT JURISDICTION CASE NO. 10707 OF 2011 FEBRUARY 2, 2012 Section 132 of the Income-tax Act, 1961 read with sections 2(d), 12 and 16 of the Protection of Human Rights Act, 1993 - Search and seizure - Whether if required, search and seizure can continue for days, but at same time due regard to human dignity and value cannot be ignored - Held, yes - During search conducted at premises of respondent No. 3 there was interrogation carried out for 42 hours commencing at 9.30 a.m. on 8-9-2010 till 3.30 a.m. on 10-9-2010; respondent No. 3 and his family members were made to remain awake when it was time for sleep - Respondent No. 3 made a complaint before Human Rights Commission alleging that during search and seizure operation raiding party committed various acts of omission and commission including violation of his human rights - Commissionallowedcomplaintofrespondentandheldthatrespondent/complainant would be entitled to monetary compensation and asked department to submit its response as to why monetary compensation be not awarded to complainant recoverable from salary of concerned officials of department - Whether since there was no possible justification to continue interrogation and keep respondent No. 3 awake till 3.30 a.m. on second night of search; and since no reason had been assigned as to why interrogations could not have been deferred till morning of next day, order passed by Human Rights Commission as to violation of human rights of respondent No. 3 was to be upheld - Held, yes - Whether however, since no opportunity was given to officials to countenance charge of violation of human rights, in absence of an opportunity to defend themselves against such charge in an enquiry, Commission erred in issuing notice to officials to show cause or respond as to why penalty may not be levied for awarding compensation to complainant - Held, yes [Partly in favour of assessee] FACTS The Income-tax Department had conducted search operation in premises of respondent No. 3. Respondent No. 3 made a complaint before the State Human Rights Commission alleging that during the search and seizure operation the raiding party committed various acts of omission and commission including TAXMAN MARCH 10 - MARCH 16, 2012 36
    • 2012] 233 violation of his human rights. The HR Commission in its order found that there was continuous interrogation without a break for more than 36 hours com- mencing at 9:30 a.m. on 8-9-2010 and the first break was given only at 3:30 a.m. on 10-9-2010 forcing the complainant/respondent and his family members to remain awake at hours which was meant for sleeping. As per the HR Commis- sion, the continuous interrogation at odd hours in night was a torturous act being violative of basic human rights of an individual. The Commission broadly agreed that the department if need be may conduct such search and seizure operation for days together but then they have to stop the same at proper time and resume again at an appropriate time in the morning. The Commission observed that the search and seizure operation have to be carried out keeping in view the basic human rights of an individual as every individual has inherent human rights which ought not be infringed upon. The HR Commission accordingly, in its order held that respondent/complain- ant would be entitled to monetary compensation and asked the department to submit its response as to why the monetary compensation be not awarded to the complainant recoverable from the salary of the concerned officials of the department. Being aggrieved by the order of HR Commission, the IT authorities preferred instant writ petition on grounds, inter alia, that the HR Commission ought not to have held the concerned officials of the Income-tax guilty of violating human rights without affording an opportunity of hearing them personally under section 6 of the Protection of Human Rights Act, 1993; that the officers had acted in good faith and in discharge of their official duty; that HR Commission erred in holding that the complainant was not given sufficient break as it was not possible for one officer to keep interrogating for 42 hours; that search and seizure manual permitted continuous interrogation. HELD The search and seizure manual of the Income-tax does not prescribe any time limit for search and survey operation and the same may continue for days if required, but it has to be in keeping with the basic human rights and dignity of anindividual.ThepurposeoftheHumanRightsActistogiveeffecttotheprocess of execution of actions of executive and bureaucratic machinery in line of accepted standard of basic human rights which are internationally recognized. The laws and approach to law for its execution must confirm to the charter of human values and dignity. Even a person accused of a serious offence has to be produced before the nearest Magistrate within 24 hours minus the time taken in reaching the Court. There is no possible justification to continue interrogation and keep the respondent No. 3 awake till 3 a.m. on the second night of search and interrogations. No reason has been assigned as to why the interrogations could not have been deferred till the morning of the next day. The officials could have continued with the interrogation on the next day in the morning after allowing respondent No. 3 to retire at an appropriate time in the night. The human rights CCIT v. State of Bihar Through The Chief Secretary (Patna) TAXMAN MARCH 10 - MARCH 16, 2012 37
    • 234 Taxman - Tax Reports [Vol. 205 belong to all of us equally and would apply no less to an intruder of law, as to a law enforcing agency. [Para 18] Even assuming that there were temporary breaks in course of interrogation which continued for 42 hours, it is not in dispute that even on the second night of search and survey on 10-9-2010, the interrogations continued till 3 a.m. and the respondent No. 3 and his family members were made to remain awake when it was time for sleep. No cause has been shown as to why it was necessary to continue the interrogations till deep in the second night of interrogations. In the instant case, the interrogation have continued for 42 hours and undisputedly at the odd hours of second night, which could easily have been avoided and deferred. No reason has been recorded for not deferring the interrogation till morning. [Para 20] The department would consider issuing appropriate instruction in future raids to record the duration of interrogation and breaks. [Para 21] The submissions of the petitioners that if required, the search and seizure can continue for days is agreed with, but at the same time due regard to human dignity and value cannot be ignored. In the instant case, no reason has been assignedastowhyitwasabsolutelyimperativetocontinuewiththeinterrogations at 3 a.m. on 10-9-2010, when search and seizure has commenced on 8-9-2010 at 9.30 a.m. Even if submissions of petitioners that there were breaks and there were no continuous interrogation for 36 hours is to be accepted, still the department has no plausible excuse for making interrogations till odd hours of second night till 3 a.m., thus, the order of Commission holding the department guilty of violating human rights is affirmed partially to the extent indicated in paras 18 and 22. The fact that the efforts of the team led to unearthing of undisclosed income from respondent and his three brothers totalling over Rs.4,81,00,000isdulyrecognized.Thesubmissionsofpetitionersthatoperations were conducted in best interest of revenue and good faith, is also agreed with. [Para 22] The other aspect is that the Commission has not issued any notice to the officials/staff engaged in search, seizure and interrogation. Nonetheless the Commission has issued notice to them to submit their response as to why monetary compensation be not awarded and be recoverable from the salary of the concerned officials. The issuance of such notice would tantamount to pre- judging the officials/staff engaged in search and seizure operation of being guilty of violation of human rights, without affording them an opportunity of hearing. Section 16 of the Protection of Human Rights Act, 1993 prohibits passing of an order by the Commission which may prejudicially injure the reputation of a person without providing a reasonable opportunity of being heard in the enquiry and to produce the evidence in his defence. [Para 23] Intheinstantcaseadmittedlynonoticehasbeenissuedtotheindividualofficials who now by the impugned order have been asked to submit their response as to why monetary compensation be not awarded from their salary. The law at the TAXMAN MARCH 10 - MARCH 16, 2012 38
    • 2012] 235 first instance prohibits the very passing of an order adjudging an individual guilty of violation of human rights without affording an opportunity of hearing. Only when an individual is first judged to be guilty of violation of Human Rights, the question of inflicting penalty would arise. In the instant case, no opportunity wasgiventotheofficialstocountenancethechargeofviolationofhumanrights. In absence of an opportunity to defend themselves against such charge in an enquiry, the Commission erred in issuing notice to the officials to show cause or respond as to why penalty may not be levied for awarding compensation to the complainant and is accordingly quashed. [Para 24] Therefore, the finding of the Commission that the Income-tax Department violated human rights of the complainant (Respondent No. 3) is to be confirmed but only to the extent indicated in instant order. [Para 25] In the result, instant writ petition is only partially allowed so far response of officialsweresoughtforlevyingmonetarypenalty;it’schallengeagainstfindings of violation of human rights is dismissed. [Para 26] CASE REVIEW Ireland v.United Kingdom [1978] ECHR 1 (para 18);Kalashnikov v.Russia [2002] ECHR 596 (para 18) and Salmouni v. France [2000] 29 ECHR 403 (para 18) followed. Rajendran Chingaravelu v.R.K. Mishra, Addl. CIT [2010] 186 Taxman 305 (SC) (para 20) distinguished. CASES REFERRED TO Rajendran Chingaraveluv. R.K. Mishra, Addl. CIT [2010] 186 Taxman 305 (SC) (para 5), Hiralal Patni v. Sri Kali Nath AIR 1962 SC 199 (para 7), Official Trustee, West Bengal v. Sachindra Nath ChatterjeeAIR 1969 SC 823 (para 7),Pooran Mal v.DirectorofInspection [1974] 96 ITR 505 (SC) (para 12),M.P. Sharma v.Satish Chandra 1954 AIR 300 (para 12), Ireland v.UnitedKingdom[1978] ECHR 1 (para 16),Kalashnikov v. Russia[2002]ECHR 596 (para 16) and Salmouni v. France [2000] 29 EHRR 403 (para 18). Sandeep Kumar andAlok Kr. Shani for the Appellant. K.P. Gupta andMrigank Mauli for the Respondent. JUDGMENT Samarendra Pratap Singh, J. - The present writ petition has been filed against the order dated 28.4.2011 passed by the Chairperson, Human Rights Commis- sion by which the learned Commission has held that there has been violation of human rights of respondent no. 3 (Rajendra Singh) by the concerned officials of the Income Tax Department while continuing search and seizure operation, for which he would be entitled to monetary compensation and has further asked the department to submit its response as to why the monetary compen- sation be not awarded to the applicant recoverable from the salary of the concerned officials of the department. 2. One Rajendra Singh made a complaint before the Bihar State Human Rights Commission (hereinafter referred to as ‘the Commission’) that during the search and seizure operation the raiding party committed various acts of CCIT v. State of Bihar Through The Chief Secretary (Patna) TAXMAN MARCH 10 - MARCH 16, 2012 39
    • 236 Taxman - Tax Reports [Vol. 205 omission and commission including violation of his human rights. Some of the broad features of the complaint which is also summarized in paragraph 2 of the writ petition are as follows: (i) The officials of the Income Tax Department confined them in their house for two days in course of search and seizure operation in their business and residential premises almost uninterruptedly. (ii) The search team confined his family members and did not allow him to cook food, thereby compelling them to purchase the same from outside. (iii) The members of the search team misbehaved, abused and tortured respondent no. 3 and his family members. (iv) The members of the search team used methods of coercion for recording statements and obtaining signatures forcibly. (v) The members of the search team hurt the religious sentiments of the Sikh community by throwing buts of used cigarettes on the photograph of Golden Temple and Sikh Guru. (vi) The members of the search team stole two Mobile Phones before leaving the premises. A copy of the complaint petition is at Annexure-1. 3. The Commission issued show cause notice to the Income Tax Department to reply to the allegations of respondent no. 3. The department filed its reply and report on 25.11.2010 and 3.2.2011. The reply of the department is contained in Annexure-2 series. The Commission came to a finding that there was continu- ous interrogation without a break for more than 36 hours commencing at 9.30 A.M. on 8.9.2010 and the first break was given only at 3.30 A.M. on 10.9.2010 forcing the applicant and his family members to remain awake at hours which was meant for sleeping. The continuous interrogation at odd hours in night is a torturous act being violative of basic human rights of an individual. The Commission broadly agreed that the department if need be may conduct such search and seizure operation for days together but then they have to stop the same at proper time and resume again at an appropriate time in the morning. The Commission observed that the search and seizure operation have to be carried out keeping in view the basic human rights of an individual as every individual has inherent human rights which ought not to be infringed upon. 4. Being aggrieved by the order of the Commission, the petitioners have preferred this writ petition mainly on the grounds mentioned hereinbelow: (i) The order of the learned Single Member is without jurisdiction being Coram non-judice. In short, in absence of any rules and regulations prepared by the State or the Commission, the order could have been passed only by all the three members sitting together and not by an individual member. (ii) The complainant had not come to this court with clean hands as he had filed a complaint before the NHRC, National Commission of Minorities and the criminal case being Jakkanpur P.S. Case No. 246 of 2010. TAXMAN MARCH 10 - MARCH 16, 2012 40
    • 2012] 237 (iii) The Commission ought not to have heard the matter as the department had preferred Cr. Misc. No. 43811 of 2010 for quashing of the F.I.R. and the criminal case itself being sub-judice before the Chief Judicial Magistrate, Patna. (iv) The Commission ought not to have held the concerned officials of the Income Tax guilty of violating human rights without affording an oppor- tunity of hearing them personally under section 16 of the Protection of Human Rights Act, 1993 (hereinafter referred to as ‘the Act, 1993’). (v) The officer had acted in good faith and in discharge of their official duty. (vi) The Commission erred in holding that the complainant was not given sufficient break as it was not possible for one officer to keep interrogating for 42 hours. Further more, the search and seizure manual permitted continuous interrogation. 5. The petitioners in support of their submissions relied upon the case of Rajendran Chingaravelu v. R.K. Mishra, Addl. CIT [2010] 186 Taxman 305 (SC) wherein the Hon’ble Apex Court did not find any fault with long detention and interrogation of appellant. 6. The petitioners in short submitted that the search operation resulted in disclosure of undisclosed income of Rs. 86,66,220/- from respondent no. 3 and Rs.4,81,66,220intotalfromallthefourbrothersincludingrespondentno.3.The search and seizure protected the interest of the State and revenue. 7. Now I will take up the points raised by the petitioners one by one. Refer: Issue No. (i): The order of the learned Single Member is without jurisdiction being Coram non-judice. The petitioners have argued that the Hon’ble Chairperson sitting singly was not competent to hear the complaint of violation of human rights. According to them, all the three members of the Commission sitting together could have heard the complaint. On the other hand, counsel for respondent no. 3 submits that the doctrine of Coram non-judice speaks about inherent or complete lack of jurisdiction in respect of subject matter which would not be the case here. All other questions are but an “exercise of jurisdiction”. He relied upon decisions in the case of Hiralal Patniv. Sri Kali NathA.I.R. 1962 SC 199 Para 4 and in the case ofOfficial Trustee, West Bengal v. Sachindra Nath Chatterjee A.I.R. 1969 SC 823 para- graphs 13, 14 and 15. He submits that the question relating to pecuniary or territorial jurisdiction would not make an order Coram non-judice. 8. Before I deal with the issue, it would be relevant to notice some of the provisions of the Protection of Human Rights Act, 1993 (hereafter referred to as “the Act, 1993”). Section 29 of the Act states that the provisions of sections 9, 10, 12, 13, 14, 15, 16, 17 and 18 shall apply to State Commission. Section 10 confers power on the Commission to lay down by regulations its own proce- CCIT v. State of Bihar Through The Chief Secretary (Patna) TAXMAN MARCH 10 - MARCH 16, 2012 41
    • 238 Taxman - Tax Reports [Vol. 205 dure. Section 40-B confers power on Commission to make regulations to carry out the provisions of the Act including procedure to be followed by Commission under section 10(2). Section 10(2) of the Protection of Human Rights Act, 1993 read as under: “10.Procedure to be regulated by the Commission.— (1) The Commission shall meet at such time and place as the Chairman may think fit. (2) Subject to the provisions of this Act and the rules made thereunder, the Commission shall have the power to lay down by regulations its own procedure”. In exercise of power under section 10(2) read with section 40-B, the National Human Rights Commission (in short ‘NHRC’) has made regulations being the National Human Rights Commission (Procedure) Regulation, 1994. Rule 8 lays down the procedure for dealing with the complaint. Sub-rule (1) of Rule 8 lays down the criteria for a case to be taken by a Single Member Bench or bench of two members or more than two members. Rule 8(1) is quoted hereinbelow for each reference. “8. Procedure for dealing with complaints. - (1) All complaints in whatever form received by the Commission, shall be registered and assigned a number and placed for admission as per the special or general directions of the Chairperson before a Single-Member Bench constituted for the purpose, not later than one week of receipt thereof. If the Single-Member Bench dealing with the case, either for admission or for final disposal, having regard to the importance of the issues involved, is of the opinion that the case should be heard by a Bench of not less than two Members, he/she may refer the case to a Bench of two Members. On receipt of the reference, the case shall be assigned to a Bench of two or more Members, as may be constituted by the Chairperson, Ordinarily, complaints of the following nature are not entertainable by the Commission:- (a) in regard to events which happened more than one year before the making of complaints; (b) with regard to matters which are sub-judice; (c) which are vague, anonymous or pseudonymous; (d) which are of frivolous nature; or (e) those who are outside the purview of the Commission.” 9. From bare perusal of the regulation, it appears that rule 8(1) of Regulations, 1994 contains the procedure for dealing with a complaint by a Commission. It states that a Single Member Bench dealing with complaint may refer the matter to a bench of two members, or more than two members if he considers that the issue is of considerable importance to be heard so. On receipt of reference, the case shall be assigned to a bench of two or more members, as may be constituted by Chairperson. In such circumstances, it cannot be said that the Single Member Bench is not competent to hear a complaint regarding violation of human rights. 10. Furthermore, the matter is one of procedure and not of jurisdiction. The respondent no. 3 has rightly relied upon the case of Hiralal Patni (supra) and TAXMAN MARCH 10 - MARCH 16, 2012 42
    • 2012] 239 Official Trustee, West Bengal (supra). The Hon’ble Apex Court in cases referred above, observed that if a court has jurisdiction to try a case and has authority to pass an order of a particular kind, the fact that it has passed an order which itnormallyshouldnothavemadeinthegivencircumstanceswouldnotindicate total want or loss of jurisdiction so as to render the order nullity. Thus, I reject the contention of the petitioner that the order passed by the learned Single Member was without jurisdiction. 11. Refer: Issue Nos. (ii) &(iii): (ii) The complainant did not disclose in his complaint before the State Human RightsCommissionthatithasfiledacomplaintbeforetheNHRC,National CommissionofMinoritiesandalsolodgedacriminalcasebeingJakkanpur P.S. Case No. 246 of 2010. (iii) The Commission ought not to have heard the matter as the department had preferred Cr. Misc. No. 43811 of 2010 for quashing of the F.I.R. and the criminal case itself being sub-judice before the Chief Judicial Magistrate, Patna. Answer: The National Commission of Minorities or a Criminal Court exercises different jurisdictions. One single incident may have wide ramifications e.g. a personapartfrombeingproceededforintrusionsofrightofaminority,canalso be proceeded for violation of human rights as well as for committing a penal offence, if the facts, so justify. The respective complaint to the National Commission of Minorities or to the police, addresses different and distinct concerns. Respondent no. 3 ought to have mentioned in his complaint that he has written to the NHRC, which complaint was subsequently transferred to the SHRC. The non-mentioning of writing of such complaint to NHRC, which eventually is to be endorsed to the competent body e.g. SHRC would be an irregularity and in no way obviate or wipe off the act of violation of human rights. Thus though it is desirable that such facts are stated, the same cannot be a ground for rejection of the complaint filed before the State Human Rights Commission. 12. This takes us to issue nos. (iv), (v) & (vi) which are taken up together as they are inter linked: (iv) The Commission ought not have held the concerned officials of the Income Tax guilty of violating human rights without affording an oppor- tunity of hearing to them personally under section 16 of the Act. (v) The officer had acted in good faith and in discharge of their official duty. (vi) The Commission erred in holding that the complainant was not given sufficient break as it was not possible for one officer to keep interrogating for 42 hours. Furthermore, the search and seizure manual permitted continuous interrogation. The petitioners submit that Bhargo Saw Mill Compound is a huge compound of about 5000 Sq. ft. in area. The apartment comprises of four residential floors CCIT v. State of Bihar Through The Chief Secretary (Patna) TAXMAN MARCH 10 - MARCH 16, 2012 43
    • 240 Taxman - Tax Reports [Vol. 205 in which respondent no. 3 and his other brothers live separately. The building also has an office of M/s Bhargo Saw Mills. The open area of the premises was used to store huge quantity of timber inside the residential premises. The two open premises across the road was also used to store timber and another premise was rented out to a school. The petitioners submit that the search and seizure operation of such a large residential and business place would involve a large number of officers and staffs. Thus, the team included three authorized officers (2 Assistant Director) and one Income Tax Officer and 11 staffs to cover up the entire place to conduct the search and seizure operations. The same set of officers apart from conducting search and seizure had to prepare the inventory of books of account, documents, jewellery and cash etc. The petition- ers submit that it would appear from perusal of the statement of respondent no. 3 that the entire statement was recorded by a Single officer and not by a batch of officers and it is humanly impossible for an officer to continuously conduct interrogation for more than 30 hours. The petitioners submit that in fact only 31 questions were asked before allowing them rest for nearly 7 hours on assessee’s request. The petitioners further submit that the search and seizure operation were conducted in two other business premises but there has been no complaint of violation of Human rights from any other partner or the brothers except respondent no. 3. The petitioners submits that the case of Pooran Malv. Director of Inspection[1974] 96 ITR 505 (SC) would applymutatis mutandis to searches made under section 41 of the Income-tax Act, 1922 now section 132 of the Income-tax Act, 1961. It is further the case of the petitioners that search and seizure is a temporary interference with right to hold the premises and the articles seized. They also state that any reasonable restrictions cannot be held to be unconstitutional. ReliancehasbeenplacedonthefollowingpassagefromthecaseofM.P.Sharma v. Satish Chandra 1954 AIR 300 which is quoted herein below : “A search & seizure is only a temporary interference with the right to hold the premises searched and the articles seized. Statutory regulation in this behalf is necessary and reasonable restriction cannot per se be considered to be unconstitu- tional”. The petitioners submit that in the case of Rajendran Chingaravelu (supra), the Hon’ble Apex Court upheld the detention of the applicant for 15 hours who was carrying a cash of Rs. 65 lacs along with a Bank certificate certifying the source and withdrawals. The Hon’ble Apex Court observed that though the individual has right to carry money, the same is subject to verification or seizure by Intelligence authority to ensure that the said money is not intended for illegal activities. The Hon’ble Apex Court further held as follows: “Any bona fide measures taken in public interest, and to provide public safety or to prevent circulation of black money, cannot be objected as interference with the personal liberty or freedom of a citizen”. 13. Mr. Mrigank Mauli, learned counsel for respondent no. 3 submits that the Commission found that the search and seizure operation commenced at 9.30 TAXMAN MARCH 10 - MARCH 16, 2012 44
    • 2012] 241 A.M. on 8.9.2010 and he was continuously interrogated for 36 hours till 10 P.M. on 9.9.2010. He further submits that the Commission noted that though the exact time of commencement of interrogation is not mentioned in the state- ment but question no. 15 gives an idea about the duration. The officer interrogating respondent no. 3 while asking question no. 15 told the applicant that he was being asked to produce books of account, but despite passage of more than 36 hours, the same had not been produced. Learned counsel further submits that the Commission rightly observed that the operation commenced at 9.30 A.M. on 8.9.2010 and the question no. 15 was being asked about 10 P.M. on 9.9.2010. Further, it would appear from question no. 16 that three hours additional time was granted to the respondent no. 3 to produce the records and the expiry time was mentioned as 1 A.M. of (10.9.2010). He submits that the Commission noticed that recording of statement was temporarily suspended to be resumed in the morning after 31st question at 3.30 A.M. on 10.9.2010. The date and time has been endorsed by the officer along with his signature. 14. Controverting the stand of respondents, the department submits that in fact only 15 questions were asked by 10 P.M. on 9.9.2010 would show that interro- gation was not long enough and there were temporary breaks in between. He submits that the search and seizure manuals do not lay down any time limit of search and seizure operation. 15. The Commission held that interrogation and recording of statement at odd hours in the night of 9/10.9.2010 was in violation of basic human rights of an individual which obviously would cause physical and mental torture. The department cannot force an individual to remain awake when it is a time for sleep. 16. The respondent no. 3 submits that the order of the Commission is in consonance with the objectives and purpose for which Protection of Human Rights Act, 1993 has been enacted. He submits that all laws must confirm to the charter of human values and dignity. In support of his submission, he relied upon a decision in the case of Ireland v. The United Kingdom [1978] ECHR 1 and in the case of Kalashnikov v. Russia [2002] ECHR 596. 17. It appears that the learned Commission has concluded that question no. 15 would show that despite passage of more than 36 hours, the books of account were not produced. The Commission as such inferred that the question was being asked at about 10 P.M. on 9.9.2010, as the operation had begun on 8.9.2010 at 9.30 A.M.. The Commission was of the view that in case if a break was given, the same would have been duly entered in the record. The Commission observedthatitbecomesevidentfromquestionno.16,that3hoursfurthertime was granted to produce the books of account, which time would expire at 1 A.M. on 10.9.2010. The Commission also noticed that the temporary break was given only after 31st question, which concluded at 3.30 A.M. on 10.9.2010. 18. The non-mentioning of breaks in the record may not be conclusive proof of the fact that interrogation and search operation continued unabated for more CCIT v. State of Bihar Through The Chief Secretary (Patna) TAXMAN MARCH 10 - MARCH 16, 2012 45
    • 242 Taxman - Tax Reports [Vol. 205 than 36 hours. It may also not be humanly possible for an official to interrogate continuously for 36 hours. However, one fact remains undisputed that the interrogation continued till 3.30 A.M. on the second night of search and seizure as per the own record of department. The search and seizure manual of the Income Tax does not prescribe any time limit for search and survey operation and the same may continue for days if required, but it has to be in keeping with the basic human rights and dignity of an individual. The purpose of the Act is to give effect to the process of execution of actions of executive and bureau- cratic machinery in line of accepted standard of basic human rights which are internationally recognized. The laws, and approach to law for its execution must confirm to the charter of human values and dignity. Even a person accused of a serious offence has to be produced before the nearest Magistrate within 24 hours minus the time taken in reaching the Court. There is no possible justification to continue interrogation and keep the respondent no. 3 awake till 3 A.M. on the second night of search and interrogations. No reason has been assigned as to why the interrogations could not have been deferred till the morning of the next day. The officials could have continued with the interroga- tion on the next day in the morning after allowing respondent no. 3 to retire at an appropriate time in the night. Respondent no. 3 has rightly relied upon the decisions rendered in the case of United Kingdom (supra), where in the court held that sleep deprivation as part of methods of interrogation amounted to inhuman treatment and violation of Article 3 of the European Convention on Human Rights. In the case of Kalashnikov (supra), the European Court of Human Right (in short ‘ECHR’) noticed that the complaint related to lack of facility to the prison inmates on account of shortage of which, the inmates slept taking turns, while one slept the others would lie or sit on the floor and card boxes. In case ofSalmouniv. France[2000] 29 EHRR 403, the court went to the extent of stating that Convention prohibits in absolute terms Torture or Inhuman or Degrading Treatment or Punishment and went on to the extent of stating that no exception to Article 3 can be made even in the event of Public Emergency threatening the life of the Nation. The human rights belong to all of us equally and would apply no less to an intruder of law, as to a law enforcing agency. 19. The term ‘human rights’ has been defined in section 2(d) of 1993 Act as the right relating to life, liberty, quality and dignity of the individual granted by the Constitution as provided in Part III of the Constitution and as embodied in International Covenants. The International Covenants has been defined in section2(f)oftheActwhichmeansInternationalcovenantsoncivilandpolitical rights and international covenants on economic, social and cultural represen- tations adopted by the general assembly of the United Nation. Article 7 of the International Covenant on Civil and Political Rights states that no one shall be subject to torture or to cruel inhuman or degrading treatment or punishment. Article 10(1) states that all persons deprived of liberty shall be treated with humanity and with respect to inherent dignity of human person. The word TAXMAN MARCH 10 - MARCH 16, 2012 46
    • 2012] 243 “Torture” has been defined in the ‘Convention Against Torture and other cruel, inhuman or Degrading treatment or punishment’. in Article-1, which reads as follows: “For the purposes of this Convention, the term Torture means any act by which severe pain or suffering, whether physical or mental, is intentionally inflicted on a person for such purposes as obtaining from him or a third person information or a confession, punishing him for an act he or a third person has committed or is suspected of having committed, or intimidating or coercing him or a third person, or for any reason based on discrimination of any kind, when such paid or suffering is inflicted by or at the instigation of or with the consent or acquiescence of a public official or other person acting in any official capacity……” The preamble specifically provides that while drafting the said Convention, regardhadbeenmadetoArticle5ofthe‘UniversalDeclarationofHumanRight and to Article 7 of the International Covenant on Civil and Political Rights, as the same are in recognition of the universal respect for an observance of Human Rights and fundamental freedoms. 20. Even assuming that there were temporary breaks in course of interrogation which continued for 42 hours, it is not in dispute that even on the second night of search and survey on 10.9.2010, the interrogations continued till 3 A.M. and therespondentno.3andhisfamilymembersweremadetoremainawakewhen it was time for sleep. No cause has been shown as to why it was necessary to continue the interrogations till deep in the second night of interrogations. The case relied by the department in the case of Rajendran Chingaravelu (supra) would not be of much help, as in the aforesaid case the petitioner was detained for 15 hours on the first day itself, as he was carrying Rs. 60 lacs at the Airport which could have been used for the illegal activities In the instant case, the interrogation have continued for 42 hours and undisputedly at the odd hours of second night, which could easily have been avoided and deferred. No reason has been recorded for not deferring the interrogation till morning. 21. The department would consider issuing appropriate instruction in future raids to record the duration of interrogation and breaks. 22. I am in agreement with the submissions of the petitioners that if required, the search and seizure can continue for days but at the same time due regard to human dignity and value cannot be ignored. In the instant case, no reason has been assigned as to why it was absolutely imperative to continue with the interrogations at 3 A.M. on 10.9.2010, when search and seizure has commenced on 8.9.2010 at 9.30 A.M. Even if I agree with the submissions of petitioners that there were breaks and there were no continuous interrogation for 36 hours as held by Commission, still the department has no plausible excuse for making interrogations till odd hours of second night till 3 A.M. Thus I partially affirm the order of learned Commission holding the department guilty of violating human rights but only to the extent indicated in paras 18 and 22. I am conscious of the fact that the efforts of the team led to unearthing of undisclosed income from petitioner and his three brothers totalling over Rs. 4,81,00,000/-. I even agree CCIT v. State of Bihar Through The Chief Secretary (Patna) TAXMAN MARCH 10 - MARCH 16, 2012 47
    • 244 Taxman - Tax Reports [Vol. 205 with the submissions of petitioners that operations were conducted in best interest of revenue and good faith. 23. The other aspect is that the learned Commission has not issued any notice to the officials/staff engaged in search, seizure and interrogation. Nonetheless the Commission has issued notice to them to submit their response as to why monetary compensation be not awarded and be recoverable from the salary of the concerned officials. The issuance of such notice would tantamount to pre- judging the officials/staff engaged in search and seizure operation of being guilty of violation of human rights, without affording them an opportunity of hearing. Section 16 of the Protection of Human Rights Act, 1993 prohibits passing of an order by the Commission which may prejudicially injure the reputation of a person without providing a reasonable opportunity of being heard in the enquiry and to produce the evidence in his defence. Section 16 is quoted herein below for easy reference: “16. Persons likely to be prejudicially affected to be heard.—If, at any stage of the inquiry, the commission- (a) consider it necessary to inquire into the conduct of any person; or (b) is of the opinion that the reputation of any person is likely to be prejudicially affected by the inquiry, it shall give to that person a reasonable opportunity of being heard in the inquiry and to produce evidence in his defence: Providedthatnothinginthissectionshallapplywherethecreditofawitnessisbeing impeached”. 24. In the instant case admittedly no notice has been issued to the individual officials who now by the impugned order have been asked to submit their response as to why monetary compensation be not awarded from their salary. The law at the first instance prohibits the very passing of an order adjudging an individual guilty of violation of human rights without affording an opportunity of hearing. Only when an individual is first judged to be guilty of violation of Human Rights, the question of inflicting penalty would arise. In the instant case, no opportunity was given to the officials to countenance the charge of violation of human rights. In absence of an opportunity to defend themselves against suchchargeinanenquiry,thelearnedCommissionerredinissuingnoticetothe officials to show cause or respond as to why penalty may not be levied for awarding compensation to the complainant and is accordingly quashed. 25. As held in the foregoing paragraphs, I affirm the findings of the learned Commission that the Income Tax Department violated Human Rights of the complainant (Respondent No. 3) but only to the extent indicated in this order. 26. In the result, this writ application is only partially allowed so far response of officials were sought for levying monetary penalty; it’s challenge against findings of violation of Human Rights is dismissed. TAXMAN MARCH 10 - MARCH 16, 2012 48
    • 2012] 245 [2012] 205 TAXMAN 245/18 taxmann.com 363 (Delhi) HIGH COURT OF DELHI Commissioner of Income-tax v. Hotline Electronics Ltd. SANJIV KHANNA AND R.V. EASWAR, JJ. IT APPEAL NO. 1073 OF 2011† DECEMBER 23, 2011 Section 41(1) of the Income-tax Act, 1961 - Remission or cessation of trading liability - Assessment year 2005-06 - Whether unpaid liabilities cannot be added to assessee’s income under section 41(1) merely because they remained unpaid for a sufficiently long time and it is required of revenue authorities to show that liability to pay creditors has ceased or has been remitted by creditors - Held, yes [In favour of assessee] FACTS During assessment proceedings, the Assessing Officer noticed that the assessee had received several advances which had not been repaid till date, for which assessee had no acceptable explanation. The Assessing Officer took the view that since the advances had not been liquidated till date and the assessee was not able to file any confirmation from the creditors, it was clear that there was a cessation of liability in respect of those advances and the assessee had no further obligation to return them. Accordingly, the Assessing Officer treated the advances so received by assessee as revenue receipt and added same to income of assessee. The Commissioner (Appeals) confirmed order of Assessing Officer. On further appeal, the Tribunal reversed order of Assessing Officer and allowed assessee’s case. HELD The interpretation placed by the Tribunal on section 41(1) is in conformity with the legal position that unless there is evidence to show that the creditor has remitted the debt or otherwise by operation of law the liability to pay him has ceased, there can be no benefit arising to the assessee within the meaning of clause(a)ofsection41(1).TheTribunalisalsorightinitsviewthatunlessnotices were issued to the creditors and they had stated that they have given up the claimsagainsttheassessee,nodecisioncanbetakenbytheincome-taxauthorities, merely on the ground that the debts remained unpaid in the assessee’s books for anumberofyears,thattheliabilityhasceasedorhasbeenremitted.Intheinstant †Arising from order of ITAT in ITA No. 2635/Delhi of 2010, dated 28-01-2011. CIT v. Hotline Electronics Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 49
    • 246 Taxman - Tax Reports [Vol. 205 case, the Assessing Officer has not issued any notice to the creditors to confirm from them whether they have given up their dues from the assessee. It must be remembered that the debts were not written back in the assessee’s accounts as found by the Tribunal. Except for the fact that the amounts were outstanding, there was no material or evidence to show that there was remission or cessation of liability. It is the Assessing Officer who has invoked section 41(1). It is he who hasstatedthattherewasaremissionorcessationoftheassessee’sliability.Itwas, therefore, incumbent upon him to make inquiry and bring on record material. Byvirtueofthepowersvestedinhimundersection133(6)oranyotherprovision oftheIncome-taxActtoseekclarificationorconfirmationfromthecreditors,the said material/evidence could have been ascertained. The assessee herein is a limitedcompanyandasperthelegalpositiontheacknowledgmentoftheliability in favour of the creditors in its balance-sheet extends the period of limitation for the purpose of section 18 of the Limitation Act. It is the assessee’s claim that the debts are subsisting and it continues to be liable to pay the creditors. It is not open to the income-tax authorities to draw the conclusion that the creditors have remitted the liability or that the liability has otherwise ceased without evidence or material when the assessee acknowledges a liability in the balance sheet and Explanation-1 is not applicable. In the instant case, the liability to the creditors continues to be shown in the assessee’s books of account and the accounts of the creditors have not been written back. This finding of fact by the Tribunal is not under challenge. [Para 7] In the instant case, the Assessing Officer has not brought on record any evidence or material, including any statement from the creditors, that the debts had been extinguished and the liability of the assessee to pay them has ceased, despite the extension of the period of limitation by acknowledgment made in the assessee’s balance sheet. Section 41(1)(a) cannot be invoked on these facts. [Para 8] The appeal of the revenue is dismissed. [Para 10] CASE REVIEW CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518 (para 8) followed. CASES REFERRED TO CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 (SC) (para 8), CIT v. Bennett Coleman & Co. Ltd. [1993] 201 ITR 1021 (Bom.) (para 8), Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 (Bom.) (para 8). N.P. Sahni for the Appellant. Mayank Bugani and Saurabh Mishra for the Respondent. JUDGMENT R.V. Easwar, J. - In this appeal by the revenue filed under Section 260A of the IncomeTaxAct,1961(‘theAct’,forshort),theorderoftheIncomeTaxAppellate Tribunal (‘the Tribunal’, for short) dated 28.01.2011 in ITA No.2635/Delhi of 2010 (assessment year 2005-06) is challenged. TAXMAN MARCH 10 - MARCH 16, 2012 50
    • 2012] 247 2. The respondent assessee is a limited company engaged in the business of manufacturing and trading in television sets. In respect of the assessment year 2005-06, it filed a return of income declaring income of Rs. 1,79,90,660/-. The return was processed under Section 143(1) of the Act but was later selected for scrutiny and notice was issued to the assessee under Section 143(2) asking for details in support of the return. In the course of the assessment proceedings, the Assessing Officer called upon the assessee to furnish the details of advances received from customers and also show when those advances were repaid. From the reply filed by the assessee, the Assessing Officer noticed that there were several advances which had not been repaid till date. He, therefore, called upon the assessee to explain why in the case of advances which had not been repaid, it should not be held that there was a cessation of liability. The assessee respondent by saying that the amounts were in the nature of credit balances which arose on account of credit notes issued in respect of rate difference, difference in calculation of raw material costs or sales returns. On these facts, the Assessing Officer was of the view that the assessee’s reply was very general without being supported by any documentary evidence. He held that the following balances were outstanding till date and no confirmation was fur- nished by the assessee in respect of them: Sl.No. Name Amount (in Rs.) 1. Hotline Calcom Electronics Co. 1114049 2. Indica Traders Pvt. Ltd. 743155 3. Kelon Corporation-CTV 24598 4. KC Merchantile Ltd.-Samsung 131898 5. Kemil Marketing P. Ltd. 2672517 6. Sona Impex Pvt. Ltd. 341514 Total 5027731 According to the Assessing Officer since the advances had not been liquidated till date and the assessee was not able to file any confirmation from the creditors, it was clear that there was a cessation of liability in respect of those advances and that the assessee had no further obligation to return them. In this view of the matter, the receipt of Rs. 50,27,731/- received by the assessee was taken as a revenue receipt and was added to income of the assessee in the assessment order passed on 24.12.2007. 3. The assessee appealed and contended that it had given advances to parties for purchases and also received advances against supplies, that it would be evident from the balance sheet that the credit balances in favour of the customers represented a running account with them and were pending adjust- ment for claims and counter claims and that in these circumstances it is not permissible to hold that the assessee was no longer liable to return the amounts to the creditors. It was thus contended that the addition was unsustainable. CIT v. Hotline Electronics Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 51
    • 248 Taxman - Tax Reports [Vol. 205 4. The CIT(A) observed that the conditions for the applicability of Section 41(1) of the Act were satisfied in the present case. He noted that the credit balances remained static for the past several years as noticed by the Assessing Officer in the assessment order. He further held that by establishing this fact, namely that the credit balances remained static for the past several years the revenue has discharged its burden and thereafter the burden shifted to the assessee who was required to establish and prove that the liability to the creditors subsisted and in this, the assessee has failed. He accordingly sustained the addition and dismissed the assessee’s appeal on this point. 5. The assessee carried the matter in further appeal before the Court in ITA No. 2635/Delhi of 2010. The Tribunal found that the credit balances had not been written off in the books of account. As regards the applicability of Section 41(1) of the Act, the Tribunal held as under:- “From the above, it is clear that Act postulates there should be benefit obtained by the assessee by way of remission or cessation of liability. In this case, we note that there is no document on record which prove that there is actual remission and cessation or the liability. It is not the case the Assessing Officer has issued notices to the creditors and they have declined that they have paid said amount. Under the circumstances, when Assessing Officer has not brought about any cogent basis and these amounts have been written off in the books of account, we do not find any reason to hold that the amount is liable to be added u/s 41(1) of the IT Act.” The assessee’s appeal on this point was thus allowed by the Tribunal. 6. The revenue challenges the order of the Tribunal and has raised the following questions of law as substantial questions of law: “1. Whether on the facts and circumstances of the case, the Income Tax AppellateTribunalwascorrectinlawindeletingtheadditionofRs.50,27,731/- made by the AO on account of cessation of liability? 2. Whether on the facts and circumstances of the case, the order of the Income Tax Appellate Tribunal is not perverse as, it being a final fact finding authority, has failed to appreciate that necessary conditions u/s 41(1) of the Income Tax Act are satisfied in this case? 3. The appellant craves leave to add, alter and modify any question of law at the time of admission of appeal.” After hearing both the sides the following substantial question of law is framed: “Whether on the facts and in the circumstances of the case, and on proper interpretation of Section 41(1) of the Income Tax Act, 1961, the Tribunal was right in law in holding that the assessee’s liability to pay the creditors had not ceased and therefore, the income tax authorities were not justified in making an addition of Rs. 50,27,731/?” 7. In our opinion, the interpretation placed by the Tribunal on Section 41(1) of the Act is in conformity with the legal position that unless there is evidence to show that the creditor has remitted the debt or otherwise by operation of law the liability to pay him has ceased, there can be no benefit arising to the assessee within the meaning of clause (a) of Section 41(1). The Tribunal is also right in TAXMAN MARCH 10 - MARCH 16, 2012 52
    • 2012] 249 its view that unless notices were issued to the creditors and they had stated that they have given up the claims against the assessee, no decision can be taken by the income tax authorities, merely on the ground that the debts remained unpaidintheassessee’sbooksforanumberofyears,thattheliabilityhasceased or has been remitted. In the present case the Assessing Officer has not issued any notice to the creditors to confirm from them whether they have given up their dues from the assessee. It must be remembered that the debts were not written back in the assessee’s accounts as found by the Tribunal. Except for the fact that the amounts were outstanding there was no material or evidence to show that there was remission or cessation of liability. It is the Assessing Officer who has invoked Section 41(1). It is he who has stated that there was a remission or cessation of the assessee’s liability. It was, therefore, incumbent upon him to make inquiry and bring on record material. By virtue of the powers vested in him under Section 133(6) or any other provision of the Income Tax Act to seek clarification or confirmation from the creditors, the said material/evidence could have been ascertained. The assessee herein is a limited company and as per the legal position the acknowledgment of the liability in favour of the creditors in its balance sheet extends the period of limitation for the purpose of Section 18 of the Limitation Act. It is the assessee’s claim that the debts are subsisting and it continues to be liable to pay the creditors. It is not open to the income tax authorities to draw the conclusion that the creditors have remitted the liability or that the liability has otherwise ceased without evidence or material when the assessee acknowledges a liability in the balance sheet and Explanation-1 is not applicable. In the present case, the liability to the creditors continues to be shown in the assessee’s books of account and the accounts of the creditors have not been written back. This finding of fact by the Tribunal is not under challenge. 8. In CIT v. Sugauli Sugar Works (P.) Ltd. [1999] 236 ITR 518/102 Taxman 713 (SC), the Supreme Court disapproved the reasoning of the Bombay High Court in CIT v. Bennett Coleman & Co. Ltd. [1993] 201 ITR 1021. In this judgment, the Bombay High Court had distinguished its earlier judgment in Kohinoor Mills Co. Ltd. v. CIT [1963] 49 ITR 578 by holding that cessation of liability can take place even as a result of an unilateral act and where a debt has become barred by limitation by operation of law, the unilateral act of the assessee transferring the same to his profit and loss account and thereby treating as his income would attract the provisions of Section 41(1) of the Act. The Bombay High Court had also observed that there was a cessation of the liability due to the expiry of period of limitation to enforce the same. Disapproving the line of reasoning of the Bombay High Court in Bennett Coleman & Co. Ltd. (supra) the Supreme Court held as under:- “We are unable to accept the reasoning of the Bombay High Court in that case. Just because an assessee makes an entry in his books of account unilaterally, he cannot get rid of his liability. The question whether the liability is actually barred by limitation is not a matter which can be decided by considering the assessee’s case alone but it is a matter which has to be decided only if the creditor is before the CIT v. Hotline Electronics Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 53
    • 250 Taxman - Tax Reports [Vol. 205 concerned authority. In the absence of the creditor, it is not possible for the authority to come to a conclusion that the debt is barred and has become unenforceable. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after the expiry of the normal period of limitation as provided in the Limitation Act.” It may be observed that in the present case, as noted earlier, the Assessing Officer has not brought on record any evidence or material, including any statement from the creditors, that the debts had been extinguished and the liability of the assessee to pay them has ceased, despite the extension of the period of limitation by acknowledgement made in the assessee’s balance sheet. Section 41(1)(a) cannot be invoked on these facts. 9. In ITA No.774/2009 by judgment of even date we have decided a similar matter where the income tax authorities had invoked Section 41(1)(a) of the Act. We have held that unpaid liabilities cannot be added as the assessee’s income under Section 41(1) merely because they remained unpaid for a sufficiently long time and that it is required of the revenue authorities to show that the liability to pay the creditors has ceased or has been remitted by the creditors. 10.For the reasons stated by us hereinabove and in the aforesaid judgment, we answer the substantial question of law raised by the revenue in the present appeal in the affirmative and in favour of the assessee. The appeal of the revenue is dismissed. There shall be no order as to costs. [2012] 205 TAXMAN 250/18 taxmann.com 372 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income-tax, Central Circle v. Infosys Technologies Ltd. V.G. SABHAHIT AND S.N. SATYANARAYANA, JJ. IT APPEAL NO. 574 OF 2006† DECEMBER 9, 2011 I. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1999-2000 - Whether amount paid by assessee-company towards subscription for obtaining corporate membership in club was allowable as revenue expenditure - Held, yes [In favour of assessee] †Arising out from Order of ITAT in I T Appeal No. 471/Bang./2003, dated 9-9-2005. TAXMAN MARCH 10 - MARCH 16, 2012 54
    • 2012] 251 II. Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 1999-2000 - Assessee-company made provision for post sale customer service and claimed same as expenditure - Assessing Officer disallowed claim of assessee as actual expenses had not been incurred by assessee during relevant assessment year - However, on appeal, Tribunal allowed assessee’s claim - It was found that Supreme Court in case of Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 had laid down conditions which are required to be satisfied for making claim in respect of post sale customer service and had laid down principles relating to same - Benefit of said decision of Supreme Court was not available to Tribunal on date when it passed impugned order and Tribunal had only considered past experience and expenses incurred in previous year, on basis ofwhichclaimwasmade-WhethermattershouldberemandedtoTribunaltopass fresh orders in accordance with law laid down in Rotork Controls India (P.) Ltd.’s case (supra) - Held, yes [Matter remanded] III. Section 80HHE of the Income-tax Act, 1961 - Deductions - Profits and gains fromexportofcomputersoftware-Assessmentyear1999-2000-Whetherexchange rate variation gain has to be excluded from total turnover and export turnover for computation of deduction under section 80HHE - Held, no [In favour of assessee] FACTS-I The assessee-company claimed amount paid towards subscription for acquisi- tion of corporate membership in club as revenue expenditure. The Assessing Officer disallowed the same as capital expenditure. On appeal, the Tribunal deleted the disallowance. On revenue’s appeal: HELD-I Issue of expenditure incurred for obtaining corporate membership has already been answered by the instant Court in ITA No. 3232/2005, dated 4-11-2011 by upholding the finding of the appellate authorities that the expenditure incurred for acquisition of membership in clubs is revenue expenditure. Accordingly, following the reasons assigned in the said decision/said issue is decided against the revenue and in favour of the assessee. [Para 5] FACTS-II The assessee-company made provision for post sale customer service and claimed the same as expenditure. The Assessing Officer disallowed the same on ground that actual expenses had not been incurred by assessee during the relevantassessmentyear.Onappeal,theTribunalallowedtheclaimofassessee. On revenue’s appeal: CIT v. Infosys Technologies Ltd. (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 55
    • 252 Taxman - Tax Reports [Vol. 205 HELD-II The material on record would clearly show that the order was passed by the Tribunal on 9-9-2005. Therefore, the benefit of the decision of the Supreme Court in Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 was not available to the Tribunal. In the said decision, the Supreme Court has laid down the conditions which are required to be satisfied for making claim in respect of post sale customer service and has laid down the principles pertainingtothesame.InaforementionedcasetheSupremeCourthadconsidered the principles laid down having regard to the facts of the said case and has stated that in each case all the conditions to be satisfied are to be considered. [Para 10] On perusal of the order passed by the Tribunal, it is found that the above said factors which are required to be satisfied, have not been considered by the Tribunal and the Tribunal has only considered the past experience and the expenses incurred in the previous year, on the basis of which the claim was made. Under the circumstances, the Tribunal being the final authority on the question of fact, is required to consider the claim made by the assessee with reference to the decision in Rotork Controls India (P.) Ltd.’s case (supra). [Para 11] Accordingly, the matter is to be remitted to the Tribunal by setting aside the finding allowing the claim. [Para 12] FACTS-III The Assessing Officer in computation of deduction under section 80HHE, had excluded exchange rate variation gains from total turnover and export turn- over. On appeal, the Tribunal reversed the order of the Assessing Officer. On revenue’s appeal : HELD-III Sofarasissueofexclusionofexchangeratevariationgainsfromexportturnover and total turnover is concerned, the said issue has already been decided by instant Court in ITA No. 1189/2006 in favour of the assessee and against the revenue, in respect of the same assessee but for different assessment year. Therefore, following the reasons assigned in the said appeal, said issue is also answered against the revenue and in favour of the assessee. [Para 5] CASE REVIEW Decision in ITA No. 3232/2005, dated 4-11-2011 (para 5); Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC) (para 11); Decision in ITA No. 1189/2006 (para 5) followed. CASES REFERRED TO Rotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422 (SC) (para 7) and Wipro GE Medical Systems Ltd. v. ITO (TDS) [2005] 3 SOT 627 (Bang.) (para 8). Indrakumar andG. Kamaladhar for the Appellant. K.P. Kumar for the Respon- dent. TAXMAN MARCH 10 - MARCH 16, 2012 56
    • 2012] 253 JUDGMENT V.G. Sabhahit, J. - This appeal is filed by the Revenue being aggrieved by the order dt. 9.9.2005 passed by the Income Tax Appellate Tribunal, Bangalore Bench“B”(hereinaftercalledas‘Tribunal’forbrevity)inITANo.471/Ban/2003. 2. This appeal has been filed raising the following substantial questions of law : (1) Whether the payment made to club subscription for obtaining corporate membership is a revenue expenditure and not capital expenditure as held by the Assessing Officer? (2) Whether the Tribunal was correct in holding that provision for post-sale customer service which is a contingent liability should be allowed as an expenditure despite the same having been not incurred by the assessee during the current assessment year? (3) Whether the Tribunal was correct in reversing the findings of the Assess- ing Officer that exchange rate variation gains had to be excluded from the total turnover and export turnover for computation of deduction under Sec.80HHE of the Act in view of the Explanation (c) to Section 80HHE of the Act which contemplates only actual amount of foreign exchange received in India? 3. The appeal has been admitted on 9.8.2007 for considering the substantial questions of law already framed in connected ITA No. 3232/05. ITA No. 3232/ 05 has already been disposed of on 4.11.2011. Therefore, the above said three substantial questions of law are to be considered in this case. 4. The material facts necessary for adjudicating the above said substantial questions of law are as follows: The assessee claimed deduction towards subscription for acquisition of Corpo- rate membership as a revenue expenditure. It also made provision for post sale customer service which is a contingent liability as an expenditure. Despite the same having not been incurred towards after sale service in view of the warranty provided by the respondent-assessee. Further, the exchange rate variation gains had been excluded from the total turn over and export turn over for computation of deduction under Sec. 80HHE of the Act. The Assessing Officer held that expenditure incurred towards acquisition of Corporate mem- bership in the Clubs is a capital expenditure and the said finding was set aside in appeal. Similarly, the amount claimed towards after sale service as contin- gent liability was also disallowed by the Assessing Officer and the same was deleted in appeal before the Commissioner of Income Tax. However, the Assessing Officer held that the exchange rate variation gains had to be excluded from the total turn over and export turnover for computation of deduction under Sec. 80HHE of the Act in view ofExplanation (e) to Sec. 80HHE of the Act which contemplates only actual amount of foreign exchange received in India and the said finding was also set aside in appeal. Being aggrieved by the order passed by the appellate authority allowing the appeal filed by the assessee, CIT v. Infosys Technologies Ltd. (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 57
    • 254 Taxman - Tax Reports [Vol. 205 Revenue preferred appeal in ITA No. 471/Bang/2003 on the file the Tribunal andtheTribunalbyorderdt.9.9.2005dismissedtheappealfiledbytheRevenue. 5. Being aggrieved by the same, this appeal is filed by the Revenue in which above said substantial questions of law has to be considered. The first substan- tial question of law has already been answered by this Court in ITA No. 3232/ 2005dt.4.11.2011byholdingthatthefindingoftheappellateauthoritiesthatthe expenditure incurred for acquisition of membership in Clubs is revenue expenditure. Accordingly, following the reasons assigned in the said judgment, first substantial question of law is answered against the Revenue and in favour of the assessee. So far as third substantial question of law is concerned, the said substantial question of law has already been answered by this Court in ITA No. 1189/06 in favour of the assessee and against the Revenue, in respect of the same assessee but for different assessment year. Therefore, following the reasons assigned in the said appeal, third substantial question of law is also answeredagainsttheRevenueandinfavouroftheassessee.Therefore,theonly substantial question of law that survives for consideration is, substantial question of law No. 2, i.e., Whether the Tribunal was correct in holding that provision for post-sale customer service which is a contingent liability should be allowed as an expenditure despite the same having been not incurred by the assessee during the current assessment year? 6. Learned counsel appearing for the appellant submitted that the assessing officer had rightly disallowed the amount claimed towards contingent expen- diture on the ground that the said sum was included without, any basis and the same could not be sustained as the actual expenses has not been incurred during the assessment year. The appellate authority set aside the said finding by holding that the estimate made towards expenditure is based upon past expenditure as also scientifically maintained accounts by the assessee and cannot be said to be contingent as the said amounts claimed towards after sale service in a sum of Rs. 2,19,18,587/- towards post sales customers support, was well founded. The appellate authorities have set aside the order passed by the Assessing Officer. 7. The learned counsel appearing for the appellants submitted that in view of the recent decision of the Hon’ble Supreme Court which is rendered after the decision of the Tribunal dt. 9.9.2005 in the case ofRotork Controls India (P.) Ltd. v. CIT [2009] 314 ITR 62/180 Taxman 422, the matter is required to be reconsidered by the Tribunal as in the said case the Supreme Court has laid down the basis on which the said amount towards post sale customer service can be claimed and the final authority on the question of fact has to consider the conditions which are required to be satisfied for making such a claim. In supportofhisclaimhehasrelieduponparaNo.13,whereinithasbeenobserved as follows: “In this case we are concerned with product warranties. To give an example of product Warranties, a company dealing in computers gives warranty for a period TAXMAN MARCH 10 - MARCH 16, 2012 58
    • 2012] 255 of 36 months from the date of supply. The said company considers following options: (a) account for warranty expense in the year in which it is incurred; (b) it makes a provision for warranty only when the customer makes a claim; and (c) it provides for warranty at 2 per cent of turnover of the company based on past experience (historical trend). The first option is unsustainable since it would tantamount to accounting for warranty expenses on cash basis, which is prohibited both under the Companies Act as well as by the Accounting Standards which require accrual concept to be followed. In the present case, the Department is insisting on the first option which, as stated above, is erroneous as it rules out the accrual concept. The second option is also inappropriate since it does not reflect the expectedwarrantycostinrespectofrevenuealreadyrecognized(accrued).Inother words, it is not based on matching concept. Under the matching concept, if revenue is recognized the cost incurred to earn that revenue including warranty cost have to be fully provided for. When valve actuators are sold and the warranty costs are an integral part of that sale price then the appellant has to provide for such warranty costs in its account for the relevant year, otherwise the matching concept fails. In such a case the second option is also inappropriate. Under the circumstances, the third option is most appropriate because it. fulfils accrual concept as well as the matching concept. For determining an appropriate historical trend, it is important that the company has a proper accounting system for capturing relationship between the nature of the sales, the warranty provisions made and the actual expenses incurred against it subsequently. Thus, the decision on the warranty provisionshouldbebasedonpastexperienceofthecompany.Adetailedassessment of the warranty provisioning policy is required particularly if the experience suggeststhatwarrantyprovisionsaregenerallyreversediftheyremainedunutilized at the end of the period prescribed in the warranty. Therefore, the company should scrutinize the historical trend of warranty provisions made and the actual expenses incurred against it. On this basis a sensible estimate should be made. The warranty provision for the products should be based on the estimate at year end of future warranty expenses. Such estimates need reassessment every year. As one reaches close to the end of the warranty period, the probability that the warranty expenses will be incurred is considerably reduced and that should be reflected in the estimation amount. Whether this should be done through a pro rata reversal or otherwise would require assessment of historical trend. If warranty provisions are based on experience and historical trend(s) and if the working is robust then the question of reversal in the subsequent two years, in the above example, may not arise in a significant way. In our view, on the facts and circumstances of this case, provision for warranty is rightly made by the appellant-enterprise because it has incurred a present obligation as a result of past events. There is also an outflow of resources. A reliable estimate of the obligation was also possible. Therefore, the appellant has incurred a liability, on the facts and circumstances of this case, during the relevant assessment year which was entitled to deduction under s. 37 of the 1961 Act. Therefore, all the three conditions for recognizing a liability for the purposes of provisioning stands satisfied in this case. It is important to note that there are four important aspects of provisioning. They are provisioning which relates to present obligation, it arises out of obligating events, it involves outflow of resources and lastly it involves reliable estimation of obligation. Keeping in mind all the four aspects, we are of the view that the High Court should not to have interfered with the decision of the Tribunal in this case.” CIT v. Infosys Technologies Ltd. (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 59
    • 256 Taxman - Tax Reports [Vol. 205 8. Learned counsel appearing for the respondent submitted that, the Tribunal has followed the decision in the case of Wipro GE Medical Systems Ltd. v. ITO (TDS)[2005]3SOT627(Bang.)whichhasbeenconfirmedbytheDivisionBench of this Court in ITA No.3047/2005 and connected matters disposed of on 21.09.2007 and the said judgment has been confirmed by the Hon’ble Supreme Court in Rotork Controls India (P.) Ltd.’s case stated (supra) and since the Tribunal has considered all the contentions which are prerequisite for making claim as per the decision in Rotork Controls India (P.) Ltd.’s case stated (supra) there is no necessity to set aside the order passed by the appellate authority and appeal is devoid of merit. 9. We have given careful consideration to the contention of the learned counsel appearing for the parties and scrutinised the material on record. 10. The material on record would clearly show that the order was passed by the Tribunal on 9.9.2005. Wherefore, the benefit of the decision of the Hon’ble Supreme Court in Rotork Controls India (P.) Ltd.’s case stated (supra) was not available to the Tribunal. In the said decision, the Hon’ble Supreme Court has laid down the conditions which are required to be satisfied for making claim in respect of post sale customer service and has laid down the principles pertain- ing to the same. In Rotork Controls India (P.) Ltd.’s case stated (supra) the Hon’ble Supreme Court has considered the principles laid down having regard to the facts of the said case and has stated that in each case all the conditions to be satisfied are to be considered. 11. On perusal of the order passed by the Tribunal we find that the above said factors which are required to be satisfied, have not been considered by the Tribunal and the Tribunal has only considered the past experience and the expenses incurred in the previous year, on the basis of which the claim was made. Under the circumstances, the Tribunal being the final authority on the question of fact, is required to consider the claim made by the assessee with reference to the decision inRotork Controls India (P.) Ltd.’s case stated (supra). 12. Accordingly, we refrain from expressing any opinion on the merits of the case in view of the order of remand proposed to be passed by us. Accordingly, it is unnecessary to answer the substantial question of law and the matter is remitted to the Tribunal by setting aside the finding allowing the claim, confirming the order passed by the appellate authority allowing the claim of 2,19,18,587/- towards post sales customers support. Appeal is disposed of accordingly in the light of the principles laid down in Rotork Controls Inidia (P.) Ltd.’s case (supra) and the matter is remanded to the Tribunal to pass fresh orders in accordance with law on the said question. All the contentions on the said question are kept open to be urged before the Tribunal. TAXMAN MARCH 10 - MARCH 16, 2012 60
    • 2012] 257 [2012] 205 TAXMAN 257/18 taxmann.com 119 (Delhi) HIGH COURT OF DELHI Commissioner of Income-tax v. Virtual Soft Systems Ltd. SANJAY KISHAN KAUL AND RAJIV SHAKDHER, JJ. IT APPEAL NOS. 216, 398, 403, 404 AND 680 OF 2011 FEBRUARY 7, 2012 Section 24, read with section 145, of the Income-tax Act, 1961 - Income from house property - Deductions - Assessment years 1996-97 to 2000-01 - Whether ICAI is, recognized as body vested with authority to recommend ASs for ultimate prescription by Central Government in consultation with National Advisory Committee of Accounting Standards, for presentation of financial statements and fact that opinion of ICAI regarding accounting for lease was expressed in a Guidance Note which had not attained a mandatory status, would not provide a basis to Assessing Officer to disregard books of account of assessee and in effect method of accounting for leases followed by assessee on basis of guideline recommended for adoption by ICAI - Held, yes - Whether lease equalization charge is result of adjustment, which assessee has to make whenever amount put asidetowardscapitalrecoveryisnotequivalenttodepreciationclaimedbyassessee and in effect debits or credits its profit and loss account with a lease equalization charge depending on whether or not depreciation claimed is less or more than capital recovery - Held, yes - Whether thus, lease equalization charges is a method of re-calibrating depreciation claimed by assessee in a given accounting period and method employed over full term of lease period would result in lease equalization amount being reduced to a naught, as debit and credits in profit and loss account wouldsquareoffwitheachother-Held,yes-Whether,therefore,leaseequalization charges debited to profit and loss account could not be disallowed while computing taxable income of assessee - Held, yes [In favour of assessee] FACTS The assessee’s assessment for relevant assessment years were reopened under section 147/148 and notices were issued to show cause as to why lease equalization charges debited to the profit and loss account should not be disallowed and, thereupon, added to the assessee’s income. The assessee contended that it had relied upon the Guidance Note dated 20-9-1995 issued by the Institute of Chartered Accountants of India (ICAI), in respect of accounting CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 61
    • 258 Taxman - Tax Reports [Vol. 205 for leases. It also submitted that the Central Government on 25-1-1996, had already issued an Accounting Standard qua section 145, which mandated that accounting policy of the assessee should be such so as to represent true and fair view of the affairs of the assessee’s business. The Assessing Officer, however, rejected the submission of the assessee, and came to the conclusion that the taxable income of the assessee had to be determined as per the IT Act; and that the said guidance note of the ICAI only provided guidelines for preparation of financial statements for the purposes of accounting. That apart, the Assessing Officer relied upon the order of the Commissioner (Appeals) passed in the assessee’s own case, for assessment year 2001-02. The sum and substance of that order was that the lease equalization charge, was a notional charge on the profits of an assessee. It was held that the said lease equalization charge represented an amount set aside out of profits of the assessee to equalize the imbalance between lease rental and depreciation created over a period of time and was, thus, a provision, and not an expense incurred by the lessor, i.e., the assessee and, therefore, a mere provision made for gauging, the profitability of a business venture could not be claimed as a deduction under the Act. Relying on the said order of the Commissioner (Appeals) for the assessment year 2001- 02, the Assessing Officer disallowed the sum attributed to lease equalization charges and, consequently, added the same to the assessee’s income. On appeal, the Commissioner (Appeals) followed his own order passed in the assessee’s case in assessment year 2001-02 and sustained the addition. The Tribunal, however, allowed the assessee’s appeal and deleted the addition. On revenue’s appeal: HELD Section 145 adverts to the method of accounting followed by an assessee. Sub- section(1)ofsection145providesthatincomechargeableunderthehead‘profits and gains of business or profession’ or ‘income from other sources’ shall be computedeitheroncashbasisoronmercantilesystem,whichevermethodbeing regularly employed by the assessee. This provision is, however, subject to the Central Government notifying accounting standard in respect of any class of assessee or class of income. Sub-section (3) of section 145 empowers the Assessing Officer to disregard the books of account submitted by the assessee only if he is not satisfied with: the correctness or completeness of the accounts of the assessee or, the method of accounting employed by the assessee or on account of A.S. notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the Assessing Officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in section 145. The fact that the assessee justified its method of accounting, by taking recourse to the Guidance Note issued by the ICAI in that behalf, was disregarded, on a disjointed reading of the provisions of the said Guidance Note. Both, the Assessing Officer as well as the Commissioner (Appeals), have adverted to paragraph 2 of the Guidance TAXMAN MARCH 10 - MARCH 16, 2012 62
    • 2012] 259 Note to come to an erroneous conclusion in as much as they have held that in determining as to whether deduction on account of lease equalization charges ought to be allowed or not, what has to be borne in mind is ultimately the provisions of the IT Act. Such an observation in paragraph 2 of the Guidance Noteisreallysayingtheobvious.Therefore,evenifthisGuidanceNotewassilent on this aspect, the provisions of the IT Act would undoubtedly still apply. [Para 9] The Assessing Officer could not have disregarded the method of accounting followed by the assessee in respect of lease rentals, as the method of accounting was based on a guideline commended for adoption by a professional body such astheICAI.TheGuidanceNotereflectsthebestpracticesadoptedbyaccountants the world over. The fact that, at the relevant point of time, it was not mandatory to adopt the methodology professed by the Guidance Note issued by the ICAI, is irrelevant, for the reason that as long as there was a disclosure of the change in accounting policy in the accounts, which had a backing of a professional body such as the ICAI, it could not be discarded by the Assessing Officer. This is specially so, since the ICAI is recognized as the body vested with the authority to recommend ASs for ultimate prescription by the Central Government in consultation by the National Advisory Committee of Accounting Standards, for presentation of financial statements. The provisions of section 211(3C) of the Companies Act are quite clear on this aspect. As a matter of fact, the proviso to the said sub-section quite clearly specifies that till such time the Central Government prescribes the Accounting Standards, the Accounting Standards issuedbytheICAI,shallbedeemedtobetherelevantaccountingstandards.[Para 9.1] In this context it would be important to note that AS-1 pertaining to disclosure of accounting policies has already been notified by the ICAI as having attained mandatory status for periods commencing on or after 1-4-1991. It is not the Assessing Officer’s case that the accounting policy with regard to lease rentals was not disclosed by the assessee. The Assessing Officer seems to have taken umbrage to the change in accounting policy having been brought about only with effect from assessment year 1996-97. As long as there was a disclosure of the factum of change in the accounting policy and its effect in the accounts, no fault could be found with the change in accounting policy merely on account of the fact that it was employed for the first time in assessment year 1996-97. The change in accounting policy had the impremature of a duly recognized professional body, i.e., the ICAI. Therefore, the fact that the opinion of the ICAI was expressed in a guidance note which had not attained a mandatory status, would not provide a basis to the Assessing Officer to disregard the books of account of the assessee and in effect method of accounting for leases, followed by the assessee. [Para 10] A lease represents an arrangement, which more often is a form of a contract, whereby party ‘A’ confers upon party ‘B’ the right to use an asset for a consideration which ordinarily is labelled as lease rentals. [Para 12] CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 63
    • 260 Taxman - Tax Reports [Vol. 205 Over a period of time, the transactions stood refined, in the sense, a lessor need not necessarily have created or even bought an asset with his own funds. Therefore,onecouldhavealeasetransactionwhere‘A’wasthelessorofanasset, which was financed by ‘C’, i.e., a lender, and which, ultimately, was leased to party ‘B’, i.e., the lessee. A lease transaction, therefore, attained several forms, depending on the comfort level of the parties entering into a transaction and, the purpose with which the transaction was entered into, bearing in mind, the nature of the asset and, the risk bearing capacity of the parties. Therefore, one can today execute a finance lease, or an operating lease, or evolve a sale and lease back arrangement, or a leveraged lease, or even employ a direct leasing arrangement [Para 12.1] There is no need to get into the various forms in which, a lease transaction may beexecutedbyparties,butwhatisimportant,isthatallthesetransactionsexhibit a facet by which access is provided to an asset, by separating ownership, risk and the provision of finance to achieve this goal. [Para 12.2] The definition of ‘finance lease’ in Guidance Note of the ICAI would indicate that the lease arrangement of a finance lease is one, whereby the lease rentals are so configured that over a period of time they enable the lessor to recover a substantial portion of the fair value of the assets. [Para 13.1] Therefore, generally the attributes of such a lease are: it is a long-term lease which is ordinarily irrevocable and the minimum present value of the lease rental decided at the commencement of the lease, which is spread over a period of time, facilitates recovery of a substantial part of the fair value of the leased assets. While fixing the lease rentals and the lease period, the economic life of leased asset is borne in mind. The lease period is normally shorter than the economiclifeoftheasset.Theotherattributeofsuchatransactionisthattherisk of breakdown or technological obsolescence is transferred to the lessee, who, therefore, ordinarily would bear the cost of maintenance, repairs and insurance of the leased assets. The ownership, however, is retained with the lessor. [Para 13.2] The Tribunal, in the captioned cases, has returned a finding of fact after examining transaction at hand that it is a finance lease. Being a final fact finding authority this finding in any case cannot be disturbed except on the ground of perversity. [Para 14] The Tribunal having found that the lease in issue is a finance lease, one would be required to consider whether the method employed by the assessee with regard to determination of the real income is a correct method. Paragraphs 11 and 12 of the Guidance Note of the ICAI read with the appendix attached to it is quite instructive in this regard. Therefore, paragraph 2 of the guidance note on which great stress is laid on behalf of revenue has to be read with paragraphs 11 and 12. The said paragraphs adverts to the following four elements, which arise, for consideration for treatment of the amount received as lease rentals by the lessee, in order to bring to tax what is his real income and, present a true and fair TAXMAN MARCH 10 - MARCH 16, 2012 64
    • 2012] 261 view of the transaction in issue. The four elements which are considered are: leaserentals;theimplicitrateofreturn(IRR);depreciation;andleaseequalization charge. [Para 14.2] Lease rental in monetary terms is a sum total of the financing charge and the amount embedded in it in the form of the capital sum. What the assessee needs to do, while offering for tax income derived from lease, is to separate the financing charge from the amount recovered towards capital, that is, the capital recoveryamount.ThefinancingchangeisdeterminedbyapplyingtheIRRtothe net investment made in the asset. The assessee also needs to provide for depreciation, on the capital value embedded in the lease rental. The fourth element, which is the lease equalization charge, is the result of the adjustment, which the assessee has to make whenever the amount put aside towards capital recovery is not equivalent to the depreciation claimed by the assessee. The assessee may claim depreciation based on the provisions of the IT Act or, may evenadoptthemethodofdepreciationprovidedundertheCompaniesAct.Inthe event, the depreciation claimed is less than the capital recovery, the difference is debited in the profit and loss account in the form of lease equalization charge, and similarly if, for any reason the depreciation claimed is more than capital recovery then, the difference is credited, once again, in the form of lease equalization charge to the profit and loss account. Therefore, the assessee, in effect,debitsorcreditsitsprofitandlossaccountwithaleaseequalizationcharge depending on whether or not the depreciation claimed is, less or more than the capital recovery. The capital recovery can be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalization charges is a method of re-calibrating the depreciation claimed by the assessee in a given accounting period. The method employed by the assessee, therefore, over the full term of the lease period would result in the lease equalization amount being reduced to a naught, as the debits and credits in the profit and loss account would square off with each other. Hence, the contention of the revenue that it is a claim in the form of a deduction which cannot be allowed, as there is no provision under the IT Act is a complete misappreciation of what constitutes a lease equalization charge. As long as the method employed foraccountingofincomemeetswiththerudimentaryprinciplesofaccountancy, one of which includes offering only revenue income for tax, no fault can be found with the assessee debiting lease equalization charges in the assessment years in issue, in its profit and loss account. This represents true and fair view of the accounts; a statutory requirement under section 211(2) of the Companies Act. The rationale is that over the entirety of the lease period the said debit would work itself out. [Para 14] Therefore,forthereasonsgivenhereinabove,themethodofaccountingfollowed by the assessee enabled it to determine the real income, which was offered to tax in the instant case. The Assessing Officer, by disallowing the deduction has added to the taxable income of the assessee that, which is not part of its income, but only an adjustment of the amount claimed as depreciation. [Para 15] CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 65
    • 262 Taxman - Tax Reports [Vol. 205 CASES REFERRED TO CIT v. Woodward Governor India (P.) Ltd. [2007] 294 ITR 451/162 Taxman 60 (Delhi) (para 7.2), Collector of Central Excise v. Dai Ichi Karkaria Ltd. [1999] 156 CTR 172 (SC) (para 7.2), Indian Railways Finance Corpn. Ltd. v. Jt. CIT [It Appeal Nos. 359, 699, 2109 & 3357 (Delhi) of 2004] (para 7.4) andJt. CIT v. Pact Securities & Financial Ltd. [2003] 86 ITD 115 (Hyd.) (para 7.4). Ms. Rashmi Chopra for the Appellant. S. Krishnan for the Respondent. JUDGMENT Rajiv Shakdher, J. - The captioned appeals lay challenge to a common judgment of the Income Tax Appellate Tribunal, Delhi Bench, New Delhi (in short‘theTribunal’)passedon19.02.2010.Theonlypointraisedinthecaptioned appeals is: whether an assessee’s leased rental income could be allowed to be reduced by taking recourse to lease equalization charges. 2. It is relevant to note that before the Tribunal the assessment years (in short ‘AY’) in issue were: AYs 1996-97 to 2000-01. Thus, the Tribunal, by virtue of the impugnedjudgmentdealtinallwithfive(5)appealsbeingITANos.117,118,119, 120 & 2292/Del/2006&04. In so far as the first appeal was concerned, that is, the one relating to 1996-97, the challenge before the Tribunal was laidvis-a-vis the order dated 26.03.2004, passed by the Commissioner of Income Tax (in short ‘CIT’) under Section 263 of the Income-tax Act, 1961 (in short the ‘I.T. Act’). The issue on merits was the same as indicated hereinabove by us. As regards the remaining four (4) appeals, what was challenged before the Tribunal was a common order of the Commissioner of Income Tax (Appeals) [in short ‘the CIT(A)’] dated 15.09.2003 pertaining to AY 1997-98 to 2000-01. In these appeals as indicated in the judgment of the Tribunal, there were two issues raised. The first issue, pertained to the validity of the reassessment proceedings carried out in the case, while the second issue, on merits, was the same as indicated above by us. 3. It is in this factual background that the Tribunal, in the first instance, dealt with the issue on merits and, having come to the conclusion that the contention of the assessee had to be sustained, the validity of the order passed in AY 1996- 97 under Section 263 of the IT Act or, the validity of the reassessment proceedings, in so far as, the remaining four assessment years were concerned, was not examined, as they had become, according to the Tribunal, “of academic interest”. 4. It is in this background that the Revenue has come up in appeal to this court. Assessment Year 1996-97 4.1 In respect of AY 1996-97, the original assessment was completed, on 30.03.1999,underSection143(3)oftheITAct.Thesaidassessmentwassetaside by CIT(A). Consequently, an order under Section 143(3) read with Section 152 of the IT Act was passed on 19.03.2002. This order led to a determination of, a negative income, qua the assessee, which was, pegged at (-) Rs. 11,02,255. The TAXMAN MARCH 10 - MARCH 16, 2012 66
    • 2012] 263 said order of assessment dated 19.03.2002, was set aside by the CIT in exercise of its power under Section 263 of the IT Act vide order dated 26.03.2004. By this order the CIT, directed inclusion of a sum of Rs. 33,77,830/- in the assessee’s income, on account of lease rental. Consequent thereto, the assessee was issued a notice under Section 143(2) of the IT Act and, after hearing the representative of the assessee, the total assessable income of the assessee was re-computed, by the order dated 09.03.2005 as follows. Income as per Order u/s 250/143(3) dated 19-03-2002 (-) 11,02,255/- Add: Lease Rental 33,77,830/- Total Assessable income 22,75,575/- 4.2 The assessee’s income was thus assessed at Rs. 22,75,575/-, interest was also levied under Section 234B and Section 234C of the IT Act; orders were also issuedforinitiationofpenaltyproceedingsunderSection271(1)(c)oftheITAct. 4.3 The assessee being aggrieved, impugned the substantive order of the CIT dated 26.03.2004 passed under Section 263 of IT. Act in appeal before the Tribunal, which culminated in the impugned judgment. Assessment Years 1998-99 to 2000-01 4.4 In so far as the remaining four assessment years were concerned the assessing officer appears to have passed separate orders of even date, i.e., 28.01.2005.A perusal of the order would show that a common thread flows through the said assessment orders. 4.5 The assessment’s were re-opened for the said years, by the assessing officer, after taking recourse to the provisions of section 147/148 of the IT Act. Notices were issued to Show Cause as to why lease equalization charges debited to the profit and loss account should not be disallowed and, thereupon added to the assessee’s income. 4.6 The assessee, filed his reply and objected to the assessment being re-opened as, according to it, there was no reason to believe that income had escaped assessment. On merits, the assessee had submitted that it had relied upon the Guidance Note dated 20.09.1995 (in short ‘the Guidance Note’) issued by the Institute of Chartered Accountants of India (in short ‘ICAI’), in respect of, Accounting for Leases. It was also submitted that the Central Government on 25.01.1996, had already issued an Accounting Standard qua Section 145 of the IT Act, which mandated that accounting policy of the assessee should be such so as to represent true and fair view of the affairs of the assessee’s business. 4.7 The assessing officer, however, rejected the submission of the assessee, and came to the conclusion that the taxable income of the assessee had to be determined as per the IT Act and, that the said Guidance Note of the ICAI only provided guidelines for preparation of financial statements for the purposes of accounting. This apart, the assessing officer relied upon the order of the CIT(A) dated27.07.2004passedintheassessee’sowncase,forAY2001-02.Thesumand CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 67
    • 264 Taxman - Tax Reports [Vol. 205 substance of the order passed by the CIT(A), in AY 2001-02, was that the lease equalizationcharge,wasanotionalchargeontheprofitsofanassessee.Thesaid lease equalization charge, represented an amount set aside out of profits of the assessee to equalize the imbalance between lease rental and depreciation created over a period of time. The lease equalization charge was thus, a provision, and not an expense incurred by the lessor, i.e., the assessee. This provisionwassimilartothatmadefordepreciation.Therefore,amereprovision made for gauging the profitability of a business venture could not be claimed as a deduction under the IT Act. It may be worthwhile to note that eventhough the order of the CIT(A) denied to the assessee the deduction, it recognized the fact that lease equalization charge was a provision for additional depreciation, crafted to reflect true and correct picture of the profitability of the assessee. Relying on the order of the CIT(A), for the AY 2001-02, the assessing officer, disallowed the sum attributed to lease equalization charges, and consequently, added the same to the assessee’s income. The disallowance, in each of the assessment years is as follows: (i) AY 1997-98 Rs. 67,02,745/-; (ii) AY 1998-99 Rs. 66,50,755/-; (iii) AY 1999-00 Rs. 1,65,12,077/- and (iv) AY 2000-01 Rs. 1,14,47,407/- 4.8 The assessment orders were carried in appeal to the CIT(A). The CIT(A) in respect of the aforementioned four assessment years passed a common order dated 15.09.2005. The CIT(A), in so far as re-opening of the assessment proceed- ings was concerned came to the conclusion that since, in the first instance, no definitive finding with regard to lease equalization charges had been given, it could not be said that there was a change of opinion on the part of the assessing officer. The CIT(A) held, that based on a consideration of the facts, the assessing officer had come to the conclusion that the lease equalization charges had been wrongly claimed as deduction and hence, there was occasion to initiate proceedings under Section 147 read with Section 148 of the IT Act. The CIT(A), was thus of the view, that the assessing officer’s action of re-assessment had to be sustained. 4.9 On the merits, the CIT(A) followed his own order dated 27.07.2004 passed in the assessee’s case in AY 2001-02 and sustained the addition. He briefly held that, the Guidance Note issued by the ICAI itself, indicated that income of the assessee had to be determined as per the prevalent tax laws, and that the Guidance Note was evolved only for the purposes of finalization of the accounts of the assessee. As noticed by us above, the assessing officer had followed the order of the CIT(A) for AY 2001-02. 5. The assessee being aggrieved by both the order of the CIT dated 26.03.2004 passed under Section 263 of the IT Act pertaining to AY 1996-97, and the common order passed by the CIT(A) dated 15.09.2003 vis-à-vis AY 1997-98 to 2000-01, preferred appeals to the Tribunal. The Tribunal, by the impugned judgment dated 19.02.2010, allowed the appeals of the assessee, on merits. TAXMAN MARCH 10 - MARCH 16, 2012 68
    • 2012] 265 6. The revenue being aggrieved, has preferred the captioned appeals before us. In these appeals, the predecessor bench had framed the following common questions of law by an order dated 06.07.2011. (a) Whether on the facts and circumstances of the case, the ITAT erred in law andonmeritsinallowingthedeductionofleaseequalizationchargesfrom lease rental income? (b) Whether the Guidance Note issued by ICAI for presentation of accounts would override the statutory provisions of the Income Tax Act, 1961? 6.1 By a subsequent order passed on 10.01.2012, the second question of law was reformulated with the consent of counsels for the assessee and revenue. The reformulated question of law reads as follows: (b) Whether in determination of the real income of the assessee recourse can be taken by the assessee to the Guidance Note issued by ICAI. Submission of Counsel 7. Before us arguments on behalf of the revenue were advanced by Ms Rashmi Chopra, while on behalf of the assessee submissions were made by Mr S. Krishnan. 7.1 Ms Rashmi Chopra, in her submissions largely relied upon the orders passed by the assessing officer and the order of the CIT(A) dated 15.09.2003. It was Ms Chopra’s submission that the assessee could not take recourse to the Guidance Note issued by the ICAI qua Accounting for Leases in determination of its income, and therefore in that regard, whether a particular deduction ought to be allowed or disallowed, one would only have to look to the provisions of the IT Act. Ms Chopra contended that, the debit made to the profit and loss account by the assessee in the AYs under consideration towards lease equalization charge was rightly disallowed by the assessing officer as, there was no provision in the IT Act for such a deduction. Ms Chopra, further submitted that, in any event, there had been no determination whatsoever by the assessing officer, as to whether the lease transactions in issue could be categorized as a finance lease. Ms Chopra stated that the issue pertaining to this aspect of the matter was pending in another appeal being ITA No. 142/2007, titledCIT v. Goodwill India. For these reasons, Ms Chopra argued that the view taken by the Tribunal, was erroneous and ought to be reversed. 7.2 On the other hand, Mr Krishnan contended that, regard may be had to the fact that the assessee was entitled to change its accounting policy which it had done, by taking recourse to the provisions of the Guidance Note issued by the ICAI, while accounting for lease transactions. The method of accounting which the assessee had followed was based what has been provided in paragraphs 11 and 22 of the Guidance Note. Mr Krishnan submitted that, the courts had accepted the recommendations issued by the ICAI from time to time, with respect to the manner and mode of reflecting transactions in books of account, in a number of judgments, pronounced by both the High Courts, as well as the CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 69
    • 266 Taxman - Tax Reports [Vol. 205 Supreme Court. In this regard he placed reliance on the judgment of this court in the case ofCIT v.Woodward Governor India (P.) Ltd. [2007] 294 ITR 451/162 Taxman 60 and the Judgment of the Supreme Court in the case of Collector of Central Excise v. Dai Ichi Karkaria Ltd. [1999] 156 CTR 172. 7.3 Mr Krishnan, further submitted that, what is provided in the Guidance Note stands transcended into an Accounting Standard (in short ‘A.S.’) issued by the ICAI, in 2001. 7.4 In this regard Mr Krishnan placed reliance on A.S. 19 issued by the ICAI. Mr Krishnan, also placed reliance on two judgments of different benches of the Tribunal in the case ofIndian Railways Finance Corpn. Ltd. v.Jt. CIT [IT Appeal Nos. 359, 699, 2109 & 3357 (Delhi) of 2004] and Jt. CIT v. Pact Securities & Financial Ltd. [2003] 86 ITD 115 (Hyd.). The latter being extensively referred to in the former judgment of the Tribunal. 7.5 It was Mr Krishnan’s contention that lease equalization charge was nothing but a method of adjusting the depreciation claimed in the books of account to enable the assessee to represent its real income by adopting an accounting methodology which, even though not mandatory, had surely the seal of approval of a professional body, such as, the ICAI. Mr Krishnan submitted that the Tribunal, had rightly come to the conclusion that the lease equalization charge could not be disallowed and hence, could not be added to the assessee’s incomeonthegroundthattherewasnoprovisionintheITActas,overtheentire lease period of the asset, the debits and credits made in the profit and loss account would square off with each other. In other words the ultimate effect of such a charge was reduced to a naught. 7.6 Reliance was also placed by Mr. Krishnan, on the provisions of Section 211(3C) of the Companies Act, 1956 (in short ‘Companies Act’), to contend that the ICAI was mandated with the task of formulating ASs from time to time for acceptance by the Central Government. Reasons 8. Having heard the learned counsels for the parties and perused the record, what emerges is as follows: However, before we proceed further, we may indicatethat,wewouldbeansweringthequestionsoflawframed;inthereverse order, in as much as, the second question would be answered first and then, we would take up the other question of law. 8.1. The foremost aspect which, thus arises for consideration in this case is: whether the method of accounting employed by the assessee to determine the real income evidently derived from lease of assets, could be given a go-by. In determining its income and its presentation, the assessee took recourse to the Guidance Note, issued by the ICAI, on Accounting For Leases. The ICAI’s publication on the subject indicates that the Guidance Note on accounting of leaseswasissuedbyit,forthefirsttime,in1988,whichwas,thenrevisedin1995. The hiatus between the date when it was first issued, and its revision, appears TAXMAN MARCH 10 - MARCH 16, 2012 70
    • 2012] 267 tobeonaccountofaninterimordergrantedbytheMadrasHighCourtinacase, which was, disposed of on, 14.07.1995. It appears that the case was dismissed as withdrawn. 8.2 We may also note that our discussion is prefaced by the fact that on 01.04.2001, the ICAI did publish A.S. 19 in respect of leases. The said A.S. 19, is applicable, in respect of, assets leased during accounting periods commencing on or after 01.04.2001. The periods, which are under consideration, in the present appeals, are prior to 01.04.2001. 9. In this background what is required to be considered is whether the books of account could be rejected by the assessing officer merely for the reason that recourse to the Guidance Note was taken by the assessee. In this regard, we would be required to examine the provisions of Section 145 of the I.T. Act. Section 145 of the I.T. Act adverts to the method of accounting followed by an assessee. Sub-section (1) of Section 145 provides that income chargeable under the head “profits and gains of business or profession” or “income from other sources” shall be computed either on cash basis or on mercantile system, whichever method being regularly employed by the assessee. This provision is, however, subject to the Central Government notifying A.S. in respect of any class of assessee or class of income. Sub-section (3) of Section 145, empowers the assessing officers to disregard the books of account submitted by the assessee only if he is not satisfied with: the correctness or completeness of the accountsoftheassesseeor,themethodofaccountingemployedbytheassessee or on account of A.S. notified under sub-section (2), not being particularly followed by the assessee. In this particular case, the assessing officer has disregarded, in substance, the method of accounting followed by the assessee qua lease rentals without basing it on the grounds provided in Section 145 of the IT Act. The fact that the assessee justified its method of accounting, by taking recourse to the Guidance Note issued by the ICAI in that behalf, was disre- garded, on what we would term as, a disjointed reading of the provisions of the said Guidance Note. Both the assessing officer as well as the CIT(A) have adverted to paragraph 2 of the Guidance Note to come to, what we consider an erroneous conclusion in as much as they have held that in determining as to whether deduction on account of lease equalization charges ought to be allowed or not, what has to be borne in mind is ultimately the provisions of the IT Act. In our view, such an observation in paragraph 2 of the Guidance Note is really saying the obvious. Therefore, even if this Guidance Note was silent on this aspect the provisions of the I.T. Act would undoubtedly still apply. Thus, as to what is the impact of provision of para 2 of the Guidance Note will be considered by us as we progress further with our judgment. 9.1 However, what is important at this stage is to first address ourselves to the aspect as to whether the assessing officer could have disregarded the method of accounting followed by the assessee in respect of lease rentals. In our view, the assessing officer could not have do so, as the method of accounting was based on a guideline commended for adoption by a professional body such as CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 71
    • 268 Taxman - Tax Reports [Vol. 205 the ICAI. The Guidance Note reflects the best practices adopted by accountants the world over. The fact that, at the relevant point in time, it was not mandatory to adopt the methodology professed by the Guidance Note issued by the ICAI, is irrelevant, for the reason that, as long as there was a disclosure of the change in Accounting Policy in the accounts, which had a backing of a professional body such as the ICAI, it could not be discarded by the assessing officer. This is specially so, since the ICAI is, recognized as the body vested with the authority to recommend ASs for ultimate prescription by the Central Government in consultation by the National Advisory Committee of Accounting Standards, for presentation of financial statements. The provisions of section 211(3C) of the Companies Act are quite clear on this aspect. As a matter of fact, the proviso to the said sub-section, quite clearly specifies that till such time the Central Government prescribes the accounting standards the accounting standards issuedbytheICAI,shallbedeemedtobetherelevantaccountingstandards.The relevant provision reads as follows: “211(3C) For the purposes of this section, the expression “accounting standards” means the standards of accounting, recommended by the Institute of Chartered Accountants of India constituted under the Chartered Accountants Act, 1949 (30 of 1949), as may be prescribed by the Central Government in consultation with the National Advisory Committee on accounting Standards established under sub- Section (1) of Section 201A : Provided that the standards of accounting specified by the Institute of Chartered Accountants of India shall be deemed to be the accounting standards until the accounting standards are prescribed by the Central Government under this sub- section.” 10. In this context it would be important to note that AS1 pertaining to Disclosure of Accounting Policies has already been notified by the ICAI as havingattainedmandatorystatusforperiodscommencingonorafter01.04.1991. It is not, the Assessing Officer’s case, that the accounting policy with regard to lease rentals was not disclosed by the assessee. The assessing officer seems to have taken umbrage to the change in accounting policy having been brought about only with effect from AY 1996-97. In our view, as long as there was a disclosure of the factum of change in the accounting policy and its effect, in the accounts, no fault could be found with the change in accounting policy merely on account of the fact that it was employed for the first time in AY 1996-97. The change in accounting policy, as noticed by us above, had the imprimatur of a duly recognized professional body,i.e.,theICAI.Therefore,notwithstandingthe fact that the opinion of the ICAI was expressed in a Guidance Note which had not attained a mandatory status, would not, in our view, provide a basis to the assessing officer to disregard the books of accounts of the assessee and in effect method of accounting for leases, followed by the assessee. 11. This brings us to the next crucial question as to whether the Tribunal had erred in allowing the deduction on account of lease equalization charges. In order to adjudicate upon this issue, it may be relevant to first understand as to TAXMAN MARCH 10 - MARCH 16, 2012 72
    • 2012] 269 howleasetransactionsoperateinthecommercialworld.Traditionally,theterm lease was confined to an immovable property such as building and/or land. Lease therefore came to be defined as: A conveyance of land or of the use of a building or a part of a building from one person (lessor) to another (lessee) for a specified period of time, in return for rent or other compensation. (See Dictionary for Accountants, Eric L. Kolher 1978, 5th edition). This traditional view, underwent a change over a period of time when, parties and/or entities entered into lease transactions even qua movable assets, such as, plant, machinery and various other assets, which also included vehicles; to name some of them. The Oxford Dictionary of Accounting (New Edition), 1999 represents that change. The definition of lease contained therein, is indicative of the shift. For the sake of convenience the definition of lease as appearing in the said dictionary is also extracted hereinbelow: “Lease: A contract between the owner of a specific asset, the lessor, and another party, the lessee, allowing the latter to hire the asset. The lessor retains the right of ownership but the lessee acquires the right to use the asset for a specific period of time in return for the payment of specific rentals or payments. Statement of Standard Accounting Practice, 21 Accounting for Leases and Hire Purchase Con- tracts, classifies leases into operating leases and finance leases with differing accounting treatments.” 12. A perusal of the definition would show that a lease represents an arrange- ment, which more often than not dons a form of a contract, whereby party ‘A’ confers upon party ‘B’ the right to use an asset, for a consideration, which ordinarily is labelled as lease rentals. 12.1 Over a period of time, the transactions stood refined, in the sense, a lessor need not necessarily have created or even bought an asset with his own funds. Therefore, you could have a lease transaction where ‘A’ was the lessor of an asset, which was financed by ‘C’,i.e., a lender, and which, ultimately, was leased to party ‘B’,i.e., the lessee. A lease transaction therefore attained several forms, depending on the comfort level of the parties entering into a transaction and, the purpose with which the transaction was entered into, bearing in mind, the nature of the asset and, the risk bearing capacity of the parties. Therefore, you could today execute a finance lease, or an operating lease, or evolve a sale and lease back arrangement, or a leveraged lease, or even, employ a direct leasing arrangement. 12.2 We do not intend to get into the various forms in which, a lease transaction may be executed by parties, but what is important, is that, all these transactions exhibit a facet by which access is provided to an asset, by separating ownership, risk and the provision of finance to achieve this goal. Since, we are concerned in this matter with a lease, which is, ordinarily known as, a finance lease, or even capital lease; an attempt would be made to articulate as to what such a transaction would entail. 13. The Guidance Note of the ICAI defines a finance lease as: “a lease under which the present value of the minimum lease payments at the inception of the CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 73
    • 270 Taxman - Tax Reports [Vol. 205 lease exceeds or is equal to substantially the whole of the fair value of the lease assets”. 13.1 As the definition would indicate the lease arrangement of a finance lease is one, whereby the lease rentals are so configured that over a period of time they enable the lessor to recover a substantial portion of the fair value of the assets. 13.2 Therefore, generally the attributes of such a lease are: (a) it is a long term lease; which is ordinarily irrevocable and, the minimum present value of the lease rental decided at the commencement of the lease, which is spread over a period of time, facilitates recovery of a substantial part of the fair value of the leased assets. While fixing the lease rentals and the lease period, the economic life of leased asset is borne in mind. The lease period is normally shorter than the economic life of the asset. The other attribute of such a transaction is that theriskofbreakdownortechnologicalobsolescenceistransferredtothelessee, who therefore ordinarily would bear the cost of maintenance, repairs and insurance of the leased assets. The ownership, however, is retained with the lessor. 14. The Tribunal, in the captioned cases, has returned a finding of fact after examining transaction at hand that it is a finance lease. Being a final fact finding authority we do not intend to disturb this finding; which in any case cannot be disturbed except on the ground of perversity. The learned counsel for the revenue though, did attempt to argue before us, that there is no determination by the assessing officer as to whether the lease transactions in issue were in the nature of a finance lease; we tend to disagree as the Tribunal quite categorically in paragraph 9 of the impugned judgment has come to a conclusion that the transactions in issue were in the nature of a finance lease. The relevant portion is extracted hereinafter for the sake of convenience: “9. As per the guidance notes, operating lease has been defined as lease other than the finance lease. If the entire value of asset was not recovered by the assessee in the case of Goodwill India Ltd. (supra) during the period of lease, it cannot be a finance lease and hence guidance notes of the ICAI cannot be applicable to such an assessee. In the present case, in the sample working submitted before us, it is shown that as against amount financed by the assessee of Rs. 677,645/-, the assessee has recovered Rs. 654,944/- as depreciation and the balance amount of Rs. 22,799/- has been explained as residual value of the leased asset. This is only 3.36% of the amount financed and hence it is reasonable claim that this balance amount is residual value. In the case of Goodwill India Ltd. (supra) relied upon by the learned DR of the revenue, as per example noted by the tribunal on page 37 of 306 ITR, against cost oftheassetofRs.100/-,onlyRs.66/-wasrecovereddepreciationandtheunrecovered amount is 34%. This cannot be said to be residual value. In view of this vital difference in facts, we are of the considered opinion that this Tribunal decision is not applicable in the present case because in the present case, the assessee is recovering full financed amount of the lease asset during the lease period in the form of depreciation and residual value. No defect is pointed out by the learned counsel of the revenue in this chart and it is also not the case of the revenue that the TAXMAN MARCH 10 - MARCH 16, 2012 74
    • 2012] 271 facts of the present case are different than the position depicted in this chart. Since, the facts are different; the Tribunal decision cited by Ld. Counsel of the revenue rendered in the case ofGoodwill India Ltd. (supra) is not relevant in the present case. Wewouldalsoliketopointoutthatinthepresentcase,itisnotthecaseoftherevenue that the leases in question are not finance lease as per the guidelines issued by ICAI. The case of the revenue as per the orders of the authorities below and as per written submissions of learned counsel of revenue before us is that the guidelines of ICAI are not decisive and no deduction is allowable as per any provision of Income Tax Act on account of Lease Equalisation charges and still we have obtained sample working from the assessee by refixing the case for clarification to satisfy ourselves that the leases in question in the present case is finance leases and as per the discussion above, we have noted that in the present case, the leases are finance lease whereas in the case ofGoodwill India Ltd.(supra), the lease was not finance lease as per the facts noted by the tribunal in that case.” [Emphasis supplied] 14.1 A perusal of the grounds of appeal would show that there is no averment whatsoever that such a finding of fact recorded by the Tribunal, was perverse. Therefore, we would have to accept that the Tribunal examined the record, and came to a correct conclusion. 14.2 The Tribunal having found that the lease in issue is a finance lease we would be required to consider whether the method employed by the assessee with regard to determination of the real income is a correct method. Paragraph 11 and 12 of the Guidance Note of the ICAI read with the appendix attached to it is, quite instructive in this regard. Therefore, paragraph 2 of the Guidance Note on which great stress is laid on behalf of revenue has to be read with paragraphs 11 and 12. We do not wish to burden the judgment with the extract of the said paragraphs, however, it is sufficient to note that the paragraphs adverts to the following four elements, which arise, for consideration for treatment of the amount received as lease rentals by the lessee, in order to bring to tax what is his real income and, present a true and fair view of the transaction in issue. The four elements which are considered are: lease rentals; the implicit rate of return (IRR); depreciation; and lease equalization charge. 14.3 Lease rental in monetary terms is a sum total of: the financing charge and the amount embedded in it in the form of the capital sum. What the assessee needs to do, while offering for tax income derived from lease is, to separate the financingchargefromtheamountrecoveredtowardscapital,thatis,thecapital recovery amount. The financing change is determined by applying the IRR to the net investment made in the asset. The assessee also needs to provide for depreciation, on the capital value embedded in the lease rental. The fourth element which is the lease equalization charge is the result of the adjustment, whichtheassesseehastomakewhenever,theamountputasidetowardscapital recovery is not equivalent to the depreciation claimed by the assessee. The assessee, may claim depreciation based on the provisions of the IT Act or, may even adopt the method of depreciation provided under the Companies Act. In the event, the depreciation claimed is less than the capital recovery, the difference is debited in the profit and loss account in the form of lease CIT v. Virtual Soft Systems Ltd. (Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 75
    • 272 Taxman - Tax Reports [Vol. 205 equalization charge, and similarly if, for any reason the depreciation claimed is more than capital recovery then, the difference is credited, once again, in the form of lease equalization charge to the profit and loss account. Therefore, the assessee in effect debits or credits its profit and loss account with a lease equalization charge depending on whether or not the depreciation claimed is, less or more than the capital recovery. The capital recovery can be known, as is evident, on deduction of financing charges from the lease rentals. In sum and substance, lease equalization charges is a method of re-calibrating the depre- ciation claimed by the assessee in a given accounting period. The method employedbytheassessee,therefore,overthefulltermoftheleaseperiodwould result in the lease equalization amount being reduced to a naught, as the debit and credits in the profit and loss account would square off with each other. Hence, the contention of the revenue that it is a claim in the form of a deduction which cannot be allowed, as there is no provision under the I.T. Act is, in our view, a complete misappreciation of what constitutes a lease equalization charge. In our opinion, as long as the method employed for accounting of income meets with the rudimentary principles of accountancy, one of which, includes offering only revenue income for tax, we cannot find fault with the assessee debiting lease equalization charges in the AYs in issue, in its profit and loss account. This represents true and fair view of the accounts; a statutory requirement under Section 211(2) of the Companies Act. As explained by us above, the rationale is that over the entirety of the lease period the said debit would work itself out. 15. Therefore, for the reasons given hereinabove, in our opinion, the method of accounting followed by the assessee enabled, it to determine the real income, which was offered for tax in the instant case. The assessing officer, by disallowing the deduction has added to the taxable income of the assessee that, which is not, part of its income, but only an adjustment of the amount claimed as depreciation. 16. Therefore, both questions of law are answered in favour of the assessee and against the revenue. The appeals of the revenue are, accordingly, dismissed. TAXMAN MARCH 10 - MARCH 16, 2012 76
    • 2012] 273 [2012] 205 TAXMAN 273/18 taxmann.com 243 (AAR - New Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI Global Industries Asia Pacific Pte. Ltd., In re JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN AND V.K. SHRIDHAR, MEMBER A.A.R. NO. 936 OF 2010 FEBRUARY 15, 2012 I. †Section 9, read with section 90, of the Income-tax Act, 1961 and article 12 of the Double Taxation Avoidance Agreement between India and Singapore (Royalties and fees for technical services) - Income - Deemed to accrue or arise in India - Applicant is a Singaporean company - It entered into a contract with IOCL to execute work of ‘Residual offshore construction work at Paradip, in east coast of India Installation of SPM Including anchor chains, floating and subsea hoses’ - For undertaking above operations resources including vessels were mobilized to India - Character of amount payable under contract is linked to nature of work and amount is not lump sum for whole contract - Lump sum amount is fixed only for mobilization and demobilisation - Whether parties can enter into a contract which provides for mobilization and demobilization for a separate consideration though they are meant to be utilized in process of installation of SPM buoy and would be taxable in India under section 44BB - Held, yes - Whether if during activities of installation, income in nature of royalty or fees for technical services or interest or of any other nature arises, then such an income has to be assessed under that head of income - Held, yes - Whether payment for mobilization and demobilization relates to use of equipment for undertaking installation work and falls under definition of royalty under article 12.3(b) of DTAA - Held, yes - Whether as installation is ancillary and subsidiary to use of equipment or enjoyment of right for such use, payment for installation would fall under definition of ‘fees for technical services’ as per article 12.4(a) of DTAA - Held, yes [In favour of revenue] II. Section 44BB, read with section 90, of the Income-tax Act, 1961 and article 5.5 ofDoubleTaxationAvoidanceAgreementbetweenIndiaandSingapore(Permanent establishment) - Non-residents - Mineral oil, business for prospecting /exploration, etc., in case of - Applicant is a Singapore company - On 23-4-2008, it was awarded a sub-contract by Larsen & Toubro (L&T) to execute work of installation and construction services for Single Point Mooring (SPM) in waters of Mumbai High †INDIA - India/Singapore - Tax Treaty - Royalties/Fees for technical services/Permanent establishment - Article 12/5 of DTAA between India and Singapore - Article 12/5 of OECD Model Tax Convention. Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 77
    • 274 Taxman - Tax Reports [Vol. 205 South field - For undertaking construction work vessels were mobilized to India - Applicant accepts that receipts under contract are taxable under section 44BB, but contends that since its vessels were not in India for more than 183 days, it would not have a PE in India in view of article 5.5 of DTAA and, therefore, liability is attracted under section 44BB - Whether article 5.5 is a deeming provision and its import is such that said article can be attracted even on provision of services simpliciter without presence of an office building in country where services are being provided - Held, yes - Whether since services and facilities being rendered by applicant go beyond installation and include pre-installation services, post- installationservices,procurementandtransportation,durationofthoseofservices cannot be excluded while calculating duration of provision of services or facilities under article 5.5 - Held, yes - Whether therefore, even if applicant was not mobilizing any vessel, it has a PE in terms of article 5.5 as it has provided services or facilities in connection with exploration, exploitation or extraction of mineral oils for more than 183 days during fiscal year - Held, yes - Whether therefore, income derived by applicant in respect of contract with L&T is taxable in India under section 44BB - Held, yes [In favour of revenue] FACTS-I The applicant is a Singapore company. During the year 2008-09, it entered into a contract with IOCL. The contract is made to execute the work of ‘Residual offshore construction work at Paradeep, in east coast of India installation of SPM including anchor chains, Floating and subsea hoses’. In layman’s term, it is installation of a system which acts as a complete terminal for discharge of crude oil from vessels stationed in the sea to the onshore tank farm. For undertaking the above operations resources including vessels were mobilized to India. The applicant submits that its presence in India in the financial year 2008-09 is only for 41 days and that would not constitute a Permanent Establishment (PE) in terms of the tax treaty with Singapore (DTAA). The applicant has sought advance ruling on the questions as to whether consider- ation, including mobilization and demobilization revenues, for services pro- vided by the applicant to ‘IOCL’ be construed to be in the nature of ‘Fees for Technical Services’ (‘FTS’) under section 9(1)(vii) or under article 12 of India - Singapore Double Tax Avoidance Agreement, and whether can the consider- ation for services provided by the applicant be construed to be in the nature of ‘Royalty’ under section 9(1) of the Act and/or under Article 12 of the tax treaty. The revenue submits that the consideration for the contract is fee for technical services under the Act and under the DTAA. As regards the existence of a PE, it is stated that the impugned services can be provided only if the applicant has an office in India. Lastly, the mobilization and demobilization expenses to the extent of distance travelled beyond the territorial waters of India are taxable in India being part of the composite contract for the activities carried out in India. TAXMAN MARCH 10 - MARCH 16, 2012 78
    • 2012] 275 HELD-I Contract with IOCL: IOCL is setting up an offshore crude oil receiving facility having Single Point Mooring (SPM) terminal about 20 km. off the coast of Paradip in the east coast of India. The facility available will unload the crude oil from Very Large Crude Carriers (VLCCs) to meet the crude oil requirement of its refineries located in the eastern part of India. It is stated that the major part of the crude receiving facility hasbeencompletedcomprisingoflaying20km.ofoffshorepipeline,installation of PLEM, spool piece connection of the 48" lying with the PLEM, hydrostatic testing of 48" pipeline, driving on six number of anchor piles with chains, 2.8km for a effluent discharge is already laid. The IOCL, in its letter dated 17-7-2008, informed the applicant about the residual offshore construction of Paradip Port and informed that the anticipated residual work is divided into 3 groups: Group1.InstallationofSPMincludinganchorchains,floatingandsubseahoses. Group 2. Work of post trenching of 48" and 14" pipeline. Group 3. All balance works required to complete the 14' affluent pipeline. [Para 7] The instant application relates to Group-1-Installation of SPM whereby the residual work to be completed is installation of SPM Buoy, which is to be secured in position with the existing 6 stud less, 345 meter long, weighing 70 tons anchor chains kept in a heap near the pile locations. The scope of work under the contract required connection of the Buoy at respective hawser location in the buoyerstensioningofthechainsrightfromthepilelocationuptoPLEMlocation. After connecting SPM buoy with the anchor chains, it is to be connected to the PLEM with two strings. Any technical clarification during installation is to be provided by SBM installation supervisor available on board the vessel. [Para 8] The payment under the arrangement is as per the Schedule of Rule (SOR). The payment is divided under seven heads. The character of amount payable is linked to the nature of work and amount is not lump sum for the whole contract. As per Letter of Acceptance (LOA), the lump sum amount has been considered only for the purpose of security deposit. However, lump sum amount is also fixed for mobilization and demobilization, built documentation. Only the amount for SPM installation and leak testing is variable indicating that the payments are according to the number of day(s). In the Note 1 to SOR, it is stated that pre and postsurveywillbeperformedusingTowTugwhicharrivesfivedaysearlierthan Comanche. The bill of entry in the Custom’s record is under the caption ‘Temporaryimportation-oneunitusedselfpropelledworkbarage’.Thecontract provides the mode of payment in INR and in India by crossed account payee cheque and sent to the registered office of the applicant or other office notified in his behalf or delivered to the authorised representative. The applicant has chosen to bifurcate the receipts under the abovementioned heads of income. It does not want the entire receipts to be labelled under installation. It is because Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 79
    • 276 Taxman - Tax Reports [Vol. 205 only 25 per cent of the receipts are in the nature of installation work and the rest is related to the use of the vessels to carry out the installation work. It cannot be said that it is a contract for installation alone. If during the activities of installation, income in the nature of royalty or fees for technical services or interest or of any other nature arises, then such an income has to be assessed under that head of income. Thus, what IOCL is paying is for each of the items seperately even though it is a composite contract. The contract is loaded in favour of mobilization expenses. The contract is a divisibleone,segregatingthemobilizationsegmentandothersegments.Nothing in law could prevent the parties to enter into a contract which provides for mobilization and demobilization for a separate consideration though they are meant to be utilized in the process of installation of SPM buoy. Where in the composite contract the receipts are bifurcated as offshore supplies and services and onshore supplies and services, it was held in the case of Ishikawajima that the receipts are taxable independent of each other and on the basis of the source andnatureofthereceipt.Intheinstantcase68,percentofthetotalconsideration relates to mobilization and demobilization, 25 per cent on actual installation and the rest relates to pre and post execution work and drawing/design documentation. Considering the entire payment, the payment made for use of equipment, i.e., the barges and stated as mobilization and demobilization expenses determine the predominant character and nature of the payment. Though the purpose of the contract is to install the buoy but the form of payment is for the use of equipment. The payment for mobilization and demobilization relatestouseofequipmentforundertakinginstallationworkandfallsunderthe definition of royalty under article 12.3(b) of the DTAA. The installation is to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, add to the length of the anchor chain where it is falling short of the desired length, towing and setting up the Buoy from the port to the location and fixing the chain to the SPM Buoy, testing the leakages of the floating hose strings, affixing the umbilical to the valves outlets and installing all end connection, installing navigational aids, pressure gauge. As installation is ancillary and subsidiary to the use of equipment or enjoyment of the right for such use, the payment for installation would fall under the definition of fees for technical services as per article 12.4(a) of the DTAA. [Para 10] FACTS-II The applicant is a Singapore company. On 23-4-2008, it was awarded a sub- contract by L&T to execute the work of installation and construction services for Single Point Mooring (SPM) in the waters of Mumbai High South field. For undertaking the construction work, vessels were mobilized to India. The applicant submits that contract with L&T is in connection with prospecting for, or extraction or production of mineral oil and would constitute PE only if the services or facilities are provided for a period of more than 183 days in the fiscal year under article 5.5 of the DTAA. It is the case of the applicant that the TAXMAN MARCH 10 - MARCH 16, 2012 80
    • 2012] 277 computation of the period of 183 days shall be from the time the vessels of the applicant gain port clearance till the time the said vessels leave the shores of India. As the vessels were not in India for more than 183 days, the applicant claims that it would not have a PE in India and no liability is attracted under section 44BB. On these facts, the applicant has sought advance ruling on taxability of amount received by it under contract. HELD-II The scope of article 5.5 is wide and deals with provision of ‘services or facilities’ in connection with the exploration, exploitation or extraction of mineral oils. Article 5.5 should be distinguished from article 5.3 which deals with ‘building site or construction, installation or assembly project.’ While for a PE to exist under article 5.3, the question would relate to the duration of installation, under article 5.5, the question that needs to be answered is the duration for which services or facilities were provided. [Para 13] Onabareperusalofthedocumentsonrecord,itisobviousthattheapplicantand L&T were under negotiation with regard to the services in question even prior to L&T entering into the contract with ONGC on 17.03.2008. In fact, a list of 45 e-mails, exchanged prior to 17.03.2008, is on record. While the details of the e- mails are not on record, the captioned subject-line clearly shows that they relate to finalization of various details with reference to the project. Thus, it is not surprising that the sub-contract between L&T and the applicant was entered into on 23.04.2008, only after due diligence by L&T and ONGC. In fact, it was the submissionoftheapplicantthatL&Tandtheapplicantwillbejointlyperforming the contractual obligations and the relation between them is something akin to a Joint Venture. This is also evident from the responsibility matrix whereby in a number of tasks the L&T will assist the applicant and vice versa. [Para 14] The sub-contract includes within its ambit not only installation but a number of pre-installationandpost-installationservicesincludingsurveystobecarriedout bytheapplicant.AppendixAtothesub-contractincludesthedetailsofapplicant’s scope of work. Under clause 2 of Appendix A, L&T would be furnishing various pre-engineering survey reports to applicant for review and comments. In fact, some of the surveys would be performed by the applicant alone. The scope of work includes various preparatory services including services in relation to drawing, design engineering as elaborated under clause 3 of the Appendix A. Under clause 4 of the Appendix A, the applicant has also certain responsibilities for procurement. In fact, the applicant has submitted in the written submission that ‘for undertaking operations, resources including vessels were mobilized to India.’ While the applicant has stressed on the arrival of these resources and vessels in India, clearly the resources were arranged for at an earlier date according to the size and description decided mutually. Thus, the services and facilities being rendered by the applicant go beyond installation and include pre- installationservices,post-installationservices,procurementandtransportation. [Para 15] Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 81
    • 278 Taxman - Tax Reports [Vol. 205 Under clause 3 of the sub-contract, the sub-contract is effective as of 23rd day of April, 2008 and shall remain in full force until all the obligations under the contract have been discharged. Several provisions under the sub-contract deal with the question of delay and amount to be paid in case of standbys. Under clause 19, applicant has provided a twelve months guarantee with relation to materials and workmanship provided by it. Under clause 25, a performance guarantee is to be given by the parent-company of the applicant to L&T within 30 days of the signing of the sub-contract. It is pertinent to note that the performance guarantee shall be valid till the end of warranty period. A performance guarantee is typically taken to ensure the performance of the obligationsofapartyunderacontract.Hence,unlessperformanceofcontractual obligations commence, a performance guarantee will not be required to be tendered. Thus, it is clear that the services under the sub-contract commenced notlaterthan23.04.2008,whichisdateonwhichthesub-contractwasconcluded and continued even after the vessels left the shores of India in lieu of the services to be provided post-installation including surveys. Hence, the obligations under the contract continued to exist even after the vessels left the shores of India. The applicant’s plea of counting the duration of services from 3-12-2008 when the applicant’svesselsweremobilizedtoIndiatill19-5-2009whenthevesselsleftthe shores of India is untenable and unacceptable. [Para 16] There is a stark difference between preliminary and preparatory services under an agreement. While the negotiations prior to 17.03.2008 could be termed as preliminary and could be ignored for the purposes of article 5.5, the rest of the activities of the applicant including surveys, drawing, designs and getting materials ready and transportation are preparatory in nature. The duration of performingthesepreparatoryactivitiescannotbeexcludedwhilecalculatingthe duration of provision of services or facilities under article 5.5. Moreover, article 5.5 is a deeming provision and its import is such that the said article can be attracted even on provision of services simpliciter without the presence of an office building, in the country where the services are being provided. It seems that even if the applicant was not mobilizing any vessels, it would have a PE in India if it provided services or facilities in connection with the exploration, exploitationorextractionofmineraloilsinIndiainthenatureofdrawing,design and the like. [Para 17] TheagreementwithL&Tfallswithintheambitofsection44BBasthesamedeals with a case where the assessee is ‘engaged in the business of providing services, or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils’. Theapplicanthasprovidedservicesorfacilitiesinconnectionwiththeexploration, exploitationorextractionofmineraloilsformorethan183daysduringthefiscal year. Hence, the applicant has a PE in India in terms of article 5.5 of the DTAA and falls within the ambit of section 44BB and not under as fees for technical services under the Act or under article 12 of the DTAA regarding this contract. [Para 18] TAXMAN MARCH 10 - MARCH 16, 2012 82
    • 2012] 279 Once an assessee comes under section 44BB(1), the provision itself deems its profits and gains as 10 per cent of the aggregate of the amounts specified in sub- section (2). Sub-section 2 (a) specifies that aggregate amount is the amount paid or payable whether in or out of India to the assessee on account of provision of services in India. In the scenario, there is no scope for splitting up the amount payable to the assessee. If the assessee wants to seek such a splitting up, it has to go under section 44BB(3). Section 44BB does not close its doors to an applicant who desires to know which part of its income accrues or arises in India and how much. The applicant can exercise its rights, provided it opts to get the income computed under section 44BB(3). The scheme of computation of income under this section does not provide any leeway to apply simultaneously both the sub- sections (1) and (3) of section 44BB to the income arising from the business activitiesfallingundertheambitofsection44BB(1).Itevengoestotheextentthat if a part of the income falls under ‘Royalties’ or ‘Fees for Technical Services’, there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged undersection44BB.Theapplicanthastofirstexercisetheoptiontogetitsincome computed under section 44BB(3). In view thereof, the entire mobilization/ demobilization revenues received by the applicant would be taxable in India. [Para 19] CASES REFERRED TO CIT v. ONGC as Representative assessee of Rolls Royce Ltd. [2008] 170 Taxman 563 (Uttarakhand) (para 3), Ishikawajima - Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC) (para 10) and State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC) (para 10). Percy Pardiwalla, Prashant Shah, Atulan Saha and R. Satish Kumar for the Applicant. Shelendra Srivastava for the Department. RULING V.K. Shridhar, Member - The applicant is a Singapore Company and has a tax residency certificate issued by the Singapore Tax Authorities. During the year 2008-09, it has signed contracts with Indian Oil Corporation Ltd.(IOCL) and Larsen & Toubro (L&T). The applicant submits that it does not have an office or any other premises in India for executing these contracts. It is stated that the contract with the IOCL involves residual offshore construction work in the navigational waters of Paradip Port Trust, Orissa, and the contract with L&T involves installation work in the waters of Mumbai High South field. The scope of work in each of the contract is as under. Contract with IOCL: The contract is made on 5.9.2008 to execute the work of “RESIDUAL OFF- SHORE CONSTRUCTION WORK at PARADEEP, GROUP-1- INSTALLATION OF SPM INCLUDING ANCHOR CHAINS, FLOATING AND SUBSEA HOSES”. In layman’s term, it is installation of a system which acts as a complete terminal Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 83
    • 280 Taxman - Tax Reports [Vol. 205 for discharge of crude oil from vessels stationed in the sea to the onshore tank farm. The total nominal contract value for the purpose of calculating the security deposit is US $ 18,598,140. The remunerations are to be calculated on the basis of the rates indicated in the schedules including service tax. For undertaking the above operations resources including vessels were mobilized to India. The work is to be completed by 28.11.2008. The applicant submits that its presence in India in the FY 2008-09 is only for 41 days and that would not constitute a Permanent Establishment (PE) in terms of the Tax Treaty with Singapore (DTAA). Contract with L&T: On 17.03.2008, L&T entered into contract No. MR/OW/MH/MHSRP-II/T-1/ 13/2007 with Oil and Natural Gas Corporation Ltd. (ONGC) for the Mumbai High South Redevelopment Project Phase-II (MHSRPII).The contract was sub- contractedtotheapplicanton23.04.2008toexecutetheworkofinstallationand construction services for Single Point Mooring (SPM) in the waters of Mumbai High South field. It is stated elsewhere that it is a contract for installation of bridge, pipelines and cables. The consideration for the contract is US $ 72.5 million on lump sum basis for each specifically identified activity, including service tax. For undertaking the construction work vessels were mobilized to India. The work which started on 3.12.2008 was completed on 19.5.2009. The applicant submits that its presence in India in FY 2008-09 is for 119 days and in FY 2009-10 for 49 days and would not constitute a PE in terms of the DTAA. Alternatively, the applicant submits that if the benefits under the DTAA are not granted then the receipts are taxable under 44BB of the Income-tax Act, 1961 (Act). It is stated that the assessing officers issued orders to withhold tax by treating the payments under the contract with IOCL as Royalty under the Act/ Article 12 of the DTAA by grossing up, and, the payments under the contract with L&T under section 44BB of the Act. 2. The applicant seeks advance ruling on the following questions:- 1. Whether on the facts and in law, can the consideration, including mobili- zation and demobilization revenues, for services provided by the Appli- cant to Indian Oil Corporation Limited (‘IOCL’) and to Larsen & Toubro (‘L&T’) be construed to be in the nature of ‘Fees for Technical Services’ (‘FTS’) under section 9(1)(vii) of the Act? 2. If the answer to question 1 is in affirmative, whether on the facts and in law, can the consideration, including mobilization and demobilization revenues, for services provided by the Applicant to IOCL and L&T be construed to be in the nature of FTS under Article 12 of the India- Singapore Double Tax Avoidance Agreement (‘Tax Treaty’). 3. Whether on the facts and in law, can the consideration for services provided by the Applicant be construed to be in the nature of ‘Royalty’ under section 9(1) of the Act and/or under Article 12 of the Tax Treaty? TAXMAN MARCH 10 - MARCH 16, 2012 84
    • 2012] 281 4. Whether on the facts and in law, can the Applicant be considered as having a Permanent Establishment (PE) in India for previous year (‘PY’) 2008-09 and PY 2009-10 under Article 5 of the Tax Treaty (in respect of its contract/s with IOCL and/or L&T? 5. If the answer to question 1 and / or 2, 3 and 4 is not in the affirmative, can it be said that the Applicant is not taxable in India on income earned from its contracts with IOCL and L&T during the PY 2008-09 and PY 2009-10? 6. If answer to question 1, 2, 3 or 4 is in the affirmative, whether on the facts and in law, can the income derived by the Applicant in respect of the contract with L&T be computed in accordance with provisions of section 44BB of the Act? 7. If answers to 1, 2, 4 and 6 is in the affirmative, whether and based on the facts and in law, can it be said that the consideration received by the Applicantformobilizationanddemobilizationofthevesselsandresources to the extent of the distance travelled outside India be considered as not attributable to activities carried out in India and hence, not liable to tax in India? 3. The Revenue submits that the consideration for both the contracts is fee for technical services under the Act and under the DTAA. The services of installa- tion of SPM under the IOCL contract is a post wellhead operation. The services of providing transportation of bricks, pipeline, cable etc. for construction under the L&T contract is also a post exploration services. It is argued that even if it is prospecting for, or extraction or production of mineral oils but being a sub- contract, cannot be taxed under section 44BB of the Act. The services imparted are technical in nature and taxable as FTS in view of the decision in the case of CIT v. ONGC as Representative assessee of Rolls Royce (P.) Ltd. [2008] 170 Taxman 563 (Uttarakhand). As regards the existence of a PE, it is stated that the impugned services can be provided only if the applicant has an office in India. Lastly, the mobilization and demobilization expenses to the extent of distance travelled beyond the territorial waters of India are taxable in India being part of the composite contract for the activities carried out in India. 4. We may mention here that while passing an order under section 197 of the Act, the Revenue took the stand that the IOCL contract is based on barge/vessel operating in offshore construction. The applicant had supplied the vessel on the agreedrentandfellinthecategoryofclause(iva)toExplanation2undersection 9(1) of the Act and also under Article 12 under DTAA as royalty. Regarding the L&T contract the Revenue and the applicant’s authorised representative took a common stand that the receipts are taxable under section 44BB of the Act. 5. The applicant submits that the two contracts are for installation and the consideration represent business receipts. The tender and work documents of the contract with IOCL shows that the SPM installed would be discharging the crude oil. The contract with L&T is a combination of construction, assembly and installation work and the nature of the contract is more of a joint venture Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 85
    • 282 Taxman - Tax Reports [Vol. 205 with L&T than a sub-contract. Being a construction and mining project, the consideration received is not a fee for technical services as it is covered under the exception provided in Explanation 2 of section 9(1)(vii) of the Act. The installation work carried out did not make available technical knowledge, experience, skill and know-how to IOCL and L&T, which in turn could enable them to apply the technology possessed by the applicant elsewhere in order that the consideration should qualify as ‘fees for technical services’ under Article 12.4(b) of the DTAA. The consideration under the two contracts is business receipts and would be taxable only if the applicant has a PE in terms of the DTAA. 6. Learned Counsel submitted that the applicant does not have a PE under the contract with IOCL, being an installation project. The project for installation would have a PE only if it continues for a period of more than 183 days in FY 2008-09 in view of Article 5.3 of the DTAA. The period of the contract was for 41 days i.e. from 15.11.08 to 4.1.09. Article 5.5 of the DTAA would apply for L&T project as the services and the facilities provided under the contract were in connection with the exploration, exploitation or extraction of mineral oil in India. Since the applicant’s contract was for 168 days i.e. from 3.12.08 to 19.5.09, the applicant would not have a PE in India. It is further submitted that Article 5.3 and 5.5 being specific, would apply in determining the PE under the DTAA rather than the general provision under Article 5.1 of the DTAA. Alternatively, the contract with L&T, carried out for ONGC, is an integral part of the process of extraction or production of mineral oil and would fall within the ambit of Section 44BB of the Act. Contract with IOCL: 7. IOCL is setting up an offshore crude oil receiving facility having Single Point Mooring (SPM) terminal about 20 km. off the coast of Paradip in the east coast of India. The facility available will unload the crude oil from Very-Large Crude Carriers (VLCCs) to meet the crude oil requirement of its refineries located in the eastern part of India. It is stated that the major part of the crude receiving facility has been completed comprising of laying 20 km. of offshore pipeline, installation of PLEM, spool piece connection of the 48" lying with the PLEM, hydrostatic testing of 48" pipeline, driving on six number of anchor piles with chains,2.8 km for a effluent discharge is already laid. The IOCL in its letter dated 17.7.2008 informed the applicant about the residual offshore construction of Paradip Port and informed that the anticipated residual work is divided into 3 groups: Group1.InstallationofSPMincludinganchorchains,floatingandsubseahoses. Group 2. Work of post trenching of 48" and 14" pipeline. Group 3. All balance works required to complete the 14" affluent pipeline. 8. The technical details of work required involving Group 1, 2 & 3, environmen- taldatapertainingtoParadip,surveydetailsofthelaidPLEMandanchorchains TAXMAN MARCH 10 - MARCH 16, 2012 86
    • 2012] 283 undertaken during June ’08 were enclosed. The expected time of completion of Group 1, 2 & 3 was stated to be 4,4 and 6 weeks, respectively, plus 2 weeks for commissioning of documentation from the date of complete mobilization of spread at project site. The IOCL desired that Group 1 and 2 work is completed in all respects and the system is commissioned before December, 2008 as these are required to commission the PHCPL project. Accordingly, it was expected the bidder should mobilize the spread to start the work by beginning of November 2008. It was emphasized that completion of work in entirety shall be the responsibility of the bidder and the bidder is to ensure that the work is completed by March 2009. Accordingly, the applicant was requested to submit the offer for all the three Groups. It was also clarified that offer for any one Group or more than one Group will also be evaluated. Even part offer for work under Group 2 may also be evaluated. IOCL gave the contract to the applicant on 5.9.2008 whereby the applicant accepted the above tender for the said work. The present application relates to Group-1-Installation of SPM whereby the residual work to be completed is installation of SPM Buoy, which is to be securedinpositionwiththeexisting6studless,345meterlong,weighing70tons anchor chains kept in a heap near the pile locations. The scope of work under the contract required connection of the Buoy at respective hawser location in the buoyers tensioning of the chains right from the pile location up to PLEM location. After connecting SPM buoy with the anchor chains, it is to be connected to the PLEM with two strings. Any technical clarification during installation is to be provided by SBM installation supervisor available on board the vessel. 9. The payment under the arrangement is as per the Schedule of Rate (SOR) annexed to the letter of acceptance-dated 04.09.2008. The payment is divided under seven heads. The character of amount payable is linked to the nature of work and amount is not lump sum for the whole contract. As per para 1.0 of LetterofAcceptance(LOA),thelumpsumamounthasbeenconsideredonlyfor the purpose of security deposit. However, lump sum amount is also fixed for mobilization and demobilization, built documentation. Only the amount for SPM installation and leak testing is variable as per note 4 and 5 to the SOR, indicating that the payments are according to the number of day(s). 10. In the SOR, the payment for various items is as under: (US $) (i) Mobilization and demobilization of Marine Spread 12,980,959 (ii) Pre and post erection work 877,288 (iii) Actual installation work 4,652,381 (iv) Documentation, Misc 87,512 In the Note 1 to SOR, it is stated that pre and post survey will be performed using Tow Tug which arrives five days earlier than Comanche. The bill of entry in the Custom’s record is under the caption ‘Temporary importation- one unit used Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 87
    • 284 Taxman - Tax Reports [Vol. 205 self propelled work barage’. The contract provides the mode of payment in INR and in India by crossed account payee cheque and sent to the registered office of the applicant or other office notified in his behalf or delivered to the authorised representative. The applicant has chosen to bifurcate the receipts under the above mentioned heads of income. It does not want the entire receipts to be labelled under installation. It is because only 25% of the receipts are in the nature of installation work and the rest is related to the use of the vessels to carry out the installation work. It cannot be said that it is a contract for installation alone. If during the activities of installation, income in the nature of royalty or fees for technical services or interest or of any other nature arises, then such an income has to be assessed under that head of income. Thus, what IOCL is paying is for each of the items separately, even though it is a composite contract. The Hon’ble Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259, relied on the factthattheconsiderationofeachportionofthecontractisseparatelyspecified and therefore it can be separated from the whole. The fact, that the contract is lump sum fixed price was also acknowledged. Here the contract is loaded in favour of mobilization expenses. The contract is a divisible one, segregating the mobilization segment and other segments. Nothing in law could prevent the parties to enter into a contract which provides for mobilization and demobili- zation for a separate consideration though they are meant to be utilized in the process of installation of SPM bouy. It has been observed in State of Madras v. Richardson & Cruddas Ltd. [1968] 21 STC 245 (SC) that even in a transaction which is in the nature of works contract, a contract of sale of material that is ultimately utilized in the works, can be inferred. Where in the composite contract the receipts are bifurcated as offshore supplies and services, onshore supplies and services, it was held in the case of Ishikawajima-Harima Heavy Industries Ltd. (supra) that the receipts are taxable independent of each other andonthebasisofthesourceandnatureofthereceipt.Herewehavenotedthat 68% of the total consideration relates to mobilization and demobilization, 25% on actual installation and the rest relates to pre and post execution work and drawing/design documentation. Considering the entire payment, the payment made for use of equipment i.e. the barges and stated as mobilization and demobilization expenses determine the predominant character and nature of the payment. Though the purpose of the contract is to install the buoy but the form of payment is for the use of equipment. The payment for mobilization and de-mobilization relates to use of equipment for undertaking installation work and falls under the definition of royalty under Article 12.3(b) of the DTAA. The installation is to be carried out by locating the ends of anchor chains, cross tensioning of the anchor chains, add to the length of the anchor chain where it is falling short of the desired length, towing and setting up the Buoy from the port to the location and fixing the chain to the SPM Buoy, testing the leakages of the floating hose strings, affixing the umbilical to the valves outlets and installing all end connection, installing navigational aids, pressure gauge. As installation is ancillary and subsidiary to the use of equipment or enjoyment of TAXMAN MARCH 10 - MARCH 16, 2012 88
    • 2012] 285 the right for such use, the payment for installation would fall under the definition of fees for technical services as per Article 12.4(a) of the DTAA. Contract with L&T: 11. While describing the scope of work under the contract, the applicant has stated in para 3 to Annexure III to the application that the contract with L & T is : “installation of bridge, pipelines, cable installation, riser guard and riser installation, pipeline crossings, free span connection, riser clamps installation, tie-in spool installation, J-tube (including clamps thereof) etc., etc.” In preamble of the agreement it is stated that the applicant has the expertise, technical knowhow,availabilityofequipmentandpersonnel.TherecitalinClause2ofthe subcontract states that applicant shall provide equipment, personnel, supervi- sion and all other things required for the performance of sub contract work which is on the basis of a back - to - back agreement between L&T and ONGC. A lump sum price of US $ 72.5 million is to be paid in a nominated bank account outside India. 12. In Annexure IV to the application, while giving interpretation of law or facts with reference to Question No. 6, the applicant states that the scope of work mentioned supra are the activities carried out for ONGC in connection with extractionorproductionof,mineraloilsinIndiaasapartofoverallconstruction project and falls within the ambit of Section 44BB of the Act. The learned counsel for the applicant submits that contract with L&T(sub-contract) is in connection with prospecting for, or extraction or production of, mineral oils and would constitute PE only if the services or facilities are provided for a period of more than 183 days in the fiscal year under Article 5.5 of the DTAA. It is the case of the applicant that the computation of the period of 183 days shall be from the time the vessels of the applicant gain port clearance till the time the said vessels leave the shores of India. As the vessels were not in India for more than 183 days, the applicant claims that it would not have a PE in India and no liability is attracted under Section 44BB of the Act. 13. Article 5.5 of the DTAA states: “Notwithstanding the provisions of paragraphs 3 and 4, and enterprise shall be deemed to have a permanent establishment in a Contracting State and to carry on business through that permanent establishment if it provides services or facilities in that Contracting State for a period of more than 183 days in any fiscal year in connection with the exploration, exploitation or extraction of mineral oils in that Contracting State.” The scope of Article 5.5 is wide and deals with provision of “services or facilities” in connection with the exploration, exploitation or extraction of mineral oils. Article 5.5 should be distinguished from Article 5.3 which deals with ‘building site or construction, installation or assembly project.’ While for a PE to exist under Article 5.3, the question would relate to the duration of installation and under Article 5.5, the question that needs to be answered is the duration for which services or facilities were provided. We are to examine the sub-contract and other material on record to find the answer. Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 89
    • 286 Taxman - Tax Reports [Vol. 205 14.Onabareperusalofthedocumentsonrecord,itisobviousthattheapplicant and L&T were under negotiation with regard to the services in question even prior to L&T entering into the contract with ONGC on 17.03.2008. In fact, a list of 45 emails, exchanged prior to 17.03.2008, is on record. While the details of the emails are not on record, the captioned subject-line clearly shows that they relate to finalization of various details with reference to the project. Thus, it is not surprising that the sub-contract between L&T and the applicant was entered into on 23.04.2008, only after due diligence by L&T and ONGC. In fact, itwasthesubmissionofthecounselfortheapplicantthatL&Tandtheapplicant will be jointly performing the contractual obligations and the relation between them is something akin to a Joint Venture. This is also evident from the responsibility matrix whereby in a number of tasks the L&T will assist the applicant and vice versa. 15. We have noted that the sub-contract includes within its ambit not only installation but a number of pre-installation and post-installation services including surveys to be carried out by the applicant. Appendix A to the sub- contract includes the details of applicant’s scope of work. Under clause 2 of Appendix A, L&T would be furnishing various pre-engineering survey reports to applicant for review and comments. In fact, some of the surveys would be performed by the applicant alone. The Scope of work includes various prepa- ratory services including services in relation to drawing, design engineering as elaborated under clause 3 of the Appendix A. Under Clause 4 of the Appendix A, the applicant has also certain responsibilities for procurement. In fact the applicant has submitted in the written submission that ‘for undertaking opera- tions, resources including vessels were mobilized to India.’ While the applicant has stressed on the arrival of these resources and vessels in India, clearly the resources were arranged for at an earlier date according to the size and description decided mutually. Thus, the services and facilities being rendered by the applicant go beyond installation and include pre-installation services, post-installation services, procurement and transportation. 16. Under clause 3 of the sub-contract, the sub-contract is effective as of 23rd day of April, 2008 and shall remain in full force until all the obligations under the contract have been discharged. Several provisions under the Sub-contract dealwiththequestionofdelayandamounttobepaidincaseofstandbys.Under Clause 19, applicant has provided a twelve months guarantee with relation to materials and workmanship provided by it. Under Clause 25, a performance guarantee is to be given by the Parent company of the applicant to L&T within 30 days of the signing of the sub-contract. It is pertinent to note that the performance guarantee shall be valid till the end of warranty period. A performance guarantee is typically taken to ensure the performance of the obligations of a Party under a contract. Hence, unless performance of contrac- tual obligations commence, a performance guarantee will not be required to be tendered. Thus, it is clear that the services under the sub-contract commenced not later than 23.04.2008, which is date on which the sub-contract was con- TAXMAN MARCH 10 - MARCH 16, 2012 90
    • 2012] 287 cluded and continued even after the vessels left the shores of India in lieu of the services to be provided post-installation including surveys. Hence, the obliga- tions under the contract continued to exist even after the vessels left the shores of India. The applicant’s plea of counting the duration of services from 3rd December, 2008 when the applicant’s vessels were mobilized to India till 19th May, 2009 when the vessels left the shores of India is untenable and unaccept- able. 17. It is to be remembered that there is a stark difference between preliminary and preparatory services under an agreement. While the negotiations prior to 17.03.2008 could be termed as preliminary and could be ignored for the purposes of Article 5.5, the rest of the activities of the applicant including surveys, drawing, designs and getting materials ready and transportation are preparatory in nature. The duration of performing these preparatory activities cannot be excluded while calculating the duration of provision of services or facilities under Article 5.5. Moreover, Article 5.5 is a deeming provision and its importissuchthatthesaidArticlecanbeattractedevenonprovisionofservices simpliciter without the presence of an office building, in the Country where the services are being provided. It seems to us that even if the Applicant was not mobilizing any vessels, it would have a PE in India if it provided services or facilities in connection with the exploration, exploitation or extraction of mineral oils in India in the nature of drawing, design and the like. 18. We are of the view that the Agreement with L&T falls within the ambit of Section 44BB of the Act as the same deals with a case where the assessee is “engaged in the business of providing services, or facilities in connection with, or supplying plant and machinery on hire used, or to be used, in the prospecting for, or extraction or production of, mineral oils”. The applicant has provided services or facilities in connection with the exploration, exploitation or extrac- tion of mineral oils for more than 183 days during the fiscal year. Hence the applicant has a PE in India in terms of Article 5.5 of the DTAA and falls within the ambit of Section 44BB of the Act and not under as Fees for Technical Services under the Act or under Article 12 of the DTAA regarding this contract. 19. Once an assessee comes under Section 44BB (1) of the Act, the provision itself deems its profits and gains as 10% of the aggregate of the amounts specified in sub-section (2). Sub-section 2 (a) specifies that that aggregate amount is the amount paid or payable whether in or out of India to the assessee on account of provision of services in India. In the scenario, there is no scope for splitting up the amount payable to the assessee. If the assessee wants to seek such a splitting up it has to go under section 44BB(3) of the Act. Section 44BB does not close its doors to an applicant who desires to know which part of its income accrues or arises in India and how much. The applicant can exercise its rights provided it opts to get the income computed under section 44BB(3) of the Act. The scheme of computation of income under this section does not provide any leeway to apply simultaneously both the sub-sections (1) and (3) of section 44BB to the income arising from the business activities falling under the ambit Global Industries Asia Pacific Pte. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 91
    • 288 Taxman - Tax Reports [Vol. 205 of section 44BB(1) of the Act. It even goes to the extent that if a part of the income falls under ‘Royalties’ or ‘Fees for Technical Services’, there is no scope to assess such receipts under these heads, once it is held that the income is from its oil exploration and production activities as envisaged under section 44BB. We are of the view that the applicant has to first exercise the option to get its income computed under section 44BB(3). In view thereof, the entire mobiliza- tion/demobilization revenues received by the applicant would be taxable in India. Que. 1 & 2 Out of the consideration for services provided by the applicant, only a part of the consideration under the IOCL contract is in the nature of Fees for Technical Services under section 9(1)(vii) of the Act and under Article 12 of DTAA with Singapore. Que. 3 Out of the consideration for services provided by the applicant only a part of the consideration under the contract with IOCL is in the nature of Royalty under section 9(1) of the Act and under Article 12 of the DTAA. Que. 4 The applicant has a PE in India in respect of its contract with L&T. Que. 5 The income derived by the applicant in respect of both the contracts is taxable in India. Que. 6 The income derived by the applicant in respect of the contract with L&T is taxable in India under section 44BB of the Act. Que. 7 The consideration received by the applicant for mobilization and demobili- zation is taxable in India under section 44BB of the Act. [2012] 205 TAXMAN 288/18 taxmann.com 46 (AAR - New Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI Shell India Markets (P.) Ltd., In re JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN AND V.K. SHRIDHAR, MEMBER A.A.R. NO. 833 OF 2009 JANUARY 17, 2012 †Section 9, read with section 90, of the Income-tax Act, 1961 and article 13 of the Double Taxation Avoidance Convention between India and UK (Fees for technical services) - Income - Deemed to accrue or arise in India - Applicant is an Indian company having network of retail fuel stations in India - SIPCL is group company †INDIA - India/UK - Tax treaty - Fees for technical services - Article 13 of DTAA between India and UK - Article 12 of OECD Model Tax Convention. TAXMAN MARCH 10 - MARCH 16, 2012 92
    • 2012] 289 ofapplicantwhichisincorporatedinUKandisinbusinessofprovidingconsultancy servicestovariousgroupcompanies-ApplicanthasenteredintoCostContribution Agreement (CCA) with SIPCL for provision of General Business Support Services (BSS) - Though applicant construes General BSS as management support services of advisory nature, it appears from CCA that applicant receives services in form of general finance advice, taxation advice, legal advice, advice on information technology, media advice, assistance in contract and procurement and assistance in marketing - Whether nature of General BSS, viewed as such, is of consultancy services and since while providing General BSS, SIPCL works closely with employees of applicant and supports/advises them, it is clear that General BSS is made available to applicant - Held, yes - Whether on facts payment made by applicant to SIPCL for availing General BSS under CCA would constitute income in hands of SIPCL and is in nature of fees for technical services within meaning of Article 13.4(c) of DTAC between India and UK - Held, yes - Whether, on facts, such payment can be said to be in nature of royalty within meaning of term in Explanation 2 to clause (vi) of section 9(1) and under Article 13 of DTAC - Held, no [In favour of revenue] FACTS The applicant is an Indian company. It has a network of retail fuel stations in India. SIPCL is a group company of assessee incorporated in UK. It is in the business of providing consultancy services to various group companies. The applicant has entered into Cost Contribution Agreement (CCA) with SIPCL for the provision of General Business Support Services (BSS). Construing the General BSS as management support services of advisory nature, the applicant submits that rendering of such services would not make available any technical knowledge,skill,experience,etc.,toenabletheapplicanttoapplythetechnology contained therein and, hence, General BSS would not be in the nature of fees for technical services within the meaning of Article 13.4 of the DTAC. The applicant further submits that the services are provided at cost and by contributing to the cost, the applicant and other cost sharer group companies become the economic owners of the know-how/intellectual property resulting from the services provided to it which may be applied to by the applicant in its activities and, hence, the question of granting a right by SIPCL to use such intellectual property by the applicant would not arise to constitute royalty under section 9(1) or under Article 13 of the DTAC. The applicant contends that the payments received are also not taxable as SIPCL does not have a permanent establishmentinIndia.Onthesefactsandsubmissions,theapplicanthassought advance ruling on taxability of payments made by it to SIPCL for availing General BSS under the terms of CCA. HELD Appendix 2 to CCA gives 13 examples of various services covered under General BSS. It is stated that these examples exclude any research and development and Shell India Markets (P.) Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 93
    • 290 Taxman - Tax Reports [Vol. 205 technical advice and service; meaning thereby that the nature of the services are ‘managerial services’ and out of the purview of article 13.4 of the DTAC. [Para 5] Under Appendix 1, the activities under the agreement cover all types of activities withrespecttoalldownstreamproductsand/orchemicalbusinesscarriedonby applicant. The services under “Contract and Procurement”(C&P) would extend from creating, approval, confirmation of purchase order to the receipt of material, invoicing and payment release. These activities in a retail business are atthecoreoftheretailmarketing.Theadvicetenderedintakingadecisionwhich is commercial in nature is a technical or consultancy service. Take the example of Taxation Advice Services under which tax matters are to be overseen and coordinated globally and regionally. The said advice to be procured would include matters like new market entries, mergers and acquisitions, financing and refinancing structures; and above all, tax policies and guidelines. Legal advicewouldbeonspecificprojectsorbusinessproposals,taxadvice.Theadvice oninformationtechnologywillincludeidentifyingopportunitiesfortheapplicant to successfully utilize cost advantaged locations and resources for application development. Thus, the services are of a highly specialized nature and involve special knowledge of the applicant’s business and industry. [Para 6] It cannot be denied that the applicant receives services in the form of general finance advice, taxation advice, legal advice, advice on information technology, mediaadvice,assistanceincontractandprocurementandassistanceinmarketing. Itistritethattheseadvisoryserviceswouldbeconsultancyservicesiftheelement of expertise or special knowledge on the part of the consultant is established. In the instant case, SIPCL is in the business of providing advice and services to various group companies. In fact, while explaining General BSS the word “advice” is used very often. Under clause 4(1) of the CCA, the mode of providing General BSS are also “through visits and other interchanges between members of the offices of the relevant staff”; an important ingredient of consultancy services. The special knowledge and use of expertise on the part of SIPCL is clearly evident from the explanation of each service as is provided by the applicant. The services being rendered are consultancy services. The agreement does cover certain other services like management support, development, communication and audit of standards of performance and human resources but it cannot be denied that under the agreement, all the services come as a bundle and cannot be segregated. The nature of General BSS, viewed as such, is of consultancy services. [Para 9] For the purpose of Article 13.4(c) of the DTAC, ‘fees for technical services’ means payments of any kind to any person in consideration for the rendering of any ‘technical or consultancy services’ if such services: (a) make available technical knowledge, experience, skill, know-how or processes, or (b) consist of the development and transfer of a technical plan or technical design. TAXMAN MARCH 10 - MARCH 16, 2012 94
    • 2012] 291 InPerfetti Van Melle Holding B.V. In re [2011] 16 taxmann.com 207/[2012] 204 Taxman 166 (AAR - N. Delhi)’ this Authority held the view that “the expression ‘make available’ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own”. Here, industry specific expertise is provided to the Indian entity which is applied in running its business and the employees of the Indian entity get equipped to carry on that business model or service model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipientmustalsobeconveyedspecificallytherighttocontinuethepracticeput into effect and adopted under the service agreement on its expiry. [Para 10] As regards the reliance placed by the applicant to the meaning of “make available” in the MOU in India-US DTAC, it may be noted that a Convention is a treaty entered into by two sovereign States relating to rights and duties of subjects or citizens of the respective States in one another’s possession. [Para 11] In the instant case, while describing the services, the term ‘advise/advice’ has been repeatedly used and the services are themselves called support services. This itself indicates that while providing General BSS, SIPCL works closely with the employees of the applicant and supports/advises them. Thus, General BSS is made available to the applicant. This opinion is further strengthened on an examination of the applicants relating to royalty. The applicant states that since it becomes the owner of any know-how generated through the services, no questionofroyaltyarises.Thesameisalsoapartofthecontractualunderstanding of the two parties. If this is so, the applicant will be able to use any know-how/ intellectual property generated from General BSS independent of the service providerand,hence,theservicesundertheagreementareclearlymadeavailable to the applicant. [Para 12] The applicant has argued that the cost incurred by SIPCL is shared by the group companies and, hence, does not involve element of income. However, it is noted thatsuchservicesarethemselvesspecificallyexcludedfromCCA.However,even if the provision of services did not involve element of profit, this Authority has held it to be taxable as fees for technical services in Timken India Ltd., In re [2005] 273 ITR 67/143 Taxman 257/158 Taxman 231 (AAR - N. Delhi) and in InternationalHotelLicensingCompany.Therefore,thecontentionoftheapplicant could not be accepted. [Para 13] Therefore, the payment made by the applicant to SIPCL for availing the General BSS under the CCA would constitute income in the hands of SIPCL and is in the nature of fees for technical services within the meaning of Article 13.4(c) of the DTACbetweenIndiaandUKandnotinthenatureofroyaltywithinthemeaning of the term inExplanation 2 to clause (vi) of section 9(1) and under Article 13 of DTAC. [Para 14] Shell India Markets (P.) Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 95
    • 292 Taxman - Tax Reports [Vol. 205 CASES REFERRED TO CIT v. Dunlop Rubber Co. Ltd. [1983] 142 ITR 493/[1982] 10 Taxman 179 (Cal.) (para 2), ITO v. Vidogum & Chemicals Ltd. [1987] 23 ITD 255 (Delhi) (para 2), Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 (Delhi) (para 2), Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.) (para 2), National Organic Chemicals Industries Ltd. v. Dy. CIT [2006] 5 SOT 317 (Mum.) (para 2), Intertek Testing Services India (P.) Ltd., In re [2008] 307 ITR 418/175 Taxman 375 (AAR - New Delhi) (para 4), International Hotel Licensing Co., In re [2007] 158 Taxman 231 (AAR - New Delhi) (para 7), CIT v. Bharti CellularLtd.[2005] 319 ITR 139/[2008] 175 Taxman 573 (Delhi) (para 7),LindeA.G. v.ITO [1997] 62 ITD 330 (Mum.) (para 7), Perfetti Van Melle Holding B.V., In re [2011] 16 taxmann.com 207/[2012] 204 Taxman 166 (AAR - New Delhi) (para 10) andTimkenIndia Ltd. In re [2005] 273 ITR 67/143 Taxman 257 (AAR - New Delhi) (para 13). Rajan Vora, G.V. Krishna Kumar and Gaurav Bhauwala for the Applicant. RULING V.K. Shridhar, Member - Applicant, Shell India Marketing Private Ltd. (SIMPL) is an Indian company. It has a network of retail fuel stations in India. Shell International Petroleum Company Ltd. (SIPCL) is a Shell Group Company incorporated in UK. It is in the business of providing consultancy services to various Shell operating companies. The applicant has entered into Cost Contri- bution Agreement (CCA) on 1.4.2008 with SIPCL for the provision of Business Support Services. Applicant submits that General Business Support Services (General BSS) under clause 4 of CCA are described in Appendix 2 to CCA. These are primarily in the nature of management support services. Any research and development, technical advice and services may be provided by a separate arrangement. The Specific BSS are provided on a specific request and are not subject matter of the questions raised in the present application. 2. According to the applicant, it is entitled to claim the application of Double Taxation Avoidance Convention between India and UK (DTAC), the contract being with a company incorporated in UK. It has therefore relied on paragraph 4 of Article 13 of DTAC, to contend that the General BSS received by it from SIPCL do not fall within the purview of Article 13.4(c) of DTAC. Applicant submits that the benefits of services rendered by SIPCL are for the Shell Group entities. The services are provided at cost and reimbursed by the Shell Group entities. No incomeCIT v.Dunlop Rubber Co. Ltd. [1983] 142 ITR 493/[1982] 10 Taxman 179 (Cal.); ITO v. Vidogum & Chemicals Ltd. [1987] 23 ITD 255 (Delhi); Sedco Forex International Drilling Inc. v. Dy. CIT [2000] 72 ITD 415 (Delhi) can be said to arise to SIPCL under the present arrangement in view of the decisions on the subject. Construing the General BSS as management support services of advisory nature, the applicant submits that rendering of such services would not ‘make available’ MOU between India-US DTAC; Raymond Ltd. v. Dy. CIT [2003] 86 ITD 791 (Mum.); National Organic Chemical Industries Ltd. v. Dy. CIT [2005] 96 TTJ 765/[2006] 5 SOT 317 (Mum.) any technical knowledge, skill, experience, etc. to enable the applicant to apply the technology contained therein. Hence General BSS would not be in the nature of fees for technical TAXMAN MARCH 10 - MARCH 16, 2012 96
    • 2012] 293 services within the meaning of Article 13.4 of the DTAC. By contributing to the cost, the applicant and other cost sharers become the economic owners of the knowhow/intellectual property resulting from the services provided to it. This may be applied to by the applicant in its activities and hence the question of granting a right by SIPCL to use such intellectual property by the applicant would not arise to constitute royalty under section 9(1) of the Income-tax Act, (Act) or under Article 13 of the DTAC. The payments received are also not taxable as SIPCL does not have a permanent establishment in India. In the absence of any income chargeable to tax the provision under section 195 of the Act would not apply. This Authority, by an Order dated 19.10.2009, allowed the application under Section 245R(2) of the Act to rule on the following questions:- i. Whether the payments made by the Applicant to Shell International Petroleum Company Limited (‘SIPCL’) for availing General Business Support Services (“General BSS”) under the terms of the Cost Contribu- tion Agreement (“CCA”), would constitute “income” in the hands of SIPCL within the meaning of the term in Section 2(24) of the Act? ii. If the answer to Question 1 is in the affirmative, whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of Fees for Technical Services (“FTS”) within the meaning of the term in Article 13 of ‘Convention between the Government of the Republic of India and the Government of the Republic of India and the Government of United Kingdom of Great Britain and Northern Ireland for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital gains’ (“the India-UK Tax Treaty”)? iii. Whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of “royalty” within the meaning of the term in Explanation 2 to clause (vi) of Section 9(1) of the Act? iv. Whether the payments made by the Applicant to SIPCL for availing General BSS under the terms of the CCA would be in the nature of “royalty” within the meaning of the term in Article 13 of the India-UK Tax Treaty? v. Based on the answers to Questions (1) to (4) above, and in view of the facts as stated in Attachment III, and also in light of the declaration provided by SIPCL that it does not have a permanent establishment in India in terms of Article 5 of the India-UK Tax Treaty, whether the payments received by SIPCL would be chargeable to tax in India? If the answer is in the affirmative, would the payments made by the Applicant to SIPCL suffer withholding tax under section 195 of the Act and at what rate? 3. There is no representation on behalf of the Revenue. No written submissions on merits have been filed even though sufficient time was allowed and the hearing was fixed more than a dozen times since November, 2009. However, Shell India Markets (P.) Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 97
    • 294 Taxman - Tax Reports [Vol. 205 detailed information regarding General BSS appearing in appendix 2 to CCA was called for by the Revenue and were filed by the Indian company SIMPL on 23.12.2009. 4. In the additional submissions, the applicant submitted that the definition of FTS as per India-UK Tax Treaty is similar to the definition of the term “fee for included services” under the India-US Tax Treaty. Since India being the common signatory to the US and UK Treaties, the identically defined terms should not carry different interpretations. This Authority has held the same view in Intertek Testing Services India (P.) Ltd. In re [2008] 307 ITR 418/175 Taxman 375 (AAR - New Delhi) and other decisions on the subject. 5. We must first decide the nature of services provided under the CCA. Appendix2toCCAgives13examplesofvariousservicescoveredunderGeneral BSS.Itisstatedthattheseexamplesexcludeanyresearchanddevelopmentand technical advice and service; meaning thereby that the nature of the services are ‘managerial services’ and out of the purview Article 13.4 of the DTAC. 6. Under Appendix 1, the activities under the agreement cover all types of activities with respect to all downstream products and/or chemical business carried on by SIMPL. Let us look into the services under “Contract and Procurement” (C&P). The activities of C&P would extend from creating, approval, confirmation of purchase order to the receipt of material, invoicing and payment release. These activities in a retail business are at the core of the retail marketing. The advice tendered in taking a decision which is commercial in nature is a technical or consultancy service. Take the example of Taxation Advice Services under which tax matters are to be overseen and coordinated globally and regionally. The said advice to be procured would include matters like new market entries, mergers and acquisitions, financing and refinancing structures; and above all, tax policies and guidelines. Legal Advice would be on specific projects or business proposals, tax advice. The advice on information technology will include identifying opportunities for the Applicant to success- fully utilize cost advantaged locations and resources for application develop- ment. Thus, the services are of a highly specialized nature and involve special knowledge of the Applicant’s business and industry. 7. In the case ofIntertek Testing Services India (P.) Ltd. (supra),thefollowinghas been held by this Authority “advisory services which merely involve discussion and advice of routine nature or exchange of information cannot appropriately be classified as ‘Consultancy services’ under the Article. An element of expertise or special knowledge on the part of the consultant is implicit in the consultancy services.” InInternational Hotel Licensing Co,In re [2007]158 Taxman 231 (AAR - New Delhi), this Authority has also held that services for marketing and promotion are consultancy services. Further, in the case of CIT v. Bharti Cellular Ltd. [2009] 319 ITR 139/[2008] 175 Taxman 573 (Delhi) the Court while relying on the definition of ‘consultancy’ in Oxford English Dictionary, Fifth Edition observed the following “the word TAXMAN MARCH 10 - MARCH 16, 2012 98
    • 2012] 295 “consultancy” has been defined in the said Dictionary as “the work or position of a consultant; a department of consultants.” “Consultant” itself has been defined, inter alia, as “a person who gives professional advice or services in a specialized field.” It is obvious that the word “consultant” is a derivative of the word “consult” which entails deliberations, consideration, conferring with someone, conferring about or upon a matter. Consult has also been defined in the said Dictionary as “ask advice for, seek counsel or a professional opinion from; refer to (a source of information); seek permission or approval from for a proposed action.” It is obvious that the service of consultancy also necessarily entails human intervention.” Even in the case of Linde A.G. v. ITO [1997] 62 ITD 330 (Mum.), the court held that the expression “consultancy” service involves giving of an advice or advisory services by a professional. 8. It cannot be denied that the Applicant receives services in the form of general finance advice, taxation advice, legal advice, advice on Information Technol- ogy, media advice, assistance in contract and procurement and assistance in Marketing. It is trite that these advisory services would be consultancy services if the element of expertise or special knowledge on the part of the consultant is established. In the facts of the case before us, SIPCL, the consultant in the present case, is in the business of providing advice and services to various Shell Operating companies. In fact, while explaining General BSS the word “advice” is used very often. Under clause 4(1) of the CCA, the mode of providing General BSS are also “through visits and other interchanges between members of the offices of the relevant staff”; an important ingredient of consultancy services. The special knowledge and use of expertise on the part of SIPCL is clearly evident from the explanation of each service as is provided by the Applicant. In our opinion, the services being rendered are consultancy services. 9. We may also point out that the Agreement does cover certain other services like management support, development, communication and audit of stan- dards of performance and human resources but it cannot be denied that under the Agreement, all the services come as a bundle and cannot be segregated. In our view, the nature of General BSS, viewed as such, is of Consultancy Services. 10. For the purpose of Article 13.4 (c) of the DTAC, “fees for technical services” means payments of any kind to any person in consideration for the rendering of any “technical or consultancy services” if such services: (a) make available technical knowledge, experience, skill, know-how or pro- cesses, or (b) consist of the development and transfer of a technical plan or technical design. In Perfetti Van Melle Holding B.V, In re [2011] 16 taxmann.com 207/[2012] 204 Taxman 166 (AAR - New Delhi) this Authority held the view that “the expression Shell India Markets (P.) Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 99
    • 296 Taxman - Tax Reports [Vol. 205 ‘make available’ only means that the recipient of the service should be in a position to derive an enduring benefit and be in a position to utilize the knowledge or know-how in future on his own”. Here, industry specific expertise is provided to the Indian entity which is applied in running its business and the employees of the Indian entity get equipped to carry on that business model or service model on their own without reference to the service provider, when the service agreement comes to an end. It is not as if for making available, the recipient must also be conveyed specifically the right to continue the practice put into effect and adopted under the service agreement on its expiry. 11. As regards the reliance place by the applicant to the meaning of “make available” in the MOU in India-US DTAC, it may be noted that a Convention is a treaty entered into by two sovereign States relating to rights and duties of subjects or citizens of the respective States in one another’s possession. 12. Having noted that the General BSS are consultancy in nature, we now proceed to examine whether the same are ‘made available’ to the applicant. It is noted that while describing the services, the term ‘advise/advice’ has been repeatedly used and the services are themselves called ‘support services’. This itself indicates that while providing General BSS, SIPL works closely with the employees of the applicant and supports/advises them. Thus we are of the view that General BSS is made available to the applicant. This opinion is further strengthened on an examination of the applicant’s arguments while answering question No. (iii) relating to royalty. The applicant states that since it becomes the owner of any know-how generated through the services, no question of royalty arises. The same is also a part of the contractual understanding of the two parties. If this is so, the applicant will be able to use any know-how/ intellectual property generated from General BSS independent of the service provider and hence the services under the agreement are clearly made available to the applicant. 13. The applicant has argued that the cost incurred by SIPCL is shared by the group companies and hence does not involve element of income. It has placed reliance on certain decisions where cost for R&D and Research & Promotional Activities were shared among group entities. Here, what we have noted is that such services are themselves specifically excluded from CCA. However, even if the provision of services did not involve element of profit, this Authority has held it to be taxable as fees for technical services in Timken India Ltd., In re [2005]273ITR67/143Taxman257(AAR-NewDelhi)andinInternationalHotel Licensing Co. (supra). We therefore, do not agree with the applicant, as we have held the payment to be in the nature of fees for technical services. 14. We therefore rule on Que. No. (i) & (ii) that the payment made by the applicant to SIPCL for availing the General BSS under the CCA would consti- tute income in the hands of SIPCL and is in the nature of fees for technical services within the meaning of Article 13.4 (c) of the DTAC between India and UK; and not in the nature of royalty within the meaning of the term in TAXMAN MARCH 10 - MARCH 16, 2012 100
    • 2012] 297 Explanation 2 to Clause (vi) of Section 9(1) of the Act and under Article 13 of DTAC, while we rule on Que. No. (iii) & (iv). Based on answer to Que. No. (i) & (ii) that the payment received by SIPCL is chargeable to tax in India and the declaration provided by SIPCL that it does not have a Permanent Establish- ment (PE) in India in terms of Article 5 of DTAC, we rule that the applicant is under obligation to withhold tax under section 195 of the Act. [2012] 205 TAXMAN 297/18 taxmann.com 45 (AAR - New Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI CTCI Overseas Corporation Ltd., In re JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN AND V.K. SHRIDHAR, MEMBER A.A.R. NO. 854 OF 2009 FEBRUARY 1, 2012 †Section 9, read with section 2(31), of the Income-tax Act, 1961 - Income - Deemed to accrue or arise in India - Applicant is a Hong Kong company and is in business of engineering, procurement and construction of petroleum, petro-chemical and power plants - With a view to execute a project awarded by Petronet, it has formed a consortium with CINDA, an Indian company, to develop a terminal for receipt and storage of liquefied natural gas at Kochi - As per terms of contract, applicant is responsible for offshore supplies and services and CINDA is responsible for onshore supplies and services - Whether under section 2(31), consortium of CINDA and applicant forms an Association of Persons (AOP) to carry out the project awarded by Petronet and applicant can be said to have a business connection in India for purpose of application of section 9(1) - Held, yes - Whether however, since applicant has not carried out any part of business relating to offshore supplies in India inasmuch as right, title, payments, etc., in supplies have passed on to Petronet, which is importing these supplies, outside India, amount received by applicant from Petronet for offshore supplies in terms of aforesaid contract is not taxable in India - Held, yes [In favour of applicant] FACTS Applicant (CTCI) is a Hong Kong company and is in the business of engineering, †INDIA - India/Hong Kong. CTCI Overseas Corpn. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 101
    • 298 Taxman - Tax Reports [Vol. 205 procurement and construction of petroleum, petro-chemical and power plants. With a view to execute a project awarded by Petronet, it has formed a consortium with CINDA, an Indian company, to develop a terminal for the receipt and storage of liquefied natural gas at Kochi. Under the contract, the consortium members are to undertake the designing, engineering, procure- ment of equipment, material supplies to erect, construct, test and commission andturnoverthefacilitiesforthestorageanddegasificationofliquefiednatural gas to Petronet. As per the terms of the contract, the applicant is responsible for offshore supplies, offshore services and mandatory spares for offshore supplies and CINDA is responsible for onshore supplies, onshore services, construction and erection and machinery spares for onshore supplies. On these facts, the applicant has sought advance ruling on taxability of the income received/ receivable by it for offshore supplies from Petronet in India. The applicant’s case is that transfer of goods to Petronet, i.e., the offshore supplies, being outside India, there is no territorial nexus for taxation regarding those offshore supplies. The revenue, on the other hand, contends that the case of the applicant is covered under the provisions of the Act as the Government of India has not entered into a Tax Treaty under section 90(2) with the Government of Hong Kong. The revenue also raises objection that the consor- tium formed by the applicant and CINDA is an Association of Persons (AOP) as per the provision of section 2(31) and payments made by Petronet should be taxed in India. HELD Under section 2(31), the consortium of CINDA and CTCI forms an Association of Persons (AOP) to carry out the project awarded by Petronet. Whether the consortium’s object is to derive profit or share the profit in a particular manner is not relevant in view of the fiction created under the Explanation to section 2(31). The responsibilities of the consortium members mentioned under the terms of the contract would also not affect conferring AOP status to the consortium in view of the formation of a consortium by CINDA and CTCI. That being so, the applicant can be said to have a business connection in India for the purpose of application of section 9(1). As the applicant is excluded from the relief under section 90(2), the fiscal jurisdiction to tax the offshore supplies would be governed under the Act. Though the applicant has a business connection in India, it has not carried out any part of the business relating to offshore supplies in India. Under the deeming provision of section 9(1) read withExplanation 1(a), any business income accruing or arising to the applicant can be taxed in India only in respect of such operations carried out in India. All that is income in the transaction for supplies has not arisen in India as the right, title, payments, etc., in the supplies have passed on to Petronet, which is importing these supplies, outside India. The applicant is not the owner of the supplies in India. The ownership vests with Petronet who imported these Supplies. Therefore, the TAXMAN MARCH 10 - MARCH 16, 2012 102
    • 2012] 299 amount received/receivable by applicant from Petronet for offshore supplies in terms of the contract is not liable to tax in India. [Para 11] CASE REVIEW Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC) (para 11) followed. CASES REFERRED TO Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC) (para 4),Hyundai Rotem Co. Korea/Mitsubishi Co., Japan, In re [2010] 190 Taxman 314 (AAR - New Delhi) (para 6), Hyosung Corporation v. DIT [2009] 314 ITR 343/181 Taxman 270 (AAR - New Delhi) (para 6) andVan Oord Acz BV, In re [2001] 284 ITR 399/ 115 Taxman 317 (AAR - New Delhi) (para 6). Pawan Kumar, Ravi Sharma, Jatin Jindal, Hui Lan Yaj, Tony Tsai, Lin Sin Hwei and Kuo Shin Ming for the Applicant. Bhupinderjit Kumar for the Department. RULING V.K. Shridhar, Member - Applicant (CTCI) is a Hong Kong company and is in the business of engineering, procurement and construction of petroleum, petro-chemical and power plants. With a view to execute a project awarded by Petronet LNG Ltd. (Petronet), it has formed a consortium with CINDA Engi- neering and Construction Pvt. Ltd. (CINDA), an Indian company, to develop a terminal for the receipt and storage of liquefied natural gas at Kochi, Kerala. The Consortium Agreement was made on 6.3.2009. Petronet awarded the contract for the project to the consortium which was amended and reinstated on 17.11.2009. Under the contract, the consortium members are to undertake the designing, engineering, procurement of equipment, material supplies to erect, construct, test and commission and turn over the facilities for the storage and regasification of liquefied natural gas to Petronet. 2. As per the terms of the contract, CTCI is responsible for offshore supplies, offshore services and mandatory spares (for offshore supplies). CINDA is responsible for onshore supplies, onshore services, construction and erection and machinery spares (for onshore supplies). 3. It is in the context of these contracts that the applicant approached this Authority for an advance ruling. While admitting the application under section 245R(2) of the Income-tax Act (Act), this Authority framed the following questions for a ruling:- (i) Whether on the facts and circumstances of the case, the income received/ receivable by the Applicant for offshore supplies from Petronet LNG Ltd. in terms of Article 13.1 of the contract for Engineering, Procurement, Construction and Commissioning for Kochi regas Facilities (Contract) is liable to be taxed in India? (ii) If the answer to the question No. (i) is in affirmative, to what extent the income received by the Applicant under the Contract for offshore supplies CTCI Overseas Corpn. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 103
    • 300 Taxman - Tax Reports [Vol. 205 is to be considered as reasonably attributable to the operations carried out in India and to be taxed in India. 4. It is the case of CTCI that transfer of goods to Petronet i.e. the offshore supplies, being outside India, there is no territorial nexus for taxation regarding those offshore supplies. Learned counsel submitted that in the light of the decision in Ishikawajma-Harima Heavy Industries Ltd. v. DIT [2007] 288 ITR 408/158 Taxman 259 (SC), the facts being identical, the questions raised have to be ruled in its favour. The counsel pointed out that the only objection raised by the Revenue is that the consortium formed by CTCI and CINDA is an Association of Persons (AOP) as per the provision of section 2(31) of the Act and payments made by Petronet should be taxed in India. 5. The representative of the Revenue submitted that the decision in IHHI does not apply to the facts of the case as CTCI is a resident of Hong Kong with whom there is no agreement under section 90(2) of the Act by the Government of India and the Government of Hong Kong. The taxability of the receipts in the hands of the CTCI would be governed under section 9(1)(i) read withExplanation 2(b) tosection9(1)oftheIncome-taxAct,1961(Act).TheconsortiumpartnerCINDA will constitute business connection of CTCI in India and CTCI is responsible for whole of the contract alongwith CINDA. 6. Referring to various clauses of the contract read with Consortium agree- ment, the learned counsel refuted the Revenue’s claim that as the role and responsibilities of each of the members of the consortium is specified and are to be paid separately, the partners to the consortium do not constitute an AOP for the purpose of taxability of the receipts. [Hyundai Rotem Co. Korea/ Mitsubishi Co., Japan,In re [2010] 190 Taxman 314 (AAR - New Delhi);Hyosung Corporation v. DIT[2009] 314 ITR 343/181 Taxman 270 (AAR - New Delhi);Van Oord Acz BV, In re [2001] 284 ITR 399/115 Taxman 317 (AAR - New Delhi). 7. As we are to understand, CTCI is responsible for offshore supplies. The two questions that arise before us are: Whether any income arises to CTCI on offshore supplies to Petronet ? Whether such income can be brought to tax under the Act pursuant to the consortium formed by CTCI and CINDA? To answer the first question we have examined the sample of an invoice for ‘offshore supplies’ placed before us. What we notice on its perusal is that: (refer to page 30 of the written submission filed on 29.8.2011) the importer is Petronet in the Declaration Form presented to the Custom Authorities. the supplier is CTCI Overseas Corporation Ltd., Taiwan, holding company of the applicant. the import is for Home Consumption of Petronet. the port of shipment is Philadelphila, USA. TAXMAN MARCH 10 - MARCH 16, 2012 104
    • 2012] 301 Then the invoices for offshore services presented by CTCI to Petronet showing the mode of payment is to: (refer to pages 55 and 56, of the written submission filed on 29.8.2001) CLYON Taipei Branch. Branch address : 16F, Hung Kua Building No. 167 Tun Hua North Road Taipei, Taiwan, ROC CTCI address is suite 1801-5, 18/F, Tower 2, China Hong Kong City, 33, Canton Road, Tism Sha Tsui, Kowloon, Hong Kong. The Taiwan address is not that of CTCI but is that of the supplier of goods to Petronet. As the supplier of offshore supplies is not the applicant but a third party to whom the payment is made by Petronet, the commercial arrangement between them in respect of the supplies is required to be examined from the angle whether it has given rise to an income in the hands of CTCI or not. 8. The question raised before us is about income received by the applicant on offshore supplies from Petronet. What we find is that no payment is made to the applicant. The payment is made in the bank in Taiwan on the basis of bill submitted by the Supplier (Holding Company) and not by the applicant. There is a difficulty in answering the question in the absence of information that the supplies were arranged through the holding company and that payment made is for supplies by the applicant. The applicant was called upon to clarify this aspect. 9. Learned counsel submitted that for the purposes of custom clearance and preparation of documents, etc. the services of AFL Dacher Pvt. Ltd. (AFL), Cochin, were obtained. AFL inadvertently mentioned the name of CTCI Over- seasCorporationLtd.,TaiwaninsteadofCTCIOverseasCorporationLtd.,Hong Kong as supplier while filling in the import declaration. This was examined and found correct by the custom authority. Regarding the name of the bank to which the payment has been remitted by Petronet, it is submitted that the applicant has maintained a bank account in Calyon Taipei Branch (Now CREDIT AGRICOLE CORPORATE AND INVESTMENT BANK) as per the certificate from the said bank. Further, a certificate from Petronet was fur- nished that the offshore supplies were made by the applicant and that the payments have been made in its favour. 10. The facts as subsequently clarified were not controverted by the Revenue. 11. The Revenue has argued that the case of the applicant is covered under the provisions of the Act as the Government of India has not entered into a Tax Treaty under section 90(2) of the Act with the Government of Hong Kong. It has a business connection in India for the reasons that it is a part of the consortium constituting an AOP as also in terms ofExplanation 2(b) to section 9(1)(i) of the Act since it is providing offshore supplies. We notice that under section 2(31) of the Act, the consortium of CINDA and CTCI forms an Association Of Persons CTCI Overseas Corpn. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 105
    • 302 Taxman - Tax Reports [Vol. 205 (AOP) to carry out the project awarded by Petronet. Whether the consortium’s object is to derive profit or share the profit in a particular manner is not relevant in view of the fiction created under the Explanation to section 2(31) of the Act. The responsibilities of the consortium members mentioned under the terms of the contract would also not affect conferring AOP status to the consortium in view of the formation of a consortium by CINDA and CTCI. That being so, the applicant can be said to have a business connection in India for the purpose of application of section 9(1) of the Act. As the applicant is excluded from the relief under section 90(2) of the Act, the fiscal jurisdiction to tax the offshore supplies would be governed under the Act. The case of IHHI was of a non-resident company incorporated in Japan which was entitled to relief under section 90(2) of the Act. Inter alia, it was held: “the concepts profits of business connection and permanent establishment should not be mixed up. Whereas business connection is relevant for the purpose of application of section 9; the concept of permanent establishment is relevant for assessing the income of a non-resident under the DTAA.” Referring to the nature of the transaction, it was held that where “the entire transaction having been completed on the high seas, the profits on sale did not arise in India….. Thus, having been excluded from the scope of taxation under the Act the application of the Double Taxation Treaty would not arise.” In the present case, though the applicant has a business connection in India, it has not carried out any part of the business relating to offshore supplies in India. Under the deeming provision of section 9(1) read with Explanation 1(a), any business income accruing or arising to the applicant can be taxed in India only in respect of such operations carried out in India. All that is income in the transaction for supplies has not arisen in India as the right, title, payments, etc., in the supplies have passed on to Petronet which is importing these supplies outside India. The applicant is not the owner of the supplies in India. The ownership vests with Petronet who imported these supplies. We may add that all such issues, including whether the contract is composite and indivisible, have been ad- dressed in the case of IHHI and we are not free to travel outside the realm of the Supreme Court’s decision, especially in a case where such a question arises on offshore supplies. We may clarify that our ruling on offshore supplies does not include offshore services which may be included therein. 12. We therefore rule on the questions posed that the amount received/ receivable by the applicant from Petronet for offshore supplies in terms of the contract dated 17.11.2009 is not liable to tax in India under the provisions of the Act, in view of the decision of Supreme Court in IHHI. TAXMAN MARCH 10 - MARCH 16, 2012 106
    • 2012] 303 [2012] 205 TAXMAN 303/18 taxmann.com 349 (Punjab & Haryana) HIGH COURT OF PUNJAB AND HARYANA Commissioner of Income-tax (Central), Ludhiana v. Madhu Gupta HEMANT GUPTA AND G.S. SANDHAWALIA, JJ. IT APPEAL NOS. 95 TO 101 & 104 OF 2000 AND 28 OF 2001 NOVEMBER 2, 2011 Section 2(24) of the Income-tax Act, 1961 - Income - Definition of - Assessment years 1990-91 to 1995-96 - Whether interest on interest-free loans availed by assessee from two companies in which she was a director, could not be treated as her deemed income in terms of section 2(24)(iv) - Held, yes [In favour of assessee] FACTS The assessee availed interest-free loan from two companies in which she was a director. During the course of assessment proceedings, the assessee was asked to explain as to why interest income on such interest-free loan be not included to assessee’s income, as a deemed benefit under section 2(24)(iv). The explanation of the assessee was not found to be satisfactory and the interest at the rate of 21 per cent was brought to tax on account of deemed benefit under section 2(24)(iv). On appeal, the Commissioner (Appeals) upheld the same. The Tribunal allowed the appeals by relying upon its earlier order passed in case of Varinder Gupta [IT Appeal No. 82 (Chandi.) of 1996, dated 9-12-1999] whereby interest on such interest-free loans was not treated as deemed income. In the aforesaid order, the reliance was placed on a judgment of Calcutta High Court in CIT v. P.R.S. Oberoi [1990] 183 ITR 103/52 Taxman 267. On revenue’s appeal: HELD It was apparent from records that the revenue had relied upon two judgments of Madras High Court in Addl. CIT v. Late A.K. Lakshmi [1978] 113 ITR 368 and CIT v. S.S.M. Lingappan [1981] 129 ITR 597 wherein, it was held that grant of amount by the company for the personal use of its employees without charging interest is a benefit granted by the Company. [Para 6] In Varinder Gupta’s case (supra), the Tribunal has relied upon the judgment of Calcutta High Court inP.R.S.Oberoi’s case (supra). The Calcutta High Court was seized of the provisions of sections 2(24)(iv), 17(2)(iii) and 40A(5). The Court also considered the fact of amendment in the Income Tax Act, 1961 by Taxation Laws (Amendment) Act, 1984 and its subsequent repeal by Finance Act, 1985. By the amending Act of 1984, it was provided that where the employer has advanced CIT v. Madhu Gupta (Punj. & Har.) TAXMAN MARCH 10 - MARCH 16, 2012 107
    • 304 Taxman - Tax Reports [Vol. 205 any loan to an employee for the purpose of building a house or purchasing a site or a house and a site or for purchasing a motor car and either no interest is charged by the employer on the amount of such loan or interest is charged at a rate lower than the rate of interest, which the Central Government may, having regard to the rate of interest charged by it from its employees on loans for such purpose granted to them, such benefit will be regarded as “perquisite”. But such amendment was repealed in the very next year. [Para 8] The assessee pointed out that the judgments of Calcutta High Court as also of Madras High Court referred to by the revenue have been considered by the Supreme Court inV.M.Salgaocar&Bros.(P.)Ltd. v.CIT [2000] 243 ITR 383/110 Taxman 67. The Supreme Court has approved the view of Calcutta High Court andalsonoticedthatthejudgmentsofMadrasHighCourtarepriortoamendment carried out by the Taxation Laws (Amendment) Act, 1984 and consequent repeal bytheFinanceAct,1985.SuchinterventionmakestheintentionoftheLegislature clear that had the existing provisions been sufficient to treat the benefit of interest-freeloan,asdeemedincome,thesamewouldnothavebeenincorporated by way of amendment and subsequently repealed. [Para 9] Section 17 falling in Chapter IV deals with computation of income under the head ‘salary’. Section 17(2) defines ‘perquisite’ for the purpose of sections 15 & 16 and for the purposes of section 17, whereas section 40A contemplates that the computation of income under the head ‘Profits and gains of business or profession’. Section 2(24)(iv) does not define the expression ‘any benefit or perquisite’. The ‘perquisite’ has been defined in section 17(2) and also were defined in section 40A(5) prior to its omission by Direct Tax Laws (Amendment) Act, 1987. The provisions of section 40A(5) prior to its omission, deal with expenditure resulting directly or indirectly in the provision of any perquisite whether convertible into money or not, i.e., the converse of section 2(24)(iv). Therefore, the interpretation in V.M. Salgaocar & Bros. (P.) Ltd. case (supra) interpreting section 17(2) and effect of amendment in section 40A(5) would be applicabletotheexpression‘benefitandperquisite’appearinginsection2(24)(iv) as well as is observed by Calcutta High Court. The Judgment of Calcutta High Court in CIT v. P. R. S. Oberoi [1990] 183 ITR 103/52 Taxman 267 considering the benefit of perquisite appearing in section 2(24)(iv), has been approved by the Supreme Court. [Para 10] In view of the aforesaid judgments, it is held that interest on interest-free loans advanced to the assessee by the company cannot be treated as deemed income in terms of section 2(24)(iv). [Para 11] CASES REFERRED TO VarinderGupta[IT Appeal No. 82 (Chandi) of 1996, dated 9-12-1999] (para 3),CIT v.P.R.S. Oberai [1990] 183 ITR 103/52 Taxman 267 (Cal.) (para 3),Addl. CIT v.Late A.K. Lakshmi [1978] 113 ITR 368 (Mad.) (para 6),CIT v. S.S.M. Lingappan [1981] 129 ITR 597 (para 6), CIT v. Tara Singh [1998] 233 ITR 669 (Delhi) (para 7) and V.M. Salgaocar & Bros. (P.) Ltd. v. CIT [2000] 243 ITR 383/110 Taxman 67 (SC) (para 9). TAXMAN MARCH 10 - MARCH 16, 2012 108
    • 2012] 305 Rajesh Katoch for the Appellant. Akshay Bhan and Alok Mittal for the Respondent. ORDER Hemant Gupta, J. - The following 9 appeals raise common question of law i.e. whether interest on the interest free loans obtained from the Company in which either the assessee or his/her spouse was a Director, is a perquisite and an income of the assessee in terms of Section 2(24)(iv) of the Income Tax Act, 1961 (for short ‘the Act’). The appeals are: SL.No. Appeal No. Assessee Assessment Year 1. ITA No.95 of 2000 Madhu Gupta 1994-95 2. ITA No.96 of 2000 Madhu Gupta 1992-93 3. ITA No.97 of 2000 Rajinder Gupta 1990-91 4. ITA No.98 of 2000 Madhu Gupta 1995-96 5. ITA No.99 of 2000 Rajinder Gupta 1994-95 6. ITA No.100 of 2000 Rajinder Gupta 1991-92 7. ITA No.101 of 2000 Rajinder Gupta 1993-94 8. ITA No.104 of 2000 Madhu Gupta 1993-94 9. ITA No.28 of 2001 Nohar Chand Gupta 1994-95 2. All the appeals are taken up together, as the questions of law in all these cases are identical. However, for the facility of reference, the facts and the question of law are being taken up from ITA No.95 of 2000. The question of law reads under: “Whether on the facts and in the circumstances of the case, which were clearly distinct from those in the preceding earlier year, the Tribunal was right in deleting addition of Rs. 2,11,469/- made by the AO by resorting to provisions of Section 2 (24)(iv) of the I.T. Act?” 3.TheassesseehasavailedinterestfreeloanofRs.2,25,000/-fromM/sVarinder AgroProductsPvt.Ltd.;Rs.7,82,000/-fromM/sPashupatiEnterprisesPvt.Ltd.; and Rs.10,07,000/- from M/s Himalya Ayurvedic & Agro Research Centre Ltd. During the course of assessment proceedings, the assessee was asked to explain astowhyinterestincomeonsuchinterestfreeloanbenotincludedtoassessee’s income, as a deemed benefit under Section 2 (24)(iv) of the Act. The explanation of the assessee was not found to be satisfactory and the interest at the rate of 21% was brought to tax on account of deemed benefit under Section 2(24)(iv) of the Act. Such order was affirmed by the Commissioner of Income Tax (Appeals). But the Income Tax Appellate Tribunal (for short “the Tribunal”) allowed the appeals by relying upon its earlier order passed in case ofVarinder Gupta [ITAppealNo.82(Chandi.)of1996,dated09.12.1999]wherebyintereston such interest free loans was not treated as deemed income. In the aforesaid CIT v. Madhu Gupta (Punj. & Har.) TAXMAN MARCH 10 - MARCH 16, 2012 109
    • 306 Taxman - Tax Reports [Vol. 205 order, the reliance was placed on a judgment of Calcutta High Court reported as CIT v. P.R.S. Oberoi [1990] 183 ITR 103/52 Taxman 267 (Cal.). 4. Learned counsel for the assessee has argued that the revenue has not filed any further appeal against the order passed in Varinder Gupta’s case (supra) relied upon by the Tribunal, therefore, the revenue cannot be permitted to dispute the findings recorded by the Tribunal. The learned Counsel for the revenue submitted that as the tax effect was not substantial in the said case, therefore, appeal was not filed. Be as it may, we have examined the question raised. 5. Before considering the arguments raised by the learned counsel for the parties, the provisions of law as it existed, relevant for the Assessment Years in question reads as under: “2. In this Act, unless the context otherwise requires - ** ** ** 24. “income” includes - ** ** ** (iv) the value of any benefit or perquisite, whether convertible into money or not, obtained from a company either by a director or by a person who has a substantial interest in the company, or by a relative of the director or such person, and any sum paid by any such company in respect of any obligation which, but for such payment, would have been payable by the director or other person aforesaid;” 6. Learned counsel for the appellant has relied upon two judgments of Madras High Court reported asAddl. CIT v.Late A.K. Lakshmi [1978] 113 ITR 368 (Mad.) and CIT v. S.S.M. Lingappan [1981] 129 ITR 597. InA.K. Lakshmi’s case (supra), it was held that grant of amount by the Company for the personal use of its employees without charging interest is a benefit granted by the Company. The Court held to the following effect: “..…We have no doubt that his section is not intended to restrict the discretion of the right of the company to advance amounts to its employees with or without interest or at any specified rate of interest. But the question would still arise whether granting amounts of the company for the personal use of its employees without charging interest would be the grant of any benefit. Our answer here must be in the affirmative. It is well known that it is difficult, if not impossible, to borrow amounts for one’s own use without having any liability to pay interest. Putting it positively, ordinarily borrowing can be had only by incurring an obligation to pay interest. What would be the amount of interest will be, unless there are statutory provisions governing the matter, a matter of agreement between the lender the borrower. But if either due to magnanimity or with a view to help an employee any amounts are advanced by an employer to an employee without an obligation to pay any interest, we have no hesitation in that he gets the use of the monies belonging to the company or any other employer without having any liability to pay interest….” 7. Such view was reiterated by the Madras High Court in its later judgment in S.S.M. Lingappan’s case (supra). Learned counsel for the appellant has also TAXMAN MARCH 10 - MARCH 16, 2012 110
    • 2012] 307 relied upon a judgment of Delhi High Court reported asCIT v.Tara Singh [1998] 233 ITR 669 (Delhi), wherein both the aforesaid judgments of Madras High Court were relied upon. 8. In Varinder Gupta’s case (supra), the Tribunal has relied upon the judgment of Calcutta High Court inP.R.S. Oberoi’s case (supra). The Calcutta High Court was seized of the provisions of Sections 2 (24)(iv), 17(2)(iii) and 40A(5) of the Act. The Court also considered the fact of amendment in the Income Tax Act, 1961 by Taxation Laws (Amendment) Act, 1984 and its subsequent repeal by Finance Act,1985.BytheamendingActof1984,itwasprovidedthatwheretheemployer has advanced any loan to an employee for the purpose of building a house or purchasing a site or a house and a site or for purchasing a motor car and either no interest is charged by the employer on the amount of such loan or interest is charged at a rate lower than the rate of interest, which the Central Govern- ment may, having regard to the rate of interest charged by it from its employees on loans for such purpose granted to them, such benefit will be regarded as “perquisite”. But such amendment was repealed in the very next year. In view of the said amendment, the Court held to the following effect: “…..Thequestionthereforeariseswhethertheenjoymentbytheassesseeofinterest- free credit an be treated as a “benefit or perquisite” within the meaning of section 2(24)(iv) of the Income-tax Act, 1961. The intention of the Legislature seems to be very clear that the expressions ‘benefit” and/or “perquisite” did not include the enjoyment of loan or credit, free of interest or at a concessional rate. This aspect has been recognized by the statute itself and to bring such items in the net of taxation, the law was amended by the Taxation Laws (Amendment) Act, 1984. By this amendment, as already indicated, a new sub-clause (vi) was inserted in Section 17 (2) and similarly another sub-clause (vi) was I was inserted in clause (b) of Explanation 2 to Section 40A(5). The effect of these amendments, which were made effective from April 1, 1985 was to ensure treatment and taxation in a case where an employee receives loan for certain prescribed purposes either free of interest or at a rate which was lower than the specified rate. However, subsequently, the Finance act, 1985, omitted the aforesaid amendments made by the Taxation Laws (Amendment) Act, 1984, with effect from the date of its insertion, namely, April 1, 1985 with a view to provide relief to salaried taxpayers.The very fact that the statute had to be amended at the first instance to bring the said item within the purview of the expression “perquisite” and it later sought to delete the same from the date of its insertion clearly shows that Parliament does not intend to treat interest-free loan or loan at a concessional rate as any benefit or perquisite granted or provided by the lender-company to the director or employee, as the case may be. [Emphasis supplied] ** ** ** The question, however, remains as to whether non-charging of interest will also fall within the purview of section 2(24)(iv) of the Act. For the purposes of applying section 2(24) (iv) of the Act, the same test as to what constitutes a benefit or a perquisite has to be applied. If the loan granted to an employee or a director or a person who has a substantial interest in the company without charging any interest or at a substantial interest in the company without charging any interest or at a concessional rate of interest does not constitute any benefit for the purposes of CIT v. Madhu Gupta (Punj. & Har.) TAXMAN MARCH 10 - MARCH 16, 2012 111
    • 308 Taxman - Tax Reports [Vol. 205 Explanation 2(b)(iii) to section 40A (5) or section 17(2)(iii) of the Act, by the same yardstick, such loan cannot also be construed as benefit or a perquisite for the purposes of Section 2(24)(iv) of the Act. In that view of the matter, we have no hesitation in holding that section 2(24)(iv) cannot be pressed into service or on the facts and in the circumstances of this case.” 9. Learned counsel for the assessee pointed out that the judgments of Calcutta High Court as also of Madras High Court referred to by the counsel for the RevenuehavebeenconsideredbytheHon’bleSupremeCourtinV.M.Salgaocar & Bros. (P.) Ltd. v. CIT [2000] 243 ITR 383/110 Taxman 67 (SC). The Hon’ble Supreme Court has approved the view of Calcutta High Court and also noticed that the judgments of Madras High Court are prior to amendment carried out by the Taxation Laws (Amendment) Act, 1984 and consequent repeal by the Financial Act, 1985. Such intervention makes the intention of the Legislature clear that had the existing provisions been sufficient to treat the benefit of interest free loan, as deemed income, the same would not have been incorpo- rated by way of amendment and subsequent repealed. In the aforesaid case, the assessee was in appeal aggrieved against the judgment of Karnataka High Court, wherein reliance was placed upon judgments of Madras High Court, as mentioned above. The Hon’ble Supreme Court has also quoted with approval, the passage from the judgment of P.R.S. Oberoi’s case (supra). It observed: “….The amendment made by the 1984 Amending Act was both to Section 17(2) and Section 40A(5). In the impugned judgment reference in fact had been made to inclusion of Sub Clause (vi) in Clause (2) of Section 17. Moreover, the High Court in the impugned judgment did not consider the amendments made by the Amending Act, 1984 on the ground “ it is difficult to see how this amendment can have any bearing upon the interpretation of the then existing provisions of the Act.”. We do not think this approach was also correct. An amending provision can certainly give guidance to interpretation of the existing provisions. The judgments of the Madras High Court which were relied upon by the High Court in the impugned judgment were for the period prior to the 1984 amendment and the Madras High Court had no occasion to consider the impact of the amendments to section 17(2) and section 40A(5) of the Act. ** ** ** The High Court in the impugned judgment could not have brushed aside the consideration of the Amending Act, 1984 and its subsequent repeal by the Finance Act 1985, by terming them of no consequence…..” 10. At this stage, we may notice that Section 17 falling in Chapter IV deals Computation of Income under the head ‘salary’. Section 17(2) defines ‘perqui- site’ for the purposes of Sections 15 & 16 and for the purposes of Section 17, whereas Section 40A contemplates that the computation of income under the head “Profits and gains of business or profession”. Section 2(24)(iv) does not define the expression “any benefit or perquisite”. The ‘perquisite’ has been defined in Section 17(2) and also were defined in Section 40A(5) prior to its omission by Direct Tax Laws (Amendment) Act, 1987. The provisions of Section TAXMAN MARCH 10 - MARCH 16, 2012 112
    • 2012] 309 40A(5) prior to its omission, deal with expenditure resulting directly or indi- rectly in the provision of any perquisite whether convertible into money or not i.e. the converse of Section 2(24)(iv). Therefore, the interpretation in V.M. Salgaocar and Bros. Pvt. Ltd.’s case (supra) interpreting Section 17(2) and effect of amendment in Section 40A(5) would be applicable to the expression ‘benefit and perquisite’ appearing in Section 2 (24)(iv) as well as is observed by Calcutta High Court. The judgment of Calcutta High Court inP.R.S. Oberoi’s case (supra) considering the benefit of perquisite appearing in Section 2(24)(iv) of the Act, has been approved by the Hon’ble Supreme Court. 11. In view of the aforesaid judgments, we are of the opinion that interest on interest free loans advanced to the assessee by the Company cannot be treated as deemed income in terms of Section 2(24)(iv) of the Act. 12. Consequently, the present appeals are dismissed that is answering the question of law in affirmative i.e. against the Revenue and in favour of the assessee. [2012] 205 TAXMAN 309/18 taxmann.com 367 (Bombay) HIGH COURT OF BOMBAY Commissioner of Income-tax, Central-II, Mumbai v. Talathi and Panthaky Associated (P.) Ltd. DR. D.Y. CHANDRACHUD AND M.S. SANKLECHA, JJ. IT APPEAL NO. 4208 OF 2009 JANUARY 30, 2012 Section 30, read with section 32, of the Income-tax Act, 1961 - Rent, rates, taxes, repairs and insurance for buildings - Assessment year 2003-04 - Assessee-company was carrying on its business in a building taken on rent - Building was declared to be unsafe for occupation by Municipal Corporation - Consequently, an agreement was entered into between owners, tenant, other occupants and a developer, under which developer was to repair and reconstruct building at its own cost, and, after that certain area was to be handed over to co-owners - Assessee was also given its equivalent portion on condition that it would contribute towards cost incurred on repair and reconstruction - Assessee’s share of cost was arrived at Rs. 1.50 crores; said agreement also provided that there would be no increase in rent payable by assessee - On above facts, Assessing Officer held that assessee had secured rights over portion of building on payment of Rs. 1.50 crores which constituted deemed CIT v. Talathi and Panthaky Associated (P.) Ltd. (Bom.) TAXMAN MARCH 10 - MARCH 16, 2012 113
    • 310 Taxman - Tax Reports [Vol. 205 ownershipofbuilding-Accordingly,AssessingOfficerheldexpenditureofRs.1.50 crores to be capital in nature and disallowed it - Commissioner (Appeals) and TribunalreversedorderofAssessingOfficer-Whetherbycontributinganamount ofRs.1.50crorestowardsre-construction,assesseeobtainedacommercialadvantage of securing tenancy of an equivalent area of premises on same rent as before - Held, yes - Whether since there was no acquisition of a capital asset and occupation of assessee continued in character of a tenancy, expenditure of Rs. 1.50 crores could not be regarded as capital in nature but revenue to be allowable by way of deduction - Held, yes [In favour of assessee] FACTS The assessee-company was a tenant in a building occupying 5000 sq. ft. The buildingwasdeclaredbythemunicipalcorporationtobeunsafeforoccupation and an eviction notice was served on the occupants. Thereafter, a partition suit was preferred by the co-owners of the building. A court receiver was appointed and the assessee being a tenant in the building continued to pay rent to the receiver. In that suit consent terms were entered into under which a developer was to repair and reconstruct the building at his costs, and, thereafter, to handover certain portion (area) to the co-owners. The consent terms contemplated that either a co-operative society, a limited company or a condominium comprising of the tenants, occupants and co-owners shall be formed. Under the terms, tenancy of the assessee was confirmed; and the assessee assumed an obligation to contribute a sum of Rs. 1.50 crores for the work of repair and restoration of the structure; and it further provided that there would be no increase in the rent payable by the assessee which continued to be Rs. 11,300 per month. The Assessing Officer in its order of assessment held that the assessee had secured rights for an area of 5000 sq ft. on a payment of a sum of Rs. 1.50 crores and the assessee was to become a member of a society or company. That, according to the Assessing Officer, would constitute deemed ownership of the premises. The Assessing Officer, therefore, came to the conclusion that the expenditure of Rs. 1.50 crores was of capital in nature and had to be disallowed. The Commissioner (Appeals), however, reversed the view taken by the Assess- ing Officer. Tribunal, confirmed the order of Commissioner (Appeals). On revenue’s appeal: HELD The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasized is that the matter has to be looked at from a commercial point of view. [Para 7] TAXMAN MARCH 10 - MARCH 16, 2012 114
    • 2012] 311 In CIT v. Madras Auto Service (P.) Ltd. [1998] 233 ITR 468/99 Taxman 575 (SC) theassesseehadinfactincurredtheentirecostofconstructionofanewbuilding but obtained no title to the new construction. The benefit which the assessee obtained was a long lease of thirty nine years on low rent. The Supreme Court heldthattheassetwhichwascreatedbelongedtosomeoneelse.Theassesseewas held to have obtained an enduring business advantage for the purpose of conducting the business profitably and more successfully, thus saving a considerable amount of revenue expenditure over the term of the lease. In the instant case, there is a concurrent finding of fact both by the Commissioner (Appeals) and affirmed by the Tribunal that the assessee was and continues to be a tenant. The character of the occupation of the assessee has not been altered. The assessee by contributing an amount of Rs. 1.50 crores to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of Rs. 11,300 in the new structure. The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P.) Ltd. (supra) on any principled basis. [Para 8] Atthisstage,itwouldbenecessarytonotethatthedecisionoftheSupremeCourt in Madras Auto Service (P.) Ltd. (supra) arose in relation to Assessment year 1968-69 which was prior to the insertion of Explanation I to section 32. Explanation I has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986 with effect from 1-4-1988. Explanation I stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expenditure is incurred by the assesseeforthepurposesofthebusinessorprofessionontheconstructionofany structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that ExplanationIisattracted,itisnecessarythatanycapitalexpenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the construction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for the Explanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of section 32, if the stipulations and conditions set out in the Explanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasized is that the explanation operates in a situation where CIT v. Talathi and Panthaky Associated (P.) Ltd. (Bom.) TAXMAN MARCH 10 - MARCH 16, 2012 115
    • 312 Taxman - Tax Reports [Vol. 205 capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out byExplanation I. In the instant case, the conclusion has already been arrived that the assessee had not incurred any expenditure of a capital nature. Theexpendituredidnotresultintheacquisitionofacapitalassetbytheassessee. The assessee continued as before to be a tenant in respect of the premises. By contributing an amount of Rs. 1.50 crores towards the reconstruction or as the case may be renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupationoftheassesseecontinuedinthecharacterofatenancy,theexpenditure could not be regarded as being of a capital nature. [Para 10] ThedecisionoftheTribunal,whichconfirmstheviewtakenbytheCommissioner (Appeals) that the expenditure was of a revenue nature does not fall for any interference in instant appeal. For the aforesaid reasons, the question of law is answered by holding that the cost of repair/reconstruction of the tenanted premises was of a revenue nature and was legitimately allowable as and by way of deduction. No error can be found in the judgment of the Tribunal. [Para 11] CASES REFERRED TO CIT v. Madras Auto Service (P) Ltd. [1998] 233 ITR 468/99 Taxman 575 (SC) (para 4), Assam Bengal Cement Co. Ltd. v.CIT [1955] 27 ITR 34 (SC) (para 7),Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971] 82 ITR 376 (SC) (para 7),L.H. Sugar Factory & Oil Mills (P.) Ltd. v.CIT [1980] 125 ITR 293/4 Taxman 5 (SC) (para 7),CIT v.Associated Cement Companies Ltd. [1988] 172 ITR 257/38 Taxman 110A (SC) (para 7) and CIT v. Hede Consultancy (P.) Ltd. [2002] 258 ITR 380/[2003] 127 Taxman 597 (Bom.) (para 9). Vimal Gupta for the Appellant. F.V. Irani and A.K. Jasani for the Respondent. JUDGMENT 1. This appeal by the Revenue raises the following substantial question of law : “(a) Whether on the facts and circumstances of the case and in law the Tribunal was right in holding that cost of repair/reconstruction of the tenanted premises is revenue in nature and allowable as deduction u/s. 30(a)(1) and thereby erred in deleting the disallowance made by the A.O. treating the same as capital in nature?” 2. The appeal is accordingly admitted on the aforesaid question and is taken up for hearing and final disposal by consent. 3. The assessee in the present case was a tenant in a building by the name of Shriniketan at Worli and was in the occupation of an area admeasuring 5,000 sq. ft. The building was declared by the Municipal Corporation to be unsafe for occupation and an eviction notice was served on the occupants. A suit was instituted on the Original Side of this Court in a partition dispute between the owners of the property. On 13 February 1978 the Court Receiver was appointed asReceiverandtheassesseebeingatenantinthebuildingcontinuedtopayrent to the Receiver. On 12 March 1999 Consent Terms were arrived at in the suit. TAXMAN MARCH 10 - MARCH 16, 2012 116
    • 2012] 313 A developer came to be impleaded as a party Respondent and was a party to the Consent Terms. Under the Consent Terms the developer agreed to repair and reconstruct the building at his costs. The developer agreed to handover a certain area in the newly constructed and renovated building to the co-owners. Under Clause 8 of the Consent Terms the developer assumed the obligation of negotiating and settling with the tenants and occupants of the building and to either offer them alternate accommodation or to relocate them in the repaired building. The Court Receiver was to execute a conveyance or a long term lease of the property in favour of the co-operative society of the owners and/or tenants of the building. The Consent Terms contemplate that either a co- operative society, a limited company or a condominium comprising of the tenants, occupants and co-owners shall be formed. On 6 April 1999 terms were arrived at between the developer and the assessee, recorded in a communica- tion which was signed by both the parties. Under the agreement the tenancy of the assessee in respect of the sixth floor presently in its possession was confirmed; and the assessee assumed an obligation to contribute a sum of Rs. 1.50 Crores for the work of repair and restoration of the structure. The agreement envisages that there would be no increase in the rent payable by the assessee which continued to be Rs. 11,300/- per month. 4. In respect of the assessment proceedings for Assessment Year 2003-04 an order of assessment was passed by the Assessing Officer on 29 December 2005. The Assessing Officer held that the assessee secured rights for an area of 5,000 sq. ft. on payment of a sum of Rs. 1.50 Crores and the assessee was to become a member of a society or company. This according to the Assessing Officer would constitute deemed ownership of the premises. The Assessing Officer came to the conclusion that the expenditure of Rs. 1.50 Crores was of a capital nature and had to be disallowed. In appeal, the CIT (Appeals) reversed the view of the Assessing Officer and following inter alia the judgment of the Supreme Court inCIT v.Madras Auto Service (P) Ltd.[1998] 233 ITR 468/99 Taxman 575 held that the assessee had not acquired any capital asset and the expenditure wasallowableasrevenueinnature.ThisviewhasbeenaffirmedbytheTribunal by its impugned decision rendered on 9 April 2009. The Tribunal has followed a decision of its Delhi Bench in another case, besides adverting to the judgment of the Supreme Court in Madras Auto (supra). 5. Counsel appearing on behalf of the Revenue submits that - (i) The assessee has obtained a benefit of an enduring nature upon the reconstruction of the building in which the assessee became entitled to possession of premises of an equivalent area on a tenancy basis; (ii) The assessee was and continues to be a statutory tenant and there was no reason for the assessee to make a payment of Rs. 1.50 Crores otherwise than to secure an asset of an enduring nature; (iii) The assessee would be entitled to become a member of the cooperative housingsocietytowhomthetitlewouldbetransferredbytheerstwhileco- owner. CIT v. Talathi and Panthaky Associated (P.) Ltd. (Bom.) TAXMAN MARCH 10 - MARCH 16, 2012 117
    • 314 Taxman - Tax Reports [Vol. 205 6. On the other hand, counsel appearing on behalf of the assessee submitted that in the present case - (i) The ownership of the structure or any part thereof does not stand transferred to the assessee and the assessee continues to be the tenant of the premises on the same monthly rent of Rs. 11,300/- for an area admeasuring 5,000 sq. ft. as before; (ii) The assessee by making a contribution of Rs. 1.50 Crores for the cost of renovation obtained a commercial revenue advantage of a right to continue in premises of an equivalent area on the same rent of Rs. 11,300/- per month which would work out to approximately to Rs. 2.26 per sq. ft.; (iii) Under the agreement which was arrived at between the assessee and the developertheassesseedoesnotacquiretitletothepremises,butcontinues to remain a tenant in the new structure. The case of the assessee would be governed by the decision of the Supreme Court inMadras Auto Service (P.) Ltd. (supra). 7. The issue as to whether expenditure incurred by an assessee is of a revenue or capital nature has fallen for determination in various contexts, but in all decisions particularly of the Supreme Court what has been emphasised is that the matter has to be looked at from a commercial point of view. InMadras Auto Service (P.) Ltd. (supra) the assessee obtained certain premises under an agreement of lease for a period of thirty nine years. Under the terms of the agreement, the assessee had a right to demolish the existing premises and to construct a new building thereon for the purposes of its business. The lease deed stipulated that the new construction shall continue to be the property of the lessor and the assessee as the lessee would only have a right to be a tenant for a period of thirty nine years subject to the payment of rent and the observance of other conditions. The Supreme Court noted that the advantage which the assessee obtained by constructing a building which belonged to someone else was the benefit of a long lease on a concessional rate at a lower rent. The saving in expenditure was the saving in revenue expenditure in the form of rent. In defining as to whether the character of the expenditure is of a revenue or capital nature the Supreme Court emphasised (following its earlier decision in Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) that expenditure may be treated as properly attributable to capital when it is made not only once for all, but with a view to bringing into existence an asset or an advantage for the enduring benefit of a trade. If a lump sum payment gets rid of an annual business expense chargeable against revenue, the lump sum payment should be regarded as a business expense. Contrariwise if the lump sum payment brings in a capital asset, then that puts the business on another footing altogether. The Supreme Court noted that by expending money for the purposes of construction, the assessee did not acquire any capital asset and the onlyadvantagewhichithadobtainedwastheleaseofanewbuildingatlowrent. After adverting to the earlier judgments of the Court in Lakshmiji Sugar Mills Co. (P.) Ltd. v. CIT [1971] 82 ITR 376 (SC), L.H. Sugar Factory & Oil Mills (P.) Ltd. TAXMAN MARCH 10 - MARCH 16, 2012 118
    • 2012] 315 v. CIT [1980] 125 ITR 293/4 Taxman 5 (SC) and CIT v. Associated Cement Companies Ltd. [1988] 172 ITR 257/38 Taxman 110A (SC) the Supreme Court observed as follows : “All these cases have looked upon expenditure which did bring about some kind of anenduringbenefittothecompanyasarevenueexpenditurewhentheexpenditure did not bring into existence any capital asset for the company. The asset which was created belonged to somebody else and the company derived an enduring business advantage by expending the amount. In all these cases, the expenses have been looked upon as having been made for the purpose of conducting the business of the assessee more profitably or more successfully. In the present case also, since the asset created by spending the said amounts did not belong to the assessee but the assessee got the business advantage of using modern premises at a low rent, thus saving considerable revenue expenditure for the next 39 years, both the Tribunal as well as the High Court have rightly come to the conclusion that the expenditure should be looked upon as revenue expenditure.” 8. In Madras Auto Service (P.) Ltd. (supra) the assessee had in fact incurred the entire cost of construction of a new building but obtained no title to the new construction. The benefit which the assessee obtained was a long lease of thirty nine years on low rent. The Supreme Court held that the asset which was created belonged to someone else. The assessee was held to have obtained an enduring business advantage for the purpose of conducting the business profitably and more successfully, thus saving a considerable amount of rev- enue expenditure over the term of the lease. In the present case, there is a concurrent finding of fact both by the CIT (Appeals) and affirmed by the Tribunal that the assessee was and continues to be a tenant. The character of the occupation of the assessee has not been altered. The assessee by contribut- ing an amount of Rs. 1.50 Crores to the reconstruction of the building has obtained an enduring advantage but nonetheless of a commercial nature of securing an equivalent area on the same rent of Rs. 11,300/- in the new structure. The ownership of the new structure has not been transferred to the assessee nor has the assessee acquired any capital asset. The case, therefore, cannot be distinguished from the situation which arose before the Supreme Court for its decision in Madras Auto Service (P.) Ltd. (supra) on any principled basis. 9. The judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) has been followed by a Division Bench of this Court inCIT v.Hede Consultancy (P.) Ltd. [2002] 258 ITR 380/[2003] 127 Taxman 597. 10. At this stage, it would be necessary to note that the decision of the Supreme Court in Madras Auto Service (P.) Ltd. (supra) arose in relation to Assessment Year 1968-69 which was prior to the insertion of Explanation I to Section 32 of the Income Tax Act 1961.Explanation I has been inserted by the Taxation Laws (Amendment and Miscellaneous Provisions) Act 1986 with effect from 1 April 1988. Explanation I stipulates that where the business or profession of the assessee is carried on in a building not owned by him but in respect of which the assessee holds a lease or other right of occupancy and any capital expendi- CIT v. Talathi and Panthaky Associated (P.) Ltd. (Bom.) TAXMAN MARCH 10 - MARCH 16, 2012 119
    • 316 Taxman - Tax Reports [Vol. 205 ture is incurred by the assessee for the purposes of the business or profession on the construction of any structure or doing of any work in or in relation to, and by way of renovation or extension of, or improvement to, the building, then, the provisions of the clause shall apply as if the said structure or work is a building owned by the assessee. In order that Explanation I is attracted, it is necessary that any capital expenditure is incurred by the assessee. In other words, it is necessary to emphasise that what Explanation I brings about is a deeming fiction by which expenditure of a capital nature incurred by the assessee for the purposes stipulated therein including inter alia for the con- struction of any structure or the work of renovation, extension or improvement can form the basis of a claim for depreciation as if the structure or work is a building owned by the assessee. But for theExplanation, an assessee would not be entitled to the benefit of depreciation even if the expenditure which was incurred was of a capital nature and the effect of the Explanation is to entitle the assessee to the benefit of the provisions of Section 32, if the stipulations and conditions set out in theExplanation are fulfilled. The deeming fiction is for the purposes of the statutory provision in question. But the point to be emphasised is that the explanation operates in a situation where capital expenditure is incurred by the assessee. Unless the expenditure is of a capital nature, there would be no occasion to apply the deeming fiction that is carved out by Explanation I. In the present case, for the reasons that we have already indicated and following the judgment of the Supreme Court in Madras Auto Service (P.) Ltd. (supra), we have arrived at the conclusion that the assessee had not incurred any expenditure of a capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises. By contributing an amount of Rs. 1.50 Crores towards the reconstruction or as the case may be renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises on the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature. 11. Counsel appearing on behalf of the assessee submitted that in the event that this Court were to hold that the expenditure is of a capital nature, in that event the assessee would have submitted in the alternative that the assessee would be entitled to the benefit of Section 30(a)(i) since the period to which the appeal relates is prior to the insertion of the Explanation to Section 30 by the Finance Act of 2003 with effect from 1 April 2004. In the view which we have taken we have arrived at the conclusion that the expenditure was of a revenue nature. The decision of the Tribunal, which confirms the view taken by the CIT (Appeals) that the expenditure was of a revenue nature does not fall for any interference in this appeal. For the aforesaid reasons, we answer the question of law by holding that the cost of repair/reconstruction of the tenanted premises was of a revenue nature and was legitimately allowable as and by way TAXMAN MARCH 10 - MARCH 16, 2012 120
    • 2012] 317 of deduction. We do not find any error in the judgment of the Tribunal. The question of law is accordingly answered in the aforesaid terms. There shall be no order as to costs. [2012] 205 TAXMAN 317/18 taxmann.com 334 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income-tax, Central Circle v. Wipro Finance Ltd. V.G. SABHAHIT AND S.N. SATYANARAYANA, JJ. IT APPEAL NO. 889 OF 2006† NOVEMBER 16, 2011 Section 32 of the Income-tax Act, 1961 - Depreciation - Allowance/rate of - Assessment year 1998-99 - There was a search and on basis of material found during search assessment was made for block period - Said block assessment order was now pending for consideration in appeal before Commissioner (Appeals) - In regular assessment for assessment year 1998-99, assessee had claimed depreciation in respect of plant and machinery, which had been leased out by assessee - Assessing Officer as well as Commissioner (Appeals) rejected assessee’s claim - However, Tribunal held that claim now made was for year 1997-98, which was beyond block period; that depreciation had been claimed in regular assessment and, thus disallowance of depreciation for relevant assessment year was erroneous - Whether Tribunal could not have jumped into conclusion that depreciation which was now sought for was beyond period of search as even according to assesseeyearofacquisitionwas1997-98andinabsenceofanymaterialtoshowdate of acquisition of property and fact that said acquisition was made beyond block period - Held, yes - Whether, therefore, order of Tribunal could not be sustained - Held, yes - Whether since block assessment order is pending for consideration before first appellate authority, matter regarding claim of depreciation on leased assets should be remanded to first appellate authority - Held, yes - Whether contentionastowhetheracquisitionofleasedassetinrespectofwhichdepreciation was claimed for assessment year 1998-99 would be covered in block assessment or should be in regular assessment was kept open to be urged before first appellate †Appeal arising out of order of ITAT in IT Appeal No. 1059 (Bang.) of 2003, dated 23-12-2005. CIT v. Wipro Finance Ltd. (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 121
    • 318 Taxman - Tax Reports [Vol. 205 authority as assessee had to produce relevant material in that behalf - Held, yes [Matter remanded] M.V. Seshachala for the Appellant. Smt. S.R. Anuradha for the Respondent. JUDGMENT 1.This appeal is filed by the revenue being aggrieved by the order passed in ITA. No. 1059/Bang/2003 dated 23.12.2005. 2. The substantial question of law raised for consideration in this appeal, is as under: “Whether the Tribunal was correct in holding that the assessee would be entitled to claim of depreciation in respect of leased assets?” 3. We have heard the learned Counsel appearing for the appellants and the learned Counsel appearing for the respondent. 4. The learned Counsel appearing for the revenue submitted that there was a search and assessment was made for the block period on the basis of the material found during the search and after passing of the original order by the assessing officer, the same was challenged in appeal and thereafter, before the Tribunal and ultimately before this Court. The matter now stands pending before the Commissioner of Income Tax (Appeals) in view of the order passed bytheIncomeTaxAppellateTribunaldated24.6.2009.Wherefore,theassessing officer had rightly rejected the claim made by the assessee for depreciation of the plant and machinery, which had been leased by the assessee. The appellate authority has ordered in appeal ITA. 10/CC/CIT(A) 1/2000-2001 that since the question regarding the block assessment is pending consideration, the claim for depreciationcannotbeallowedatthisstage.Beingaggrievedbytheorderofthe appellate authority the revenue had preferred appeal before the Income Tax Appellate Tribunal. The assessee also had preferred appeal before the Tribunal. The Tribunal at Bangalore A Bench by order dated 23.12.2005 held that the claim now made is for the year 1997-1998, which is beyond the block period. Wherefore, depreciation is claimed in the regular assessment and since the depreciation had been allowed in the earlier assessment year disallowance of the depreciation was erroneous. Accordingly, dismissed the appeal filed by the revenue and allowed the appeal filed by the assessee and being aggrieved by the same this appeal is filed by the revenue. 5. It is the contention of the learned Counsel appearing for the appellants that though the assessee may be entitled to depreciation in respect of the plant and machinery leased, but having regard to the provisions of Section 32 of the Income-tax Act the Written Down Value for the period, depreciation for which claimed, can be arrived at only after ascertaining the WDV at the end of the block period. Wherefore, the learned counsel submitted that the order passed by the appellate Tribunal should be set aside and remanded to the appellate authority. 6. The learned Counsel for the respondent submitted that the Tribunal has given a categorical finding that the claim for depreciation is for the assessment TAXMAN MARCH 10 - MARCH 16, 2012 122
    • 2012] 319 year 1997-98 which is beyond the block period which is pending before the Commissioner of Income-tax. Wherefore, the assessee was entitled to deprecia- tion as sought for. 7. We have given careful consideration to the contentions of the learned Counsel appearing for the parties and scrutinised the material on record including the earlier order passed by this Court in ITA. Nos. 106 and 633/2004 and the order passed in respect of block assessment dated 29.1.1999 subject matter of which now is pending before the first appellate authority. 8. The material on record discloses that the order passed by the Tribunal pertains to the assessment year 1998-99. It cannot be disputed that ownership is a bundle of joys and the assessee being the owner has leased the plant and machinery which would only confer the lease hold rights in favour of the lessee and wherefore, the owner can claim depreciation as admissible under the Act. However, depreciation can be granted as admissible only after ascertaining the WDV as on the previous year of assessment. Wherefore, the Tribunal could not have jumped into the conclusion that the depreciation which is now sought for is beyond the period of search as even according to the assessee the year of acquisition was 1997-98 and in the absence of any material to show the date of acquisition of the property and the fact that the said acquisition was made beyond the block period. Hence, the order of the Tribunal cannot be sustained. Having regard to the fact that the question of block assessment is pending before the first appellate authority, we deem it appropriate that the matter could be remanded to the first appellate authority after setting aside the order of the ITAT. The contention as to whether the acquisition of plant and machinery in respect of which depreciation is now claimed for the assessment year 1998-1999 is covered in the block assessment or should be in the regular assessment is kept open to be urged as the assessee has to produce the relevant material in that behalf. Accordingly, we pass the following: ORDER The appeal is allowed in part. The order passed in ITA No. 1059/Bang/2003 dated 23.12.2005 is set aside. The substantial question of law is answered by holding that the assessee would be entitled to claim depreciation in respect of leased assets. The question as to whether the leased assets were acquired and depreciation is claimed in respect of the block period or subsequent thereto, is kept open to be urged before the first appellate authority. If the first appellate authority comes to the conclusion on the basis of the material on record that would be produced by the assessee that the said acquisition is subsequent to the block assessment, the depreciation can be granted in regular assessment. Note: “The above is true transcription of the judgment dictated to me by late Hon’ble Shri Justice V.G. Sabhahit presiding over the Division Bench with Hon’ble Shri Justice S.N. Satyanarayana in Open Court on 22.11.2011.” CIT v. Wipro Finance Ltd. (Kar.) TAXMAN MARCH 10 - MARCH 16, 2012 123
    • 320 Taxman - Tax Reports [Vol. 205 [2012] 205 TAXMAN 320/18 taxmann.com 172 (AAR - New Delhi) AUTHORITY FOR ADVANCE RULINGS (INCOME TAX), NEW DELHI Citrix Systems Asia Pacific Pty. Ltd., In re JUSTICE P.K. BALASUBRAMANYAN, CHAIRMAN AND V.K. SHRIDHAR, MEMBER A.A.R. NO. 822 OF 2009 FEBRUARY 6, 2012 †Section 9 of the Income-tax Act, 1961, read with article 12 of DTAA between India and Australia (Royalties) - Income - Deemed to accrue or arise in India - Applicant is an Australian Company engaged in business of providing software services - It has appointed ‘I’, an Indian company, as non-exclusive distributor for sale of its software products in India - It is contended by applicant that under agreement, software products are purchased by distributor from applicant and sold by distributor - In respect of certain software products such as Citrix XenApp, distributor places order of purchase with applicant and makes payment for same to applicant and thereafter applicant transmits a Key to end-user customer and on receipt of said Key, end-user customer downloads software from applicant’s server - Applicant submits that right acquired by purchaser from sale is only to use copyrighted article and not right to use copyright embedded in software and, therefore, sum received by applicant from distributor from sale of software is nature of sale revenue and cannot be classified as royalty as defined in section 9(1)(vi) and/or under Article 12 of Indo-Australian tax treaty - Whether whenever a software is assigned or licensed for use, there is involved an assignment of right to use embedded copyright in software or a license to use embedded copyright, the intellectual property right in software - Held, yes - Whether, therefore, it is not possible to divorce software from intellectual property right of creator of software embedded therein - Held, yes - Whether, therefore, applicant’s argument that licensing of a software for use by end-use customer, is mere sale of a copyrighted article and does not involve grant of a right to use copyright in software, cannot be accepted - Held, yes - Whether in view of above, it has to be ruled that payments received by applicant from distributor for sale of software product is in nature of royalty within meaning of section 9(1)(vi) - Held, yes - Whether since Article 12.3 of DTAA between India and Australia defining royalties also ropes in payment of consideration for use of a copyright in addition to consideration paid for right to use a copyright, covered by definition in Income-tax Act, payment received by †INDIA - India/Australia - Tax Treaty - Royalties - Article 12 of DTAA between India and Australia - Article 12 of OECD Model Tax Convention. TAXMAN MARCH 10 - MARCH 16, 2012 124
    • 2012] 321 applicant from distributor is to be treated as royalty within meaning of Article 12 - Held, yes [In favour of revenue] Circulars & Notifications : Circular No. 621, dated 19-12-1991. FACTS The applicant is a company incorporated in Australia. It claims to be one of the leading providers of software services which help in virtualization, networking and application delivery. It also offers a range of application collaboration, firewall, networking and streaming solutions. In the year 2006, the applicant entered into a distribution agreement with ‘I’, an independent Indian company engaged in the business of distribution of computer software and hardware. Under the agreement, ‘I’ was appointed as a non-exclusive distributor of the products of the applicant in India. Some of the key products distributed under the agreement are Citrix XenApp, Citrix Access Gatway and Citrix Netscaler. According to the applicant, under agreement, the software products are purchased by the distributor from the applicant and sold by the distributor. With respect to the hardware products, the applicant shifted the products directlytothedistributorwhichinturnsuppliedtheseproductstore-sellersand end-user customers. But, for the software product, Citrix XenApp, while sale and collection is made through the distributor, no physical delivery of the product is made to the distributor. On the basis of the demand of the customers for Citrix XenApp, the distributor places orders of purchase with the applicant and makes payment for the same to the applicant. The applicant then directly transmits a ‘key’ to the end-user customer who is required to download the XenApp software. On receipt of the key, the end-user customer downloads the software from the server of the applicant. The distributor ‘I’ owns the respon- sibility for collection of the price for the product from its customers. In addition to the distribution of hardware products and Citrix XenApp under the distribu- tion agreement, ‘I’ also facilitates the execution of the Citrix Subscription Advantage Programme between the applicant and its existing customers. The programme is offered by the applicant in the form of a package of support services during the period of the programme. ‘I’ facilitates execution of the subscription programme in the same manner as in the case of software products. All transactions between ‘I’ and the applicant are on a principal to principal basis. The applicant is seeking an advance ruling on the taxability in India of the payments made by ‘I’ to it for the software product, Citrix XenApp and the Subscription Advantage Programme. It is contended by the applicant that right acquired by the purchaser from the sale is only to use the copyrighted article and not the right to use the copyright embedded in the software and, therefore, sum received by the applicant from ‘I’ is in nature of sale revenue and cannotbeclassifiedasroyaltyasdefinedinsection9(1)(vi)and/orunderArticle 12 of DTAA between India and Australia. HELD Clause (b) of section 14 of the Copyright Act deals with copyright in the case of Citrix Systems Asia Pacific Pty. Ltd., In re (AAR - New Delhi) TAXMAN MARCH 10 - MARCH 16, 2012 125
    • 322 Taxman - Tax Reports [Vol. 205 a computer programme. It means the exclusive right to do any of the acts specified in clause (a) of sub-section (1), to sell or give on commercial rental or offer for sale or for commercial rental any copy of the computer programme, provided that such commercial rental does not apply in respect of computer programmes where the programme itself is not the essential object of the rental. [Para 16] The definition of copyright says that for the purposes of that Act, copyright means the exclusive right to do or authorize the doing of the acts referred to in thatsection.Thishasnothingtodowiththeconsequenceofthecopyrightholder passing on his rights otherwise than absolutely, either by assignment under section 18 of the Act or otherwise. The owner can also grant an exclusive license to another to exploit the copyright. In terms of section 30 of the Act, he can also grant a mere licence limited in point of right, limited in point of user, limited in point of duration. The farming out of that right under section 30 of the Act is neither an assignment nor need it be exclusive license. It can be a mere license. [Para 17] Thus, a reference to the Copyright Act indicates that use of a copyright either by anowneroralicensee,wouldnotbeaninfringementofacopyright.Thetransfer of ownership can be by an assignment to another of the copyright either wholly or partially, either generally or with special limitations and either for the whole term of the copyright or any part thereof. Similarly, a license can be granted by the owner of the copyright of any interest in the right. An exclusive right also can be granted excluding even oneself from the right to use the copyright owned. So, a transgression of the limitations of an assignment or of a license would prima facie be an infringement of the copyright and invite the consequences, provided for under the Act. Similarly, the act of taking copies or act of adaptation will not be an infringement only if it is done by a lawful possessor of a copy of the computer programme. A lawful possessor can only be an assignee, an exclusive licenseeoralicenseeoftheprogramme.Whenheacquiresacomputerprogramme, he also gets the right to use that programme to a limited extent. This is on the basis that in so acquiring the computer programme, he has also got a right, absolute or limited to use the copyright. [Para 18] When a software is created by a person who acquires a copyright for it, he becomes the owner of that copyright. He can transfer or license that right either by himself or through an agent. When he sells or licenses the software for use, he is also selling or licensing the right to use the copyright embedded therein. If a software is used without being lawfully acquired either by purchase or by license, that would amount to an infringement of the copyright obviously, because of the copyright embedded in the software. The software is a literary work and clearly the copyright of the creator over the software is an important andcommerciallyvaluableright.So,wheneverasoftwareisassignedorlicensed for use, there is involved an assignment of the right to use the embedded copyright in the software or a license to use the embedded copyright, the intellectual property right in the software. Therefore, it is not possible to divorce TAXMAN MARCH 10 - MARCH 16, 2012 126
    • 2012] 61 [2012] 205 TAXMAN 61 (Mag.)/18 taxmann.com 257 (Article) NON-COMPETE FEE RECEIPT- WHETHER 2003 AMENDMENT IN SECTION 28(va) IS CLARIFICATORY GOPAL NATHANI* An Overview 1. In Guffic Chem. (P.) Ltd. v. CIT [2011] 332 ITR 602/198 Taxman 78/10 taxmann.com 105 (SC) the assessee and Ranbaxy, both were engaged in the business of pharmaceuticals and to ward off competition in manufacture of certain drugs, Ranbaxy had entered into an agreement with the assessee restricting it from manufacturing the drugs mentioned in the Schedule against payment of Rs. 50 lacs. The Commissioner (Appeals) as well as the ITAT held that the said sum of Rs. 50 lakhs received by the assessee from Ranbaxy was a capital receipt not taxable under the Income-tax Act, 1961. The Karnataka High Court reversed the decision of the Tribunal by placing reliance on the judgment of the Supreme Court in the case of Gillanders Arbuthnot & Co. Ltd. v. CIT [1964] 53 ITR 283. The Supreme Court in reversing the decision of the Karnataka High Court held that as far as the issue of receipt of compensation attributable to the negative/ restrictive covenant is concerned the matter though it is settled in Gillanders Arbuthnot & Co. case (supra) but is not understood well by the Karnataka High Court in their decision. In further explaining the facts in Gillanders Arbuthnot & Co. case (supra) the judgment read out that the assessee therein carried on business in diverse fields besides acting as managing agents, shipping agents, purchasing agents and secretaries. The assessee also acted as importers and distributors on behalf of foreign principals and bought and sold on its own account. Under an agreement which was terminable at will the assessee acted as a sole agent of explosives manufactured by Imperial Chemical Industries (Export) Ltd. That agency was terminated and by way of compensation the Imperial Chemical Industries (Export) Ltd. paid for first three years after the termination of the agency two- fifths of the commission accrued on its sales in the territory of the agency of the assessee and in addition, in the third year full commission was paid for the sales in that year. The Imperial Chemical Industries (Export) Ltd. took a formal undertaking from the assessee to refrain from selling or accepting any agency for explosives. Thus, two questions arose for determination before the Supreme Court, namely, whether the amounts received by the assessee for loss of agency was in normal course of business and, therefore, whether they constituted revenue receipt? The second question which arose before the Apex Court was whether the amount received by the assessee (compensation) on the condition not to *The author is a Chartered Accountant. NON-COMPETE FEE RECEIPT - WHETHER 2003 AMDT. IN SEC. 28(va) TAXMAN MARCH 10 - MARCH 16, 2012 127
    • 62 TAXMAN - MAGAZINE [Vol. 205 carry on a competitive business was in the nature of capital receipt? It was held thatthecompensationreceivedbytheassesseeforlossofagencywasarevenue receipt whereas compensation received for refraining from carrying on com- petitive business was a capital receipt. This dichotomy has not been appreciated by the Karnataka High Court in their impugned judgment inGuffic Chem. (P.) Ltd. case (supra). The Supreme Court, therefore, had no difficulty in holding that non-compete fee will be capital in nature. Even though it was not desirable, the Supreme Court went further on to read new clause (va) in section 28 which amends the position under the law to tax non-compete fee as a business income. However, the Apex Court made it clear that the Parliament had stepped in to specifically tax such receipts under non- competition agreement under the head ‘business’ with effect from 1-4-2003 only, so that in the assessee’s case for assessment year 1997-98 it had no application. The following observations deserve mention: “One more aspect needs to be highlighted. Payment received as non-competition fee under a negative covenant was always treated as a capital receipt till the assessment year 2003-04. It is onlyvideFinanceAct,2002witheffectfrom1-4-2003 that the said capital receipt is now made taxable [See: section 28(va)]. The Finance Act, 2002 itself indicates that during the relevant assessment year compensation received by the assessee under non-competition agreement was a capital receipt, not taxable under the 1961 Act. It became taxable only with effect from 1-4-2003. It is well-settled that a liability cannot be created retrospectively. In the present case, compensation received under Non-Competition Agreement became taxable as a capital receipt and not as a revenue receipt by specific legislative mandatevide section28(va)andthattoowitheffectfrom1-4-2003.Hence,thesaidsection28(va) is amendatory and not clarificatory.” (Unquote) On the other hand, in regard to the treatment in the hands of the company who makes such payment the issue is still not free from controversy. The Delhi High Court in their recent decision dated 30.11.2011 inPitney Bowes India (P.) Ltd. v. CIT [2012] 204 Taxman 333/17 taxmann.com 116 upheld the view held by the Special Bench in Tecumseh India (P.) Ltd. v. Addl. CIT [2010] 127 ITD 1 (Delhi). The Special Bench held that the line of demarcation between capital expendi- ture and revenue expenditure is very thin. Therefore, it is not desirable for any Court to do that which the Parliament has abstained from doing, i.e., to formulate precise rules for the guidance or embarrassment of businessmen in theconductofbusinessaffairs.ThefollowingobservationsoftheSpecialBench find relevance as it looks up to the Parliament for the resolving of the dispute (Pg 217): “If we peruse all the aforementioned decisions which have laid down various tests to consider a question that whether a particular expenditure will be capital or revenue, one thing is clear that the line of demarcation between the capital expenditure and revenue expenditure is very thin. Therefore, it is not desirable for any Court to do that which Parliament has abstained from doing,i.e.,to formulate precise rules for the guidance or embarrassment of businessmen in the conduct TAXMAN MARCH 10 - MARCH 16, 2012 128
    • 2012] 63 ofbusinessaffairs.JusticeBhagwatiwhiledescribingsuchsituationinthedecision of Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) has referred to the quotation of Lord Macnaghten in Dovey v. John Cory [1901] AC 477 at page 488. Similarly, the observations of Rowlatt, J. from the decision in the case ofCountess Warwick Steamship Co. Ltd. v. Ogg [1924] 2 KB 292 at page 298 have been reproduced where it is stated that it is very difficult to lay down any general rule which is both sufficiently accurate and sufficiently exhaustive to cover all or even a great number of possible cases, and any attempt was refused to be made to lay down any such rule.” Thus, as far as the treatment of receipt is concerned the Parliament has inserted an amendment in section 28 (insertion of clause (va) to assign it as a character of trading receipt but on the other hand, when it comes to claiming deduction of such payment the Act is silent. The Delhi High Court inPitney Bowes India (P.) Ltd. case (supra) further left it for the decision of the Assessing Officer to decide whether such payment would yield any deduction for depreciation under section 32 or not? Thus, as regards treatment of receipt of non-compete fee the law makers, it seems, also misjudged the rule of law laid down by the Apex Court inGillanders Arbuthnot & Co. Ltd. case (supra) as early as in 1964 and assumed uncertainly on the subject; so it suggested an amendment on prospective basis to bring certainty. Though there is no mention of such uncertainly/controversy in the budget speech or notes on clauses or memorandum, yet the Explanatory Circular No. 8, dated 27-8-2002 does reflect an attempt on the part of the Legislature to remove an uncertainly on the subject as it reads as follows: “26. New provisions for taxing the receipts in the nature of non-compete fees and exclusivity rights. 26.1 For the purpose of giving certainty to taxation of receipts in the nature of non- compete fees and fees for exclusivity rights, the Finance Act, 2002, has included within the scope of “profit and gains of business or profession”, any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business, or not to share any know-how, patent, copyright, trade- mark, licence, franchise or any other business or commercial right of similar natureorinformationortechniquelikelytoassistinthemanufactureorprocessing of goods or provision for services. However, the provisions clarify that receipts for transfer of right to manufacture, produce or process any article or thing or right to carry on any business, which are chargeable to tax under the head “Capital gains”, would not be taxable as profits and gains of business or profession.” The Parliament, being the supreme law making power, cannot be understood to have framed the law under a misjudgment in which case it should be assumed that it reversed the position held in Gillanders Arbuthnot & Co. Ltd. case (supra) from the earlier date only so that the amendment be understood as clarificatory in nature. The High Court can misinterpret the law but as the far as the Supreme Court goes, their interpretation of the law is sacrosanct and can be disturbed only by the Parliament. Now the Parliament making a law in 2003 reversing the position NON-COMPETE FEE RECEIPT - WHETHER 2003 AMDT. IN SEC. 28(va) TAXMAN MARCH 10 - MARCH 16, 2012 129
    • 64 TAXMAN - MAGAZINE [Vol. 205 held way back in 1964 cannot be misunderstood as one having prospective application, even though the Courts may have misunderstood the law all these years. Just that the Parliament has made such an amendment after so many years cannot be understood as giving any advantage or benefit to the assessees and more so, for the reason that the amendment is considered to be a tax avoidance measure under the Parliament memorandum explaining the provi- sions of the Finance Bill, 2002 - [2002] 254 ITR (St.) 190, 219, in no less than the following words: Measures to Curb Tax Avoidance - New provisions for taxing the receipts in the nature of non-compete fees and exclusivity rights:- 2.0 This amendment proposes to insert a new provision in the Income-tax Act, 1961, for charging to tax any sum received or receivable in cash or in kind under an agreement for not carrying out activity in relation to any business; or not to share any know-how, patent, copyright, trade-mark, licence, franchise or any other business or commercial right of similar nature or information or tech- nique likely to assist in the manufacture or processing of goods or provision for services, under the head “Profits and gains of business or profession.” The proposed amendment will take effect from 1st April, 2003 and will, accordingly, apply in relation to the assessment year 2003-04 and subsequent years. [Clauses 3 and 13] (Unquote) Concluding Remarks 3.0 Amendments of such kinds that are aimed at curbing tax avoidance generally must be read as clarificatory in nature. Here is a vast opportunity for the revenue to collect taxes on non-compete fee on transactions that have gone untaxed on the basis of the ratio of the decision of the Supreme Court in Gillanders Arbuthnot & Co. Ltd. case (supra). •DT - Sec. 28(va). TAXMAN MARCH 10 - MARCH 16, 2012 130
    • 2012] 65 [2012] 205 TAXMAN 65 (Mag.)/18 taxmann.com 375 (Article) VODAFONE’S CASE - NO CAPITAL PUNISHMENT FOR CAPITAL INVESTMENT DINDAYAL DHANDARIA* Introduction 1. The case of Vodafone International Holdings B.V. v. Union of India [2012] 17 taxmann.com 202/204 Taxman 408 (SC) drew worldwide attention not only because it involved the largest ever tax demand made on a single assessee in India [about INR 12000 crores], but involved adjudication of various issues pertaining to offshore transactions - particularly cross-border mergers/acqui- sitions and tax avoidance/evasion. The judgment in this case covers a detailed examination of various issues pertaining to separate corporate identity, hold- ing/subsidiary company structure, controlling interest, look at v. look through provisions, underlying assets, circumstances when corporate veil can be lifted, jurisdiction in offshore transactions, indirect transfer of underlying assets, tax avoidance-cum-tax evasion, international treaties, DTAAs, TAS under section 195(1), Representative Assessee and the Scope of section 9(1)(i) of Income-tax Act, 1961, etc. This judgment merits attention not only because a huge tax demand has been quashed, but also for the detailed and authoritative exposi- tion of law by the Supreme Court on various contentious issues. At this juncture it is appropriate to mention that in recent years the Income Tax Department has, after sparing a large number of domestic taxpayers from “scrutiny” assessments, shifted its focus to offshore transactions involving various complex issues, e.g., “Determination of Arm’s Length Price”, “Establish- ing Territorial nexus of income”, “Application of source rule”, “Interpretation of DTAAs”, “Impact of Indo-Mauritius Treaty”, “Applicability of withholding tax provisions”,“Discoveringpaymentsforroyaltiesembeddedincomplextransac- tions”, etc. The inadequacy of existing taxation laws in dealing with such vexed issues and the prejudicial approach of the Revenue have been exposed in a number of cases decided by the Courts, including the impugned case ofVodafone Interna- tional Holding B.V. (supra). Brief facts of the case 2. The Hutchison Group, Hong Kong first invested into the telecom business in India in 1992 when the said Group invested in an Indian joint venture vehicle bythenameofHutchisonMaxTelecomLtd.(HMTL)-lateronrenamedasHEL. HEL was an Indian company in which shares were acquired by Hutchison group of companies through a structural arrangement of holding and subsid- iary companies incorporated in various foreign countries, particularly in *The author is a Chartered Accountant. VODAFONE’S CASE - NO CAPITAL PUNISHMENT TAXMAN MARCH 10 - MARCH 16, 2012 131
    • 66 TAXMAN - MAGAZINE [Vol. 205 Mauritius. Hutchison Telecommunication International Ltd. (HTIL) was incor- porated in Cayman Islands. HTIL and its downstream companies held interests in mobile telecommunications business in several countries including India. CGP was a 100 per cent subsidiary of HTIL incorporated in Cayman Islands as an ‘exempted company’ and it had a controlling interest in HEL. The appellant- company, namely-Vodafone International Holdings BV (VIH), was resident for tax purposes in the Netherlands. On 11-2-2007 a Sale Purchase Agreement (SPA) was entered into between the appellant and HTIL under which HTIL agreed to transfer to the appellant its entire issued share capital in CGP and thereby, the entire interest of HTIL in HEL was transferred to the appellant. The Controversy 3.Theissuethatcameupforconsiderationwasastowhetheraforesaidtransfer could be termed as an indirect transfer of a capital asset situate in India and whether section 9(1)(i) would be attracted in such a case and, consequently, whether capital gain arising from such transactions could be taxed in India.? The deeming provision contained in section 9(1)(i) of the Income-tax Act, 1961 reads as under: “Income deemed to accrue or arise in India. 9. (1) The following incomes shall be deemed to accrue or arise in India :- (i) all income accruing or arising, whether directly or indirectly, through or from any business connection in India, or through or from any property in India, or through or from any asset or source of income in India,or through the transfer of a capital asset situate in India. …………” On analysis of the above provision, it transpires that all income accruing or arising, whether directly or indirectly is liable to be deemed to accrue or arise in India, in either of the following four circumstances: (a) through or from any business connection in India; (b) through or from any property in India; (c) through or from any asset or source of income in India; (d) through the transfer of a capital asset situate in India. The Revenue contended that as Vodafone received certain rights and entitle- mentsfromHTILinIndiawhichconstituted“Capitalassets”withinthemeaning of section 2(14) of the Act, capital gains tax on transfer of such assets was taxableinIndiaasprovidedinthe4thlimboftheclausehighlightedhereinabove. As per Revenue, such rights and entitlements were following: (a) Indirect interest in HEL; (b) Controlling rights in certain indirect holding companies of HEL; (c) Controlling rights through shareholders agreement which included the right to appoint directors in certain indirect holding companies of HEL; TAXMAN MARCH 10 - MARCH 16, 2012 132
    • 2012] 67 (d) Interest in form of preference share capital in indirect holding companies of HEL; (e) Rights to use Hutch Brand in India; (f) Non-compete agreement with Hutch brand in India. In order to understand the basis of controversy, it is important to decide the context in which the words “directly or indirectly” have been used in the above clause. These words appear in the above clause immediately after the words “income accruing or arising”, meaning thereby that the clause contained in the provisions for taxing a direct or indirect income accruing or arising in India. But the Revenue contended that these words applied to transfer of a capital asset situated in India and so, both direct and indirect transfers of a capital asset were covered by the provisions of this clause. Firstly, such erroneous interpretation of the law gave rise to the controversy in this case and secondly, the Revenue, without any basis, persisted on alleging that the transaction resulted into evasion of tax and for that reason, in arguing that it was a fit case for lifting of the corporate veil. Bombay High Court’s Decision 4. The Revenue succeeded before the High Court partially. The High Court held that VIH on purchase of CGP got indirect interest in HEL acquired controlling right in certain indirect holding companies in HEL; controlling rights through shareholder’s agreements which included the right to appoint directors in certain indirect holding companies in HEL; interest in the form of preference share capital in indirect holding companies of HEL; rights to use Hutch brand in India; non-compete agreement with Hutch brand in India, etc., which all constituted capital asset, as per section 2(14). The High Court further held that VIH by virtue of its diverse agreements had nexus with the Indian jurisdiction and, hence, the proceedings initiated under section 201 for failure to withhold tax by VIH on payments made to HTIL could not be held to lack jurisdiction. However, the High Court asked the Assessing Officer (AO) to do apportionment between income that was deemed to accrue or arise as a result of nexus with India and that which lay outside. Issues Before The Supreme Court 5. Several issues were raised before the Supreme Court in as many as 20 questions. The hearing continued for 28 days and as many as 40 lawyers appeared before the Court. The Court’s ruling contains a vivid exposition of the law on many important issues of international taxation, corporate identity, controlling interest of holding over subsidiaries, lifting of corporate veil in case of tax evasion, tax evasion versus tax planning, etc., which merit attention. The transaction between VIH and HTIL related to transfer of shares. Shares being tangible assets are covered by the expression “Property”. Transfer of property attracts capital gains tax and so, the transfer of shares. But as this VODAFONE’S CASE - NO CAPITAL PUNISHMENT TAXMAN MARCH 10 - MARCH 16, 2012 133
    • 68 TAXMAN - MAGAZINE [Vol. 205 transaction took place between two non-residents outside India, no such tax could be levied on such transfer of shares. There was a complicated structure of holding, subsidiary companies and cross-holdings. The tax authorities exam- ined the structure meticulously and discovered that by virtue of the impugned offshore transaction, control over assets situated in India exchanged hands and they were deprived of the capital gains tax due to them. They felt that notwithstanding that transfer of shares could not be taxed, the transfer of capital assets could be taxed on the strength of the provisions contained in the 4th limb of section 9(1)(i) of the Income-tax Act. Prima facie it was also not possible. In order to apply the provisions contained in the impugned 4th limb, it was necessary to identify the capital assets, how they were transferred and that these were situated in India and transferred in India. In other words, it was required to “look through” the transaction to determine the underlying assets and for this purpose, it was necessary to satisfy the test of “substance over form” theory. This could not be done without piercing the corporate veil. Then again, without lifting corporate veil, the tax authorities could not get jurisdiction over the transactions made between two non-residents. Being aware of its predicament but not willing to concede the issue, the Revenue urged for overruling the Union of India v. Azadi Bachao Andolan [2003] 132 Taxman 373 (SC) case (which has not been nullified by a retrospective amendment of law, as is done in many other cases) and raised the alternative arguments of “Representative Assessee” being liable to pay tax. The Supreme Court ruled that transfer of shares of a foreign company which has an Indian Company as its subsidiary does not amount to transfer of any capital asset situated in India within meaning of the 4th limb of section 9(1)(i) of the Income-tax Act, 1961. Comments 6. A spouse generally has various controls over the other (e.g., financial, moral, spiritual, religious, and what not), to such an extent that they form alter ego of each other. But for tax purposes, they are treated as two separate identities and their income is clubbed only if the same falls under the mischief of section 64 of the Income-tax Act, 1961. In case of transfer of shares of limited companies (majority holding or not), the transferees do not get any individual or specific right over any particular asset or any portion of the underlying assets of the company. For the purpose of calculating the gain/loss on transfer of shares, the cost and sale price of shares only are taken into consideration. The underlying assets are not valued. If in case of every transfer of shares, the taxmen start looking through the transac- tion and calculating the gain/loss with reference to the value of the underlying assets, the stock markets would have to pull down their shutters. These are the elementary laws on taxation. Similarly, separate identities of a holding and a subsidiary company are well recognised by law. It is clear from reading of the above that the tax authorities tried to ignore this phenomenon TAXMAN MARCH 10 - MARCH 16, 2012 134
    • 2012] 69 and tried to look through the transaction without having any legal basis and without having any reason to establish that the transaction was tax avoidant, having been resorted by dubious methods or that the transaction was a sham and/or a colourable device. The litigation in the matter of Vodafone started in September, 2007 and the various legal precedents cited, discussed or commented upon by the Supreme Court pertain to a period prior to this date. The judgment does not lay down any new precedent but only explains them. The Revenue contended that Azadi Bachao Andolan (supra) needs to be overruled, insofar as it departs from McDowell & Co. Ltd. v. CTO [1985] 22 Taxman 11 (SC). This highlights the limitations of existing law and the lack of corrective legislation. It cannot be presumed that the Revenue was not aware of the above limitations of law. But it did not refrain itself from initiating litigation in a sensitive matter of international taxation which affects foreign investments. Apart from it, the highest ever tax demand (excluding minimum penalty for an equal amount) sent shock waves through India Inc. The tax authorities impose penalty for concealment of income under section 271(1)(c) of the Income-tax Act, 1961 even where an assessee makes a mere erroneous claim in absence of any concealment or furnishing of inaccurate particulars of income. [See HCIL Arsspl Triveni (JV) v. Asstt. CIT [2011] 16 taxmann.com 384 (Delhi). But they enjoy immunity even if they enter into frivolous litigations. Perhaps, under these circumstances, the Supreme Court had to teach the tax authorities the elementary law of taxation by referring to the decision of the House of Lords in Salomon v. Salomon [1897] A.C. 22 which we learnt during our course for a degree in graduation in Commerce (about 45 years ago). Moreover, this might have prompted the Hon’ble Justice K.S. Radhakrishnan of the Hon’ble Supreme Court to remark that“the demand of nearly INR 12,000 crores by way of capital gains tax would amount to imposing capital punish- ment for capital investment”. It is heartening to note from a recent report in The Economic Times that, as a Vodafone effect, the tax authorities and the Finance Ministry are contemplat- ing moving the Supreme Court to figure out how they should go about handling information on undisclosed offshore bank accounts of the Indians. This is no doubt a step towards minimising needless and avoidable litigation. Note: The Supreme Court’s ruling is not only authoritative exposition of law on various issues, it is a brilliant tutorial on subjects covered and merits attention by the tax practitioners and taxpayers.] • DT Secs. 2(14), 4, 6, 9, 90, 163 and 195. • INDIA - India - Tax Treaty - Capital Gains. • INDIA - India - Withholding taxes. VODAFONE’S CASE - NO CAPITAL PUNISHMENT TAXMAN MARCH 10 - MARCH 16, 2012 135
    • 70 TAXMAN - MAGAZINE [Vol. 205 CASE DIGEST [2012] 205 TAXMAN 70 (Madras)(Mag.)/18 taxmann.com 1 (Madras) HIGH COURT OF MADRAS SDB Cisco (India) Ltd. v. Assistant Commissioner of Income-tax, Company Circle-VI(1), Madras P. JYOTHIMANI AND P.P.S. JANARATHANA RAJA, JJ. TC. (A) NO. 829 OF 2004† NOVEMBER 23, 2011 Section 145 of the Income-tax Act, 1961 - Method of accounting - Change of - Assessment year 1991-92 - Assessee was following cash system of accounting - However, for purpose of preparing annual return for submission to members in Annual General Meeting and for filing necessary returns under Companies Act, 1956, mercantile system was adopted - Took a view that assessee had to compute its income for purpose of Act on accrual basis - Whether, on facts, impugned order passed by Tribunal was to be upheld - Held, yes [In favour of revenue] CASE REVIEW CIT v.Bilahari Investment (P.) Ltd. [2008] 299 ITR 1/168 Taxman 95 (SC) (para 8) andCIT v. Realest Builders & Services Ltd. [2008] 307 ITR 202/170 Taxman 218 (SC) (para 9) distinguished. CASES REFERRED TO CIT v.Bilahari Investment (P.) Ltd. [2008] 299 ITR 1/168 Taxman 95 (SC) (para 8) andCIT v. Realest Builders & Services Ltd. [2008] 307 ITR 202/170 Taxman 218 (SC) (para 9). J. Balachander for the Appellant. T. Ravikumar for the Respondent. †Arising from order of ITAT in IT Appeal No. 2370/Mad./1995, dated 23-1-2003. TAXMAN MARCH 10 - MARCH 16, 2012 136
    • 2012] 71CASE DIGEST [2012] 205 TAXMAN 71 (Madras)(Mag.)/18 taxmann.com 338 (Madras) HIGH COURT OF MADRAS Commissioner of Income-tax v. Tidel Park Ltd. F.M. IBRAHIM KALIFULLA AND B. RAJENDRAN, JJ. T.C. (A) NO. 531 OF 2009 JULY 13, 2009 Section 115JB of the Income-tax Act, 1961 - Minimum alternate tax - Assessment year 2002-03 - While computing book profits under section 115JB, assessee- company changed its method of computing depreciation from straight line method to written down value method - There was also a resolution passed by board of directors for changing existing rates of depreciation for purpose of books depreciation - Excess amount of depreciation so calculated was debited in profit and loss account, which was audited, certified and filed with registering authority - Whether so long as compliance in regard to submission of accounts had not suffered any statutory defect, revenue authorities had to accept authenticity of accounts submitted in accordance with provisions of Companies Act, 1956 - Held, yes - Whether therefore, impugned change in method of computing depreciation was to be allowed - Held, yes [In favour of assessee] FACTS The assessee-company changed the rates of depreciation charged in the accounting year and in the notes of annual report, it was mentioned that due to change in depreciation rate charged on the assets in the books, there was a reduction in the book profits to the extent of Rs. 14.30 crores. On being questioned, the assessee-company submitted that it had a right to claim higher rate of depreciation based on the life of the assets. There was also a resolution passed by the board of directors on 4-7-2003, for changing the existing rates of depreciation for the purpose of books depreciation. According to the Assessing Officer, inasmuch as such a resolution came to be passed on 4-7-2003, it was an afterthought, as the same was after the closure of the books of account. The Commissioner (Appeals) also confirmed the view of the Assessing Officer, while the Tribunal noted that the change in the method of computing depreciation from straight line method to written down value method, thereby, the amount debited was reflected in the profit and loss account, which was audited, certified and filed with the registering authority. The Tribunal, therefore, held that the Assessing Officer, as well as the Commissioner (Appeals) had to accept the authenticity of the accounts submitted in accordance with the provisions of the Companies Act, 1956, which obligates the company to maintain its accounts in a manner provided by the Act, which was scrutinized and certified by the statutory auditors and approved by the company in its general body meeting and thereafter filed before the Registrar of Companies. On revenue’s appeal : TAXMAN MARCH 10 - MARCH 16, 2012 137
    • 72 TAXMAN - MAGAZINE [Vol. 205 HELD Having perused section 115JB, in particular sub-section (2), it is opined that the reasoning of the Tribunal was well justified. Going back to sub-section (2) of section 115JB, it can be safely held that so long as the accounts of the company are audited by the statutory auditors in accordance with the provisions of the Companies Act, in the same line of reasoning, it will have to be held that the passing of the resolution by the board of directors on 4-7-2003, was also in consonance with the provisions of the Companies Act empowering the board of directors for changing the rate of depreciation, which is beneficial to the company, while working out its account which was also filed before the Registrar of Companies, in compliance with the provisions of the Companies Act. So long as the said compliance in regard to the submission of the accounts has not suffered any statutory defect, the application of the ratio laid down by the Supreme Court inApollo Tyres Ltd. v.CIT [2002] 255 ITR 273/122 Taxman 562 by the Tribunal is well justified. Insofar as the issue raised based on the Explanation(iia)tosection115JBisconcerned,thesamewillhavenoapplication inasmuch as the insertion of the said provision itself was by way of an amendment, which was introduced by the Finance Act, 2006 with effect from 1-4-2007, while instant case is concerned with the previous year corresponding to the assessment year 2002-03, with reference to which the said amended provision will have no application. Therefore, looked at from any angle, there is no scope to entertain this appeal. [Para 3] The tax appeal, therefore, fails and is dismissed. [Para 4] CASES REFERRED TO Apollo Tyres Ltd. v. CIT [2002] 255 ITR 273/122 Taxman 562 (SC) (para 3). Mrs. Pushya Sitaraman for the Appellant. [2012] 205 TAXMAN 72 (Madras)(Mag.)/17 taxmann.com 259 (Madras) HIGH COURT OF MADRAS Indian Additives Ltd. v. Deputy Commissioner of Income-tax, Co. Circle-II(3) ELIPE DHARMA RAO AND D. HARIPARANTHAMAN, JJ. TAX CASE APPEAL NO.1 OF 2008 NOVEMBER 10, 2011 Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings - Whether assessee, engaged in manufacture and selling of additives on commission TAXMAN MARCH 10 - MARCH 16, 2012 138
    • 2012] 73CASE DIGEST basis, was not entitled to deduction under section 80-IB in respect of service income and commission because those incomes were not derived from activity of industrial undertaking - Held, yes [In favour of revenue] Section 260A of the Income-tax Act, 1961 - High Court, appeal to - Whether when Court is satisfied that case involves not only the substantial question of law formulated, but also other substantial question of law not formulated by it, it can hear such questions on reasons to be recorded - Held, yes [In favour of revenue] FACTS The assessee was involved in manufactue and selling of additives on commis- sion basis. The assessee filed its return claiming deduction under section 80-IB in respect of various incomes such as surplus money kept in fixed deposits for the purpose of bank guarantee or letters of credit, on service income received for training, on interest received on loans given to the employees, on commis- sion receipts, and on interest collected from sundry debtors for delay in payments and other receipts. The Assessing Officer rejected the assessee’s claim holding that aforesaid incomes were totally outside the scope of income derived from industrial undertaking. On appeal, the Commissioner (Appeals) observed that only with regard to cash discounts that were received on purchases, the plea of the assessee that it went to reduce the purchases was to be considered. Since value of purchases was reduced, the quantum of profit from the industrial undertaking increased. He thus, took a view that cash discount received only with respect to its purchases relating to manufacturing activity was eligible for deduction and not on purchases towards trading goods. The Tribunal upheld the order of the Commissioner (Appeals). The instant appeal was admitted appeal for determination of the substantial question of law, only with regard to two heads,i.e.serviceincomeandcommissionreceived. HELD Though under sub-section (4) of section 260A, it has been mandated that the appeal shall be heard only on the question formulated, the proviso to this sub- section makes it clear that ‘nothing in this sub-section shall be deemed to take away or abridge the power of the Court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is satisfied that the case involves such question.’ Therefore, if the Court is satisfied that the case involves not only the substantial question of law formulated, but also other substantial question of law not formulated by it, it can hear such questions on reasons to be recorded. [Para 17] Inthecaseonhand,thoughtheassesseehasfiledappealquestioningdisallowance ofbenefitundervariousheadsbytheAssessingOfficer,Commissioner(Appeals) and Tribunal, this Court has admitted this appeal for determination of the substantial question of law regarding only ‘service income’ and ‘commission received’. However, in order to give a quietus to the entire issue and further since TAXMAN MARCH 10 - MARCH 16, 2012 139
    • 74 TAXMAN - MAGAZINE [Vol. 205 non-formulation of the substantial question of law with regard to other disputed heads would automatically amount to dismissal of the appeal of the assessee regarding those heads, without any opportunity for him to be heard, that too withoutofferinganyreasonsforsuchdenial,itisdecidedtotakeupotheraspects urged by the assessee also, in due compliance of the avowed principles of natural justice and by exercising the power under proviso to sub-section (4) of section 260A. [Para 18] A reading of Chapter VI-A of the Act makes it clear that it deals with ‘Deductions to be made in computing total income’, which contains sections 80 to 80U with omission of certain sections in between. On analyzing this Chapter VI-A, it is clear that ‘Section 80-IB/80-IA are the code by themselves as they contain both substantive as well as procedural provisions.’ [Para 21] To substantiate their claim, the assessee is required to satisfy the condition that the deductions, claimed by them, are entitled to be allowed, since ‘derived from’ their business. [Para 23] The fact finding authority (Assessing Officer), on a thorough analysis of the entire materials placed on record and discussing the same, threadbare, has arrived at an irresistible conclusion that the training activities carried out by the assesseeatitsheadquartershavenodirectnexuswiththeindustrialundertaking as such. While such being the factual finding arrived at by the fact finding authority and confirmed by the Commissioner (Appeals) and also the Tribunal, no material has been placed on record by the assessee to take a contra view. [Para 25] The Commissioner (Appeals) himself, on re-analysis of the entire materials placed on record, has allowed deductions, to some extent, regarding cash discount on purchases relating to manufacturing activity and also with regard to imported materials, which on further scrutiny, has been upheld by the Tribunal. [Para 26] An argument has been advanced on the part of the assessee, during the course of hearing of this appeal, that the matter needs re-hearing by the fact finding authorities, since they have not considered the issues involved in the matter in their proper perspective. [Para 27] In the case on hand, the assessee’s claim has been tested on touchstone not only bythefactfindingauthority(theAssessingOfficer),butalsobytheCommissioner (Appeals)andTribunal,beingthelastfactfindingauthorityandhavefilteredthe claimoftheassessee,makingiteligibletotheextentthelawpermits.Inthewhole process of orders passed by the Commissioner (Appeals) and the Tribunal, no perversityofapproachhasbeenfound.Therefore,reiteratingthewellestablished principle of law that while sitting on appeal under section 260A, this Court cannot set aside the factual findings recorded by the fact finding authorities, particularly in the absence of any adverse approach by them, it is to be held that the Tribunal is right in law in excluding the following from income eligible for deduction under section 80-IB of the Income-tax Act, 1961: TAXMAN MARCH 10 - MARCH 16, 2012 140
    • 2012] 75CASE DIGEST (i) Service income (ii) Commission received. [Para 28] In the result, this appeal filed by the assessee is dismissed. CASES REFERRED TO CIT v. Indo Matushita Carbon Co. Ltd. [2006] 286 ITR 201 (Mad.) (para 13), Helios & Metheson Information Technology Ltd. v. Asstt. CIT [2011] 15 taxmann.com 324 (Mad.) (para 15),Eveready Industries India Ltd.v.CIT[2010] 323 ITR 312 (Cal.) (para 15),Liberty India v. CIT [2009] 183 Taxman 349 (SC) (para 21), CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 (SC) (para 24), Cotton Base v. ITO [Tax Case (Appeal) No. 524 of 2010, dated 16-8-2010] (para 27) andM. Janardhana Rao v.Jt. CIT [2005] 2 SCC 324 (para 28). Dr. Anitha Sumanth for the Appellant. K. Subramanian for the Respondent. [2012] 205 TAXMAN 75 (Kerala)(Mag.)/18 taxmann.com 228 (Kerala) HIGH COURT OF KERALA Commissioner of Income-tax, Kottayam v. Duroflex Coir Industries Ltd. C.N. RAMACHANDRAN NAIR AND K. SURENDRA MOHAN, JJ. IT APPEAL NOS. 774, 776, 862, 1453 AND 1567 OF 2009 OCTOBER 19, 2010 Section 80HH, read with sections 80-I and 35, of the Income-tax Act, 1961 - Deductions - Profits and gains from hotel or industrial undertakings, etc., in backward areas - Whether deductions under section 80HH and section 80-I have to be granted with reference to gross total income arrived at after allowing deduction under section 35(2) - Held, yes [In favour of revenue] FACTS The assessee-company was engaged in manufacture and sale of rubberized coir products like mattresses, pillows, railway and bus seats. It had four industrialunitsoneofwhichwasanewoneandwaslocatedinabackwardarea. The assessee claimed that it was entitled to get deduction under sections 80HH and 80-I in respect of said unit before allowing deduction under section 35(2). However, the Assessing Officer first granted eligible deduction under section 35(2) on the capital expenditure in research and development and on the gross total income so arrived at, he granted deductions under sections 80HH and 80- I. On appeal, the Commissioner (Appeals) allowed deduction under sections TAXMAN MARCH 10 - MARCH 16, 2012 141
    • 76 TAXMAN - MAGAZINE [Vol. 205 80HH and 80-I from the gross total income before granting deduction under section 35(2). The Tribunal upheld the order of the Commissioner (Appeals). On revenue’s appeal : HELD The definition of ‘gross total income’ contained in section 80B(5) will prove the scheme or the method of computation to be followed to arrive at the total income by granting deductions under Chapter VI-A including sections 80HH and 80-I. It is made clear that before granting any deduction under Chapter VI-A which includes sections 80HH and 80-I, the gross total income of the assessee has to be determined which is income computed under all heads including business income computed after granting deductions and allowances under sections 30 to 43D which includes deduction of capital expenditure on research and development allowable under section 35(2). What is clear from the definition of sections 80HH and 80-I is to first determine the gross total income and work out therefrom the profit attributable to the eligible industry and then deduct from the gross total income the prescribed percentage of profit of such industry as provided in sections 80HH and 80-I to arrive at the total income on which tax is payable. The detailed procedure, sequence-wise for computation of total income on which tax is payable is as follows: (i) First, business income has to be computed as stated in section 29 by applying the provisions of sections 30 to 43D. Since capital expenditure employed in research and development is allowable under section 35(2), the said deduction hastobeallowedinthecourseofcomputationofbusinessincomeoftheassessee asawhole.Theincomesocomputedbyapplyingtheaboveprovisionsisthegross businessincomewhichsofarastheassesseewasconcernedisthegrossbusiness income from all the industrial units. The next procedure is to club income computedunderalltheheadsofincomewhichwillformthe“grosstotalincome” of the assessee. (ii) The next procedure is to determine “total income” which among other things isbyprovidingvariousdeductionsunderChapterVI-Afrom“grosstotalincome”. So far as deductions under sections 80HH and 80-I are concerned, these deductions are with reference to income of the eligible industrial unit and, therefore, ‘business income’ computed has to be desected to identify the profit of the eligible industrial unit from which the percentage of eligible deductions under sections 80HH and 80-I has to be allowed. (iii)EventhoughvariousdeductionsunderChapterVI-Ahavetobegrantedfrom the gross total income which is the combined income computed under the provisions of the Act under all heads of income, deduction eligible under section 80HH and section 80-I are specific percentage of profit attributable to the eligible industry which is new and located in backward area. [Para 5] Inviewofabovefindings,theTribunalwentwronginallowingdeductionunder sections 80HH and section 80-I from the gross total income before granting TAXMAN MARCH 10 - MARCH 16, 2012 142
    • 2012] 77CASE DIGEST deduction under section 35(2). The deduction under section 35(2) has to be first allowed in the computation of business income as a whole and thereafter deductionsundersection80HHandsection80-Ihavetobegrantedonlyfromthe net income attributable to the eligible industrial unit. Accordingly, the appeal was to be allowed by reversing the orders of the Tribunal and that of the first appellateauthorityandtheAssessingOfficerwasdirectedtorevisetheassessment, if the original assessments were in any way at variance with the above scheme of computation of relief. If the assessments were made consistent with the above scheme of computation of relief, then such assessments would stand confirmed. [Para 6] CASES REFERRED TO Synco Industries Ltd. v. Assessing Officer, Income-tax [2008] 299 ITR 444/168 Taxman 224 (SC) (para 4),CIT v. Canara Workshops (P.) Ltd. [1986] 161 ITR 320/27 Taxman 262 (SC) (para 4) and CIT v. Balmer Lawrie & Co. Ltd. [1995] 215 ITR 249 /83 Taxman 520 (Cal.) (para 4). P.K.R. Menon and Jose Joseph for the Appellant. Joseph Kodianthara for the Respondent. [2012] 205 TAXMAN 77 (Karnataka)(Mag.)/18 taxmann.com 226 (Karnataka) HIGH COURT OF KARNATAKA Commissioner of Income-tax v. Gokuldas Exports V.G. SABHAHIT AND S.N. SATYANARAYANA, JJ. IT APPEAL NO. 964 OF 2006† NOVEMBER 8, 2011 Section 45 of the Income-tax Act 1961 - Capital gains - Chargeable as - Assessment year 1995-96 - Assessee-firm, by making a book entry on 29-3-1995 allowed its partners to withdraw individual properties contributed by them and, thereafter, firm was converted into joint stock company on 3-4-1995 - Assessing Officer held that transaction would amount to transfer of capital assets which would attract capitalgainundersection45(4)-Commissioner(Appeals)upheldorderofAssessing Officer - However, on second appeal, Tribunal, relying upon decision rendered by Tribunal in Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.), held that there was no transfer of capital asset and, therefore, provisions of section 45(4)wouldnotbeattracted-WhetherfactsinUnityCareandHealthServicescase were entirely different from one in instant case and, therefore, Tribunal was not †Arising from order of ITAT in ITA No. 1062/Bang./2004. TAXMAN MARCH 10 - MARCH 16, 2012 143
    • 78 TAXMAN - MAGAZINE [Vol. 205 at all justified in relying upon said decision - Held, yes - Whether since question as to whether there was transfer of immovable property which would attract capital gain under section 45(4) was a pure question of fact and same was to be decided by Tribunal, matter was to be remitted to Tribunal for fresh disposal in accordance with law - Held, yes. [In favour of revenue] FACTS During assessment proceedings of the assessee-firm, the Assessing Officer noticed that there was transfer of capital assets to partners of firm on 29-3-1995 by making book entry and, thereafter, there was conversion of firm into joint stock company on 3-4-1995. He held that the transactions would attract capital gains under section 45(4). On appeal, the Commissioner (Appeals) upheld the order of the Assessing Officer. On second appeal, the Tribunal relying upon the decision rendered by Tribunal in Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.), held that there was no transfer of capital asset and therefore, provisions of section 45(4) would not be attracted. On revenue’s appeal to the High Court: HELD It is well-settled that the Tribunal is the final authority to decide the question of fact. Both, the Assessing Officer and the first appellate authority, have held that since there was transfer of capital asset on 29-3-1995 in favour of the new partners of the firm, the same would attract provisions of section 45(4) and tax has to be paid on the capital gain. However, the Tribunal has set aside the order passed by the first appellate authority and the Assessing Officer only on the ground that in the earlier order passed by the Tribunal in Unity Care & Health Services (supra) it has been held on similar facts that the transaction would not attractsection45(4).Itisthecaseoftheassesseethaton29-3-1995therewasbook entry wherein individual property contributed by partners is allowed to be withdrawn by making entry and, thereafter, those properties have not been shown as asset of the joint stock company and the conversion was on 3-4-1995. However, in the case of Unity Care & Health Services case it was a partnership firm registered by eight partners on 2-10-2000 under the Partnership Act and on 3-10-2000, it got registered under the Companies Act. Before registration or conversion as a company, the assets of the partnership firm were revalued as on 2-10-2000, after depreciation The firm did not declare any capital gains on transfer of assets from partnership firm to the company which was a separate entityand,therefore,theAssessingOfficerwasoftheviewthatduetoconversion of partnership firm into a limited company, there was transfer of capital assets by the firm to the limited company and capital gain arose on account of this transfer.However,intheinstantcase,factsareclearlydifferent.Eventhoughthe order passed by the Tribunal in Unity Care & Health Services has been confirmedbythisCourtinITANo.3170/2005filedbytherevenuebyorderdated TAXMAN MARCH 10 - MARCH 16, 2012 144
    • 2012] 79CASE DIGEST 5-7-2010, it is clear that facts under which the finding was given that the impugned transaction would not amount capital gain were entirely different from the one in the instant case and, therefore, the Tribunal was not at all justified in relying upon the decision in the Unity Care & Health Services case (supra).TheTribunalhasnotgoneintootheraspectswhichareinthereasonings givenbythefirstappellateauthorityandtheAssessingOfficerwhileholdingthat the capital gain under section 45(4) is attracted and the assessee is liable to pay tax on the same and, therefore, the order passed by the Tribunal is perverse and arbitrary and cannot be sustained and liable to be setaside. [Para 8] Since the question as to whether there was transfer of immovable property whichwouldattractcapitalgainundersection45(4)isapurequestionoffactand the same is to be decided by the Tribunal, the matter is to be remitted to the Tribunal, for fresh disposal in accordance with law. [Para 9] CASE REVIEW Asstt.CIT v.UnityCare&HealthServices [2006] 103 ITD 53 (Bang.) (para 8)distinguished. CASES REFERRED TO Asstt. CIT v. Unity Care & Health Services [2006] 103 ITD 53 (Bang.) (para 2), Jansons v. CIT [1985] 154 ITR 432/[1984] 17 Taxman 330 (Kar.) (para 4), CIT v. Gurunath Talkies [2010] 328 ITR 59/189 Taxman 171 (Kar.) (para 4) andCIT v.A.N. Naik Associates [2004] 265 ITR 346/36 Taxman 107 (Bom.) (para 4). K.V. Arvind and M.V. Seshachala for the Appellant. S. Parthasarathi for the Respondent. [2012] 205 TAXMAN 79 (Delhi)(Mag.)/18 taxmann.com 331 (Delhi) HIGH COURT OF DELHI Commissioner of Income-tax v. Modipon Ltd. (No. 2) SANJAY KISHAN KAUL AND RAJIV SHAKDHER, JJ. IT APPEAL NO. 48 OF 1999 JANUARY 25, 2011 Section 43B, read with section 37(1), of the Income-tax Act, 1961 - Business disallowance-Certaindeductionstobeallowedonlyonactualpayment-Assessment year 1989-90 - Whether an assessee is entitled to claim deduction on account of excise duty paid in advance as business expenditure - Held, yes - Whether, therefore, revenue’s objection that it was only on removal of goods that amount credited to personal ledger account could be claimed as deductible under section 43B, could not be accepted - Held, yes [In favour of assessee] TAXMAN MARCH 10 - MARCH 16, 2012 145
    • 80 TAXMAN - MAGAZINE [Vol. 205 FACTS In instant appeal, the question came up for consideration was as to whether the assessee was entitled to claim deduction on account of excise duty paid in advance as business expenditure. HELD It is a common case of the parties that the objective with which the provision of section43Bwasintroducedwastoplugaloopholeinthestatutewhichpermitted deduction on an accrual basis without the requisite obligation to deposit the tax with the State. Resultantly, on the basis of mere book entries the assessee would claim deduction without actually paying the tax to the State. [Para 5] In the factual matrix of the present case, the controversy arises in respect of the excisedutypayablebytheassesseeonthegoodsmanufacturedinthefactory.The incidenceforimpositionofexciseduty,thatis,theliabilityarisesonmanufacture of goods. A self-assessment procedure was provided under rule 173G of the Central Excise Rules. [Para 6] It is the submission of department that the aforesaid rule envisages payment in advance of the excise duty which is to be adjusted only on the goods being removedfromthefactorypremises.Itis,thus,contendedthattheamountofduty is liable for deduction only when the goods are removed from the factory premises. [Para 7] The mischief which is sought to be cured by induction of the provisions of section43Bissubservedbythepaymentofthedutytothedepartmentconcerned. The procedure envisaged for payment of excise duty envisages such duty to be deposited in advance with the treasury before the goods are removed from the factory premises. The duty, thus, already stands deposited in the accounts of the assessee maintained with the treasury and the amount, thus, stands paid to the State. [Para 8] Thus, the submission of the department that it was only on removal of the goods that the amount credited to the personal ledger account could be claimed as deductible under section 43B cannot be accepted. [Para 9] In the result, it was to be held that the assessee was entitled to claim deduction of Rs. 14.71 lakhs on account of excise duty paid in advance as business expenditure. CASE REVIEW Berger Paints India Ltd. v.CIT [2004] 266 ITR 99/135 Taxman 586 (SC) (para 3) followed. CASES REFERRED TO Berger Paints India Ltd. v. CIT [2004] 266 ITR 99/135 Taxman 586 (SC) (para 3). Ms. P.L. Bansal for the Appellant. S.K. Agarwal for the Respondent. TAXMAN MARCH 10 - MARCH 16, 2012 146
    • 2012] 81CASE DIGEST [2012] 205 TAXMAN 81 (Delhi)(Mag.)/18 taxmann.com 266 (Delhi) HIGH COURT OF DELHI Minda HUF Ltd. v. Union of India DIPAK MISRA, CJ. AND SANJIV KHANNA, J. WRIT PETITION (CIVIL) NO. 8273 OF 2007 SEPTEMBER 26, 2011 Section 41(1), read with section 147, of the Income-tax Act, 1961 - Remission or cessationoftradingliability-Assessmentyear2003-04-AssessingOfficerreopened assessment observing that assessee had, in its computation of income, deducted Rs.42,73,617beingamountwrittenbackcreditedtoprofitandlossaccountandout of said sum assessee had considered only Rs. 32,29,341 as income under section 41(1) while excess deduction of Rs. 10,44,276 had escaped assessment - Assessee had already explained that excess of Rs. 10,44,276 had already been added back in computation of income of two preceding assessment years 2001-02 and 2002-03 - In these years Rs. 5,87,617 and 17,19,837 were added back as bad and doubtful debts - On other hand, revenue failed to show and establish whether Rs. 10,44,276 was in fact not added back in earlier years - Whether since there was no material and ground to reopen assessment on account of reason in respect of taxability of profit under section 41(1) and reason recorded was a mere suspicion, it had no foundation or prima facie basis - Held, yes [In favour of assessee] Section 37(1), read with section 147, of the Income-tax Act, 1961 - Business expenditure - Allowability of - Assessment year 2003-04 - Assessee claimed royalty payment as revenue expenditure which, Assessing Officer observed, was allowable as capital expenditure - Assessing Officer initiated reassessment under section 147 - It was found that nature of expenditure had already been discussed during original assessment - Whether since Assessing Officer had not verified facts, and there was no specific denial of fact that during course of original assessment proceedings, assessee had filed reply before Assessing Officer on whether or not payment of royalty were revenue expenditure in nature, it was to be held that there was only change of opinion subsequently and, hence, reassessment proceedings were not valid - Held, yes [In favour of assessee] FACTS The Assessing Officer reopened the assessment observing that (i) the assessee initscomputationofincomedeductedRs.42,73,617beingamountwrittenback credited to profit and loss account considered separately under section 41 and out of this sum, the assessee considered only Rs. 32,29,341 as income under section 41, and thus, the excess deduction of Rs. 10,44,276 had escaped assessment. (ii) Further, the Assessing Officer noted that the assessee paid TAXMAN MARCH 10 - MARCH 16, 2012 147
    • 82 TAXMAN - MAGAZINE [Vol. 205 certain amount as revenue expenditure paid as royalty which was allowable as capital expenditure, and not as revenue expenditure. The assessee filed objec- tion that during the assessment proceedings, these issues were already dis- cussed. Regarding profit under section 41, it was clarified that difference of amount was due to provision of earlier year written back, which were not allowed in relevant assessment year (iii) Regarding royalty, taxes were paid and challan was submitted to Assessing Officer. The Assessing Officer, however, did not accept the assessees contentions and, initiated reassessment proceedings under section 147. On writ : HELD Amount of profit taxable under section 41 FromreadingofthereasonsrecordedbytheAssessingOfficer,itappearsthatthe Assessing Officer did not find any justification or ground to continue with the reassessment proceedings in view of the objection filed for reason given in respect of amount of profit chargeable under section 41. The impugned order does not refer to or meet the contention of the assessee in respect of reason in respect of profit changeable under section 41. In the original record, there is a writtennotebytheassesseeexplainingthatRs.10,44,276hadalreadybeenadded back in the computation of income for the assessment years 2001-02 and 2002- 03,whichisapparentfromthecomputationsforthesaidassessmentyears.[Para 8] It also appears that in the reassessment order an addition of Rs. 10,44,276 has been made, inter alia, observing that the assessee had not been able to establish that the aforesaid amount was included in the computation for the earlier assessment years though in the assessment years 2001-02 and 2002-03, Rs.5,87,617andRs.17,19,837,respectively,wereaddedbackasbadanddoubtful debts only; their break up was not given. The assessee had to substantiate its claim, as to why said addition should not be made. Thus, in the reassessment order the addition has been made on ground these the assessee had failed to substantiatethatRs.10,44,276wasaddedbackintheearlieryears.Thereasoning establishes that the revenue did not have any basis to show and establish whether this amount was, in fact, not added back in the earlier assessment years. There was, therefore, no material and ground to reopen the assessment on account of reason in respect of taxability of profit under section 41. The said reason was merely a suspicion without any material and had no foundation or prima facie basis. [Para 9] The assessee had further stated that the aspect of bad and doubtful debts was examinedduringthecourseoftheoriginalassessmentproceedingsandthethen Assessing Officer was informed that said amount had been added back and, accordingly,theAssessingOfficerhadagreed.Itmaybenotedthatintheoriginal assessment proceedings an addition of Rs. 7,41,240 was made on account of bad debts written off. [Para 10] TAXMAN MARCH 10 - MARCH 16, 2012 148
    • 2012] 83CASE DIGEST Royalty Payment With regard to royalty payment, the assessee had stated in the objections that duringthecourseoforiginalassessmentproceedingstheassesseehadsubmitted a reply on the royalty paid. The Assessing Officer in the order has not adverted to or referred to any reply. It is stated that no such explanation was available on record. The factum that the original record, except for the papers mentioned in were missing is not adverted to. The assessee has placed on record with instant writ petition, a note of royalty payment and it is stated that the said note was furnished during the course of the original assessment proceedings. Reference to the said note is made in the writ petition. In the counter affidavit/reply filed to the writ petition, the revenue has not specifically dealt with and denied that during the course of the original assessment proceedings the assessee had filed thenoteonroyaltypaidandclaimedthatthepaymentswererevenueexpenditure. Itisnotedthatthecounteraffidavit/replyhasbeenfiledbyDeputyCommissioner who was also the Assessing Officer. Notice under section 147/148 was issued by her and she is also the author of the order rejecting the objections filed by the assessee. Thus, there is no specific denial of the fact that during the course of the original assessment proceedings, the assessee had filed the reply before the Assessing Officer on whether or not the payment of royalty were revenue expenditure in nature. It is a well settled principle in law that allegations made in the pleadings must be specifically denied. Absence of specific denial can be construed as acceptance of the fact stated. The said note gives the break up of the agreements entered into for trade and technical assistance in the year 1995-96 with Huf Hulsbeck and Furst, Germany and in the year 2001-02 with All-Tech S.R.L.,Italy.ThesaidnotealsogivesdetailsoftheTDSdeductedonthepayments made. The details of TDS as per the order were on record. It is stated that as per the trade and technical agreements, royalty payable was related to sales by the assessee company, hence, it was a revenue expenditure. [Para 12] In view of the aforesaid discussion, the core issue is a short one. The issue that needs examination is whether the question that royalty payable was in the nature of revenue expenditure, and not capital expenditure, was examined duringtheoriginalassessmentproceedings.Incasethesaidaspectwasdiscussed/ considered, then the assessee is entitled to succeed as it is now well-settled that reassessment proceedings cannot be initiated on a mere change of opinion. In case this aspect was not considered and examined by the Assessing Officer in the original assessment proceedings, there is no question of change of opinion and, therefore, logically and sequentially, the reassessment proceedings have been validly initiated and at this stage, a prima facie view is to be taken, and whether or not finally any addition would be justified and made, is not to be examined. [Para 15] In view of the pleadings, failure of the revenue to deny the fact that the reply on royalties payable was filed before the Assessing Officer, there was no option but to accept the assessee’s contention. The said aspects have been discussed. The Revenue has not made any attempt to even get in touch with the Assessing TAXMAN MARCH 10 - MARCH 16, 2012 149
    • 84 TAXMAN - MAGAZINE [Vol. 205 Officer who had authored the original assessment 2006 and enquired whether or not during the original proceedings, the said aspect has been examined. The records maintained by the revenue are scanty and only some papers relating to the original assessment proceedings are available. The reassessment notice was issuedafteraboutoneyearfromwhentheoriginalassessmentorderwaspassed. Thereafter, the order rejecting the objections was passed. In the objections the assessee had referred to the reply filed during the course of the original assessmentproceedings.NothingpreventedtheAssessingOfficerfromexamining the said aspect and stating that no reply was filed by the assessee in the course of the original assessment proceedings. The new Assessing Officer could have also asked and verified facts from the earlier Assessing Officer who had passed the original assessment order, as the documents/papers were missing. On the other hand, a cryptic order was passed without specifically dealing with the said contention and fact stated by the assessee. [Para 16] In view of the aforesaid, the instant writ is to be allowed and writ of certiorari is issued quashing the notice under section 147/148 and the order rejecting the assessee’s objections. It is held that the reasons recorded show only a change of opinion and, therefore, the reassessment proceedings are not valid. [Para 17] CASES REFERRED TO ITO v. Lakhmani Mewal Das [1976] 103 ITR 437 (SC) (para 5), Allahabad Bank v. CIT [1993] 199 ITR 664 (Cal.) (para 5),CIT v. Punjab Financial Corpn. [1990] 183 ITR 438/52 Taxman 405 (Punj. & Har.) (para 5),BSNL v.Abhishek Shukla[2009] 5 SCC 368 (para 12) and CIT v. Kelvinator of India Ltd. [2010] 187 Taxman 312 (para 15). Ajay Vohra, Ms. Kavita Jha and Somnath Shukla for the Petitioner. Kamal Sawhney for the Respondent. [2012] 205 TAXMAN 84 (Delhi)(FB)(Mag.)/18 taxmann.com 174 (Delhi)(FB) HIGH COURT OF DELHI (FULL BENCH) Airport Authority of India v. Commissioner of Income-tax A.K. SIKRI, ACTG. CJ. RAJIV SHAKDHER AND R.V.EASWAR, JJ. IT APPEAL NOS. 432, 433, 437, 517, 792, 1250 & 1251 OF 2008 DECEMBER 16, 2011 I - Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Allowability of-Assessmentyears1996-97onwards-Assessee-authority,engagedinmanagement of certain airports and allied services, had been making provisions for incurring expenditure towards removal of illegal encroachments in and around security area TAXMAN MARCH 10 - MARCH 16, 2012 150
    • 2012] 85CASE DIGEST ofairportsandtowardsrehabilitationofencroachers-AssessingOfficerdisallowed said provision holding that expenditure, if any incurred, was of capital nature - Whether expenditure so incurred was to facilitate smooth functioning of assessee’s business, i.e., in relation to carrying on business in a profitable manner, and, therefore, it was revenue in nature - Held, yes - Whether, however, deduction was to be allowed on actual payment basis only - Held, yes [In favour of assessee] II - Section 5 of the Income-tax Act, 1961 - Income - Concept of real income - Assessment years 1996-97 onwards - Whether if income does not result at all, there cannot be a tax, even though in book keeping an entry is made about a hypothetical income which is not materialized - Held, yes - Assessee-authority had been providing space at airports managed by it to various Government agencies like Customs, Immigration, Meteorological Department, Post Office, Police Agencies, etc., for performance of their duties - No payment was made by those Government agencies for space occupied by them - However, on advice of CAG assessee had beenraisingproformainvoices-AssessingOfficertreatedamountofthoseinvoices to be income of assessee on ground that assessee was following mercantile system of accounting - Whether on application of ‘real income’ theory no income had accrued to assessee in respect of Government agencies, like Police, Customs, etc., who had never paid any amount to assessee - Held, yes [In favour of assessee] FACTS - I The assessee, a statutory authority, was engaged in management of certain airports and other allied activities. On some of these airports, illegal encroach- ments were found in and around the security area of the airports. With the intervention of local authorities, schemes were devised to rehabilitate the encroachersandthemoneywasrequiredforrehabilitation.Forthatreason,the assessee had been making provisions for the aforesaid expenditure to be incurred in removal of encroachers and had been incurring the expenditure for the said purpose from time-to-time. For identical purpose, namely, for removal of hutments/encroachers, the assessee had paid a sum of Rs. 19.89 crores to the DDAfordevelopmentofanalternatesitefortheresidentsofthatareawhowere vacated as their lands were acquired for expanding of International Airport of Delhi. The Assessing Officer and the Tribunal disallowed the provision so made holding that the expenditure, if any incurred was of capital nature. On refer- ence, the order of the Tribunal was upheld by the Division Bench of the High Court. On reference to Full Bench. HELD - I Applying the test laid down inCIT v.J.K. Synthetics Ltd. [2009] 309 ITR 371/176 Taxman 355 (Delhi) as well as the ratio of Bikaner Gypsums Ltd. v. CIT [1991] 187 ITR 39/[1990] 53 Taxman 279 (SC) to the facts of instant case, a conclusion TAXMAN MARCH 10 - MARCH 16, 2012 151
    • 86 TAXMAN - MAGAZINE [Vol. 205 wouldbethattheexpenditureinquestionbytheassesseewasrevenueinnature. It is not in dispute that the land belongs to the assessee. Certain encroachers in all these airports had encroached upon the part of the land. In the schemes formulatedbytheGovernmentforremovaloftheseencroachersandrehabilitate them at other places, if the assessee had paid the amount, that amount is not for acquisition of new assets. The payment was made to facilitate its smooth functioning of the business, i.e., in relation to carrying on the business in a profitable manner. [Para 13] Therefore,suchanexpenditure,ifincurredbytheassessee,wouldbeonrevenue account and is not capital in nature. [Para 14] The Tribunal, however, proceeded to discuss the case on the basis that only a provision for such an expenditure was made and in fact there was no payment made in the assessment year(s) in question. It, thus, went on to determine whether it was a contingent liability to be accrued at a future date on the happeningofcertainevents.TheTribunalfirstobservedthattheliabilitywasnot statutory in nature. If at all, it was contractual. Thereafter, it addressed the issue as to whether the liability was contractual in nature and was capable of fair ascertainment. Taking note ofBikaner Gypsums Ltd. (supra), the Tribunal held that such an expenditure, if incurred in the year, would be revenue in nature. [Para 15] However, the Tribunal stated that no such liability had been incurred or crystallized. It held that though various meetings had taken place between the assesseeandtheGovernment,apartfrommakingcertainrecommendationsand estimatingthelikelyexpenditure,noagreementcameintoexistencebetweenthe assessee and the hutment dwellers with or without the involvement of any third party and as no agreement between the assessee and hutment dwellers has been filed,nolegallyenforceableliabilitywasfastenedontheassesseeinrelevantyear and, therefore, even under mercantile system of accounting, the assessee is not entitled to deduct the impugned amount simply because a provision was made. The Tribunal also took note of the submission of the assessee that it had, in fact, released a payment of Rs. 16.01 crore, but rejected this plea on the ground that the date of release of the money and the person to whom the money had been paid had not been stated. [Para 16] No doubt, having regard to the judgment of the Supreme Court inBharat Earth Movers v. CIT [2000] 112 Taxman 61, which laid down that the liability should have been actually incurred in the year and it should be capable of reasonable ascertainment, the assessee is to prove that such a liability had actually been incurred and was capable of reasonable ascertainment. A finding of fact is arrived at that no such ascertainment of liability could be proved by the assessee. To that extent, the order of the Tribunal cannot be faulted with. However, it would be necessary to mention at this stage that certain documents were produced to show that amount of Rs. 16.01 crores in the assessment year 1998- 99 was, in fact, paid and similar amounts were paid in other years as well. Once TAXMAN MARCH 10 - MARCH 16, 2012 152
    • 2012] 87CASE DIGEST it is held that such amounts are paid, these are admissible deductions being revenueinnature.ThedeductionwouldbeallowedbytheAssessingOfficeronly after the assessee furnishes proof of having made such a payment in the different assessment years in question. [Para 17] The criteria laid down by the Tribunal that for admissibility of the expenditure there has to be an agreement between the assessee and the hutments dweller is clearly wrong. It is a matter of record that in these schemes no such agreement is actually arrived at between the persons who make the payment like the assessee herein and the hutments dwellers. Therefore, even if in a given case the assessee is able to show that rehabilitation scheme was formulated by the Government and the assessee as beneficiary was asked to make the payment under the said scheme, that would be sufficient evidence to claim the deduction of expenditure as held by the Supreme Court in Bikaner Gypsums Ltd. (supra). However, it is found that in the instant case, a finding of fact is recorded by the Tribunal that no such scheme could be furnished by the assessee for which the assessee was supposed to make the provision. To that extent, therefore, the Tribunaliscorrectinitsview.Atthesametime,following BikanerGypsumsLtd. (supra), this finding has become irrelevant as the deductions on the basis of actual payment, are to be allowed. [Para 18] FACTS - II The assessee-Authority had given space in the airports managed by it to various Government agencies like the Police Department, Post and Telegraph, Meteo- rologicalDepartment,etc.Itwasthecaseoftheassesseethatthesedepartments had their offices to facilitate the functioning of the assessee and they did not agree to pay any licence fee of the space occupied by them on the plea that they were regulatory bodies to provide special services in terms of the Government directions. Still the assessee had raised the proforma invoices in all these years and kept in memoranda account, only because its auditors, namely, CAG of India had suggested/emphasized the assessee to maintain these accounts. The assessee also emphasized that such use by Government Department should not be treated as commercial use since they had to be provided space for the performance of duty and, therefore, no regular revenue was being generated. The Assessing Officer, however, did not accept the aforesaid plea and treated the amount of proforma advices as income of the assessee on the ground that the assessee was following mercantile system of accounting and, therefore, the income had accrued by the very fact that spaces were given to those agencies and against those spaces proforma invoices/bills were raised. Those additions had also been sustained till the stage of the Tribunal. HELD - II It is a matter of record that certain Government department like Customs, Immigration, Meteorological Department, Post Office, Police Agencies including BSF, CISF, Special Bureau of Govt., FRRO, Intelligence Bureau, etc., have been TAXMAN MARCH 10 - MARCH 16, 2012 153
    • 88 TAXMAN - MAGAZINE [Vol. 205 provided accommodation in the terminal buildings and other technical areas by the assessee. The real income theory is accepted by the Supreme Court in State Bank of Travancore v.CIT [1986] 158 ITR 102/24 Taxman 337. As per this judgment, the concept of real income is applicable in judging whether there has been income or not. If income does not result at all, there cannot be a tax, even though in book- keeping,anentryismadeaboutahypotheticalincomewhichdoesnotmaterialize. Thisprincipleisapplicablewhethertheaccountsaremaintainedoncashsystem orundermercantilesystem.Iftheaccountsaremaintainedunderthemercantile system, it has to be seen whether income can be said to have been really accrued to the assessee-company. In the instant case, it is not in dispute that there is some realization from the aforesaid Government Agencies though details are not available. In the year 1998-99 Rs. 19.66 crores towards proforma advices were made. These included private parties as well as Government departments. Insofar as private parties are concerned, there is no issue that the income has accrued and would be taxable in the year in which these invoices are made. In case money from these private parties is not realized later on, that can always be claimedasbaddebt.TheinstantissueisconcernedwiththeGovernmentparties in respect of which proforma invoices totalling of Rs. 5.33 crores were made. However, in respect of assessment year 1998-99 against the total proforma invoice of Rs. 5.33 crores, the payment receipt was of a meagre sum of Rs. 10.30 lacs. The same is the position in respect of earlier assessment years. [Para 19] The Tribunal is not correct in taking view that merely because a meagre sum of Rs. 10.33 lacs is received, the entire amount of Rs. 5.33 crores is to be treated as income and same treatment is to be given in other assessment years. What is to be seen is as to which Government department is remitting the amount. From thedetailsfurnished,itisobviousthatsomeofthedepartmentshavenevermade any payment. [Para 20] The issue, therefore, is restored back to the Assessing Officer to examine the matter in the light of aforesaid discussion. In respect of the Government Agencies, like Police, Customs, etc., who have never paid any amount to the assessee, on the application of real income theory and taking a realistic view, no income has accrued to assessee merely because proforma advices were raised, that too, at the instance of the CAG of India. [Para 21] TheAssessingOfficerisdirectedtodeterminethetaxabilityofproformainvoices in respect of those parties who have been remitting part payments and have accepted their liability and not in respect of those Government Agencies who have never paid any amount. [Para 22] CASE REVIEW Decision of the Delhi High Court inInternational Airports Authority of India v.CIT [2008] 303 ITR 433/[2007] 163 Taxman 620 (para 14) reversed. Bikaner Gypsum v. CIT [1991] 187 ITR 39/[1990] 53 Taxman 279 (SC) (para 11), CIT v. J.K. Synthetics Ltd. [2009] 309 ITR 371/176 Taxman 355 (Delhi) (para 12), Bharat Earth TAXMAN MARCH 10 - MARCH 16, 2012 154
    • 2012] 89CASE DIGEST Movers v.CIT[2000]245ITR428/112Taxman61(SC)(para17),StateBankofTravancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC) (para 19) followed. CASES REFERRED TO Bharat Earth Movers v. CIT [2000] 112 Taxman 61 (SC) (para 6), V. Jaganmohan Rao v. CIT & Excess Profit Tax [1970] 75 ITR 373 (SC) (para 8),Sitalpur Sugar Works Ltd. v. CIT [1963] 49 ITR 160 (SC) (para 8), Hardiallia Chemicals Ltd. v. CIT [1996] 218 ITR 598/87 Taxman 108 (Bom.) (para 8), International Airports Authority of India v. CIT [2006] 286 ITR 323/156 Taxman 1 (Delhi) (para 9), International Airport Authority of India v. CIT [2008] 303 ITR 433/[2007] 163 Taxman 620 (Delhi) (para 10),Bikaner Gypsums Ltd.v.CIT [1991] 187 ITR 39/[1990] 53 Taxman 279 (SC) (para 11), Assam Bengal Cement Co. Ltd. v. CIT [1955] 27 ITR 34 (SC) (para 11), CIT v. J.K. Synthetics Ltd.[2009] 309 ITR 371/176 Taxman 355 (Delhi) (para 12), State Bank of Travancore v. CIT [1986] 158 ITR 102/24 Taxman 337 (SC) (para 19) and Godhra Electricity Co. Ltd.v. CIT [1997] 225 ITR 746/91 Taxman 351 (SC) (para 19). O.S. Bajpai, Ms. Manasvini Bajpai and V.N. Jha for the Appellant. Kamal Sawhney for the Respondent. [2012] 205 TAXMAN 89 (Delhi)(Mag.)/18 taxmann.com 294 (Delhi) HIGH COURT OF DELHI Commissioner of Income-tax v. Modipon Ltd. (No. 1) A.K. SIKRI AND MS. INDERMEET KAUR, JJ. IT APPEAL NO. 1924 OF 2010 DECEMBER 7, 2010 Section 37(1) of the Income-tax Act, 1961 - Business expenditure - Year in which deductible - Assessment year 2004-05 - During relevant assessment year, assessee claimed certain expenses as business expenditure - Assessing Officer was of view that a part of expenses claimed related to prior period and as assessee-company was following mercantile system of accounting, said expenses should have been claimedinpreviousyear-OnappealbeforeTribunal,assessee’scasewasthatthose expenses were not booked earlier due to non-receipt of details and information thereof on time which was beyond its control - It was further submitted that as per accountingpolicyfollowedbyassessee,suchexpenseswerebookedinyearinwhich they were settled for payment - Tribunal having gone into details of each and every such expense, recorded a finding of fact that all those expenses were settled during relevant year - Accordingly, Tribunal allowed assessee’s claim - Whether on facts, no substantial question of law arose from Tribunal’s order and, thus, revenue’s appeal was to be dismissed - Held, yes [In favour of assessee] TAXMAN MARCH 10 - MARCH 16, 2012 155
    • 90 TAXMAN - MAGAZINE [Vol. 205 FACTS The assessee filed its return claiming certain expenses allowable as business expenditure. The Assessing Officer was of the view that a part of the expenses claimed related to the prior period and as the assessee company was following the mercantile system of accounting, the said expenses should have been claimed in the previous year. The Commissioner (Appeals) confirmed this view of the Assessing Officer. However, in further appeal, the Tribunal reversed the order of the Assessing Officer as well as the Commissioner (Appeals) and allowed those expenses. On revenue’s appeal: HELD When the assessee was following the mercantile system of accounting, the explanation furnished by the assessee before the Assessing Officer and the Commissioner (Appeals), which was reiterated before the Tribunal was that the expenses were not booked due to non-receipt of details and information thereof on time, which was beyond the control of the assessee. It was also explained that the aforesaid expenses to the tune of Rs. 41.95 lakhs were marginal as compared to enormous size of the assessee-company. It was also explained that as per the accounting policy followed by the assessee, such expenses were booked in the year in which they were settled for payment. The Tribunal went into details of each and every such expense and recorded the finding of fact that all these expenses were settled during relevant year. It was also recorded that more than 50 per cent of expenses could be claimed only on actual expenses, as they were covered under section 43B(d). [Para 2] That apart, a specific query was put to the revenue that whether the return filed in the earlier assessment year showed profit or loss insofar as the assessee- company was concerned. The revenue was not in a position to answer to this. The assessee informed that even in the earlier year, the assessee had shown positive income and paid tax thereon. If that was the situation, in any case, there was no loss of revenue. Had this expense been allowed in the previous year, the assessee would have paid lesser tax. On this ground also, it was not found to be a fit case to interfere with the order of the Tribunal. [Para 3] This appeal was to be, accordingly, dismissed. [Para 4] CASES REFERRED TO Goetze (India) Ltd. v. Deputy CIT [2008] 115 ITD 119 (Delhi) (para 2). N.P. Sahini for the Appellant. S.K. Aggarwal for the Respondent. TAXMAN MARCH 10 - MARCH 16, 2012 156
    • 2012] 91CASE DIGEST [2012] 205 TAXMAN 91 (Rajasthan)(Mag.)/18 taxmann.com 308 (Rajasthan) HIGH COURT OF RAJASTHAN Commissioner of Income-tax, Udaipur v. Hotel Hilltop N.P. GUPTA AND DEO NARAYAN THANVI, JJ. IT APPEAL NO. 25 OF 2005 MARCH 17, 2008 Section 2(22) of the Income-tax Act, 1961 - Deemed dividend - Assessee-firm had received certain amount as an advance from a company under an agreement to handover management of firm’s hotel to said company - Partners of assessee-firm were also shareholders in said company - Assessing Officer treated said amount received by assessee-firm as deemed dividend under section 2(22)(e) in hands of assessee and assessed same to tax - Whether it was not assessee-firm which was showntobeshareholderofcompanybutinfactitwasitspartnerswhowereholding more than requisite amount of shareholding in company and were having requisite interest in firm - Held, yes - Whether, therefore, aforesaid amount received by assessee would not be deemed dividend in hands of assessee-firm, rather it would obviously be deemed dividend in hands of individuals (partners), on whose behalf, or on whose individual benefit, being such shareholders, amount was paid by company to concern - Held, yes [In favour of assessee] FACTS The assessee-firm had shown liability of Rs. 12.46 lakhs under the head ‘other liabilities’, out of which a liability to the extent of Rs. 10.87 lakhs pertained to a company. It transpired to the Assessing Officer, that this liability consist of Rs. 10 lakhs, received as an advance against the security from the company, to the firm, under agreement to hand over the management of the firm’s hotel to the company and balance amount was shown as trade credits. The Assessing Officer also found that the partners of the assessee-firm were shareholders in said company. The Assessing Officer, accordingly treated the amount of Rs. 10 lakhs to be deemed dividend under section 2(22)(e) and assessed it in the hands of the assessee-firm. On appeal, the Commissioner (Appeals) held that since the firm was not a shareholder of the company, the amount of Rs. 10 lakhs could not be assessed to tax in hands of assessee under section 2(22)(e). On further appeal, the Tribunal upheld the order of the Commissioner (Appeals). On revenue’s appeal: HELD From reading of section 2(22)(e) it is clear, that it comprehends manifold requirements, the first being, the payment should be made by way of loan or advance, to the concern. Of course on this aspect, the conclusion has been recorded by the Tribunal against the Revenue, but then on bare reading of the agreement and considering the totality of circumstances, including the very TAXMAN MARCH 10 - MARCH 16, 2012 157
    • 92 TAXMAN - MAGAZINE [Vol. 205 nature of the term ‘security’, and the fact, that substantial portion of this Rs. 10 lakhs of amount, say more than 9 lakhs, have been advanced only during 7-1- 1991 to 22-3-1991, it is difficult to accept, it as a security, in the sense of the term, as comprehended in the agreement, rather it clearly appears to be simply a nomenclature used, to borrow the words of the Assessing Officer ‘transparent cover’. [Para 7] Themoreimportantaspect,beingtherequirementofsection2(22)(e)is,that“the payment may be made to any concern, in which such shareholder is a member, or the partner, and in which he as substantial interest, or any payment by any suchcompany,onbehalf,orfortheindividualbenefitofanysuchshareholder….”. Thus, the substance of the requirement is, that the payment should be made on behalf of, or for the individual benefit of any such shareholder. Obviously, the provision is intended to attract the liability of tax on the person, on whose behalf, or for whose individual benefit, the amount is paid by the company, whether to the shareholder, or to the concern firm, in which event, it would fall within the expression ‘deemed dividend’. Obviously, income from dividend, is taxable as income from other sources, under section 56, and in the very nature of things, the income has to be, of the person earning the income. The assessee in the instant case is not shown to be one of the persons, being shareholder. Of course thetwoindividualsbeingpartnersoftheassessee-firmarethecommonpersons, holding more than requisite amount of shareholding, and are having requisite interest,inthefirm,butthen,therebythedeemeddividendwouldnotbedeemed dividend in the hands of the firm, rather it would obviously be deemed dividend in the hands of the individuals, on whose behalf, or on whose individual benefit, beingsuchshareholder,theamountispaidbythecompanytotheconcern.[Para 8] Thus, the significant requirement of section 2(22)(e) is not shown to exist. The liability of tax, as deemed dividend, could be attracted in the hands of the individuals, being the shareholders, and not in the hands of the firm. [Para 9] Accordingly, the appeal failed and is dismissed. [Para 11] CASE REVIEW Order of Tribunal dated 16-9-2004 partly affirmed. K.K. Bissa for the Appellant. Anjay Kothari for the Respondent. TAXMAN MARCH 10 - MARCH 16, 2012 158
    • 2012] 93CASE DIGEST [2012] 205 TAXMAN 93 (Madras)(Mag.)/18 taxmann.com 286 (Madras) HIGH COURT OF MADRAS Commissioner of Income-tax v. Century Flour Mills Ltd. MRS. CHITRA VENKATARAMAN AND P.P.S. JANARTHANA RAJA, JJ. TAX CASE APPEAL NOS. 1034 AND 1035 OF 2004† MARCH 14, 2011 Section 36(1)(iii) of the Income-tax Act, 1961 - Interest on borrowed capital - Assessment year 1991-92 - Assessee-company entered into an agreement for purchase of land owned jointly by ‘P’, managing director of assessee-company, and also ‘N’ - As per agreement, a sum of Rs. 20 lakhs was given as advance to managing director - Said agreement was renewed year after year - Due to some unavoidable reasons, sale could not be effected - Accordingly, managing director refunded amount of advance received from assessee-company - Assessee’s claim fordeductionundersection36(1)(iii)inrespectofinterestpaidonmoneyborrowed was rejected by Assessing Officer holding that assessee had given said amount as advance to managing director - On second appeal, Tribunal held that revenue had notestablishednexusbetweenborrowedfundsandadvancedmoneywithmanaging director - Tribunal accordingly allowed assesee’s claim - Whether since amount was given only for purchase of land and it was for benefit of business, it could not be concluded that payment in question was for non-business purpose - Held, yes - Whether, therefore, Tribunal was justified in allowing assessee’s claim - Held, yes - [In favour of assessee] FACTS The assessee-company entered into an agreement for purchase of land owned jointly by ‘P’ managing director of the assessee-company and also ‘N’. As per the agreement,asumofRs.20lakhswasgivenasadvancetothemanagingdirector. The said agreement was renewed year after year. Due to some unavoidable reasons, the sale was not effected. Accordingly, the managing director re- funded the amount of advance received from the assessee-company. The assessee’s claim for deduction under section 36(1)(iii) in respect of interest paid on money borrowed was rejected by the Assessing Officer holding that the assessee had given said amount as advance to the managing director. On second appeal, the Tribunal held that the revenue had not established the nexus between the borrowed funds and advanced money with the managing director. The Tribunal therefore allowed the assessee’s claim. On revenue’s appeal: †Appeal arising out of order of ITAT in ITA Nos. 79 and 80/Mds./1998, dated 24-6-2004. TAXMAN MARCH 10 - MARCH 16, 2012 159
    • 94 TAXMAN - MAGAZINE [Vol. 205 HELD It was noted that the revenue has not disallowed any interest in earlier assessment years, i.e., 1984-85 to 1990-91. It is also pertinent to note that the managingdirectorrefundedtheentireadvanceamountbecausethesalehasnot been effected. So in view of the refund of the amount, it is clear that the company paid the amount only for purchase of land owned jointly by the managing director and ‘N’. It is only an advance and it is not a loan as alleged by the AssessingOfficer.Onlyforpurchaseoftheproperty,theamountwasgiventothe land owner, who is the managing director and another person by name one ‘N’. It is not a loan simpliciter. It is only the sale consideration paid as advance. [Para 6] The Tribunal has given a categorical finding that there is no nexus established by the Assessing Officer between the borrowed fund and the advanced amount. Therefore, the Assessing Officer had failed to establish that the borrowed amount was given as a loan to the managing director. It is also pertinent to note that the borrowed fund was not diverted for non-business purposes. In the present case, the amount is given only for the purchase of the land and it is for the benefit of the business and it cannot be held that it is for the non-business purposes. The revenue has not disallowed any interest for the period from 1984- 85 to 1990-91. Only during these two years, the revenue disallowed the interest. Consideringtheabovefactors,theTribunalhascorrectlycometotheconclusion that the disallowance made by the Assessing Officer is not in accordance with law and rightly set aside the order of the lower authority. [Para 7] In the result, the revenue’s appeal is to be dismissed. CASES REFERRED TO CIT v.V. I. Baby & Co.[2002] 254 ITR 248/123 Taxman 894 (Ker.) (para 4),CITv.Abhishek Industries Ltd. [2006] 286 ITR 1/156 Taxman 257 (Punj. & Har.) (para 4) andS.A.Builders Ltd. v. CIT (Appeals) [2007] 288 ITR 1/158 Taxman 74 (SC) (para 10). K. Subramanian for the Appellant. TAXMAN MARCH 10 - MARCH 16, 2012 160