CONSOLIDATED DIGEST OF CASE LAWS (JANUARY 2011 ......CONSOLIDATED DIGEST OF CASE LAWS (JANUARY 2011...

CONSOLIDATED DIGEST OF CASE LAWS (JANUARY 2011 TO DECEMBER 2011)

(Journals Referred: ACAJ / BCAJ / BLR / CITC / CTR / DTR / ITD / ITR (Trib.) / ITR / SOT / TTJ /TLR / Taxman / Taxation / Tax World , www.itatonline.org)

CHAPTER I PRELIMNARY

Section 2 : DefinitionsS. 2(IA) : Agricultural income - Sale of rubber scrap - Scrap generated in industrial activity.Sale of scrap rubber which is generated in course of extraction of rubber latex from trees cannot be brought to Income tax by applying Rule 7A because scrap is generated in course of taking yield which is purely an agricultural operation. However, income from scrap generated in industrial activity of processing latex in to products referred to in Rule 7A(1) has to be brought to income tax under rule.CIT v. State Farming Corporation of Kerala . (2011) 199 Taxman 371 / 244 CTR 560 / 58 DTR 104 (Ker.)(High Court)

S. 2(IA) : Agricultural income – Seeds - Human labour and efforts - Sale of hybrid seeds could not be treated as agricultural income for the purpose of exemption under section 10(1). [S. 10(1)]Irrespective of nature of produce or product of land, whatever is grown on land with assistance of human labour and effort and whatever does not grow wild or spontaneously on soil without human labour and effort would be an agricultural product and process of producing it would be ‘agriculture’ within the meaning of expression in section 2(IA), therefore seeds are agricultural product and sale of seeds can be agricultural income. Assessee company was in business of cultivation, production and marketing of open hybrid seeds both for domestic and international market and it entered in to agreement with farmers for production of open hybrid tomoto seeds for its own benefit or on behalf of its overseas principals. By virtue of agreement farmers agreed to demarcate a particular acreage of land earmarked for purpose of cultivation of particular seeds during fixed period and to carry on cultivation of open hybrid seeds in the land so earmarked under guidance, specifications and supervision of assessee company. Preparation of bed, sowing of seeds, cultivation and harvesting of hybrid seeds was done by farmers and they were entitled a price fixed by assessee per quintal for all such seeds which would qualify specification indicated by assessee. The Court held that reading the terms of agreement would only indicate that assessee company was interested only to have healthy foundation seeds grown for process of converting same as certified seeds, therefore on facts income arising to assessee by sale of hybrid seeds could not be treated as agricultural income for purpose of exemption under section 10(1). (A. Ys. 1998-99 to 2004-05).CIT v. Namdhari Seeds (P) Ltd. (2011) 203 Taxman 565 / 64 DTR 153 (Karn.)(High Court)

S. 2(IB) : Amalgamation – Subsidiary - Tax avoidance. Assessing Officer rejected the scheme of Amalgamation with its subsidiary holding that it was a mere device to avoid tax. CIT(A) accepted the scheme. On revenue’s appeal the tribunal held that as the scheme has been sanctioned by High Court and it cannot be held that there was motive to avoid tax, further the shares were issued to outside shareholders by assessee company in terms of scheme sanctioned by High Court and the allotment of shares were done on the basis of valuation report submitted by an independent valuer.( A. Y. 2004-2005)ACIT v. TVS Motors Co. Ltd. (2010) 36 DTR 89 / (2011) 128 ITD 47 / 137 TTJ 220 (Chennai)(Trib.)

S. 2(13) : Business – Adventure in nature of trade – Capital asset - Investment in agricultural land - Town panchayat. [S. 2(14)(iii)]

Consolidated Digest of Case Laws (Jan-Dec 2011) http://www.itatonline.org 1

A person makes investment in agricultural land within limits of town panchayats, and agricultural income was shown and declared year after year. Permission was sought to develop lands. No further action, was taken for over 12 years till date of sale, and entire land is sold after its value appreciated ,it would not become adventure in the nature of trade. A Town Panchayat is notified for urban agglomeration, but it is not a municipality. Agricultural lands falling within said town panchayat would not fall within municipality, and hence is not a capital asset as per the definition (A.Y.2006-07)ITO v. Chandar- HUF ( 2011) 47 SOT 17 (Chennai)(Trib.)

S. 2(14) : Capital asset - Agricultural land - Payment of compensation of certain immovable property. (S. 194LA)Definition of “agricultural land” as given in section 2(14) cannot be imported for purpose of payment of compensation on acquisition of certain immovable property as per section 194LA. (A.Y. 2005-06).ITO TDS v. Special land Acquisition Officer (2011) 46 SOT 458 (Mum.)(Trib.)

S. 2(14) : Capital asset - Capital gains - Town panchayat.A Town Panchayat is notified for urban agglomeration, but it is not a municipality. Agricultural lands falling within said town panchayat would not fall within municipality, and hence is not a capital asset as per the definition under section 2(14)(iii). (A.Y. 2006-07)ITO v. Chander–HUF (2011) 47 SOT 17 (Chennai)(Trib.)

S. 2(14) : Capital asset - Capital gains - Agricultural land - Outside municipal limits. (S. 45)During the relevant assessment year, the assessee sold a piece of land. According to assessee the said land was agricultural land and did not fall within the definition of capital asset as defined in section 2(14)(iii) because it was located 9/9 kms., away from local municipality. The Assessing Officer treated the land as capital asset falling with in the provisions of section 2(14)(iii). The Tribunal held that in the instance case the agricultural land of the assessee was out side the municipal limits and that also 2.5 kms. away from the outer limits of the said municipality, assessee’s land did not come within the purview of section 2(14)((iii) either under sub clause (a) or (b), hence, the same could not be considered as capital asset within the meaning, hence no capital gain tax could be charged on the sale transaction of the land entered by the assessee. (A. Y. 2007-08).Dy. CIT v. Arjit Mitra (2011) 48 SOT 544 (Kol.)(Trib.)

S. 2(14) : Capital asset - Capital gains - Agricultural land – Beyond 5 Kms. municipal limits - Not notified. (S. 45)Assessee company sold certain land which was claimed to be agricultural land and not liable for capital gains tax. Assessing Officer relying on the reply of Tehsildar, Samlakha, observed that the land was situated with in the local; municipality limits and thus, it was a “capital asset” as defined in section 2(14), hence, liable to capital gains tax. The Tribunal held that where land belonging to assessee was not located in area falling with in 5 Kms. of local municipal limit as notified by Central Government, it was to be regarded as an agricultural land and ,thus capital gains arising on sale of it was not liable to tax. (A. Y. 2003-04).ITO v. Gahlot Farmas (P) Ltd. (2011) 48 SOT 303 (Delhi)(Trib.)

S. 2(14) : Capital asset - Agricultural land in India – Distance – Measurement.For measurement of distance for the purpose of deciding the character of land, whether agriculture or not, is to be done in terms of the approach by road and not by straight line distance on horizontal plane or as per crow’s flight. Order of Tribunal is affirmed by High Court. (A. Y. 2001-02)


CIT v. Satinder Pal Singh (2010) 188 Taxman 54 / 229 CTR 82 / 33 DTR 281 (P&H)(High Court)

S. 2(15) : Charitable purpose - Production of television and radio programmes – Registration. (S. 12A)Production of television and radio programmes for purpose of telecasting and broad casting through assessee’s own network or through one hired by it would not constitute advancement of any object of general public utility with in the meaning of section 2(15). Application for registration has to be considered with reference to objects of assessee available as on end of previous year during which registration is sought under section 12A.CIT v. A. Y. Broadcast Foundation (2011) Tax L.R. 892 / (2011) 199 Taxman 376 / 58 DTR 167 / (2012) 340 ITR 166 / 246 CTR 301 (Ker.)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend - Loans or advances - Share holderIn order that the first part of cl.(e) of section 2(22) is attracted, the payment by a company has to be by way of an advance or loan. The advance or loan has to be made, as the case may be either to a shareholder, being a beneficial owner holding not less than ten percent of the voting power or to any concern to which such a share holder is a member or a partner and in which he has a substantial interest. Amount received from a company been misappropriated by shareholder, there was no loan or advance. Further, even assuming that it was a dividend, it have to be taxed in the hands of the shareholders and not in the hands of the assessee.(A. Y. 2003-04)CIT v. Universal Medicare (P.) Ltd. (2010) 324 ITR 263 / (2011) 237 CTR 147 / 37 DTR 409 / 190 Taxman 144 (Bom.)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend – Loans or advance – Share holderWhere assessee is not a shareholder of the paying company, the dividend is not assessable in its hands. The legal fiction in S. 2(22)(e) enlarges the definition of dividend but does not extend to, or broaden the concept of a “shareholder”. Asst. CIT v Bhaumik Colour Pvt. Ltd. (2009) 313 ITR 146 (Mum) (AT) (SB) approved in CIT v Universal Medicare Pvt. Ltd. (2010) 324 ITR 263 (Bom) & CIT v Hotel Hilltop (2009) 313 ITR 116 (Raj.) followed. CIT v. Ankitech Pvt. Ltd. (2011) 57 DTR 345 / 242 CTR 129 / (2011) Tax LR 629 / (2012) 340 ITR 14 (Delhi)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend - Security deposit - Date of deposit.Since on the date on which the security deposit was given by the company to the assessee , the assessee held less than 10 percent beneficial interest in the company, the amount of security deposit can not be treated as deemed dividend under section 2(22)(e), merely on the ground that share holding increased to 44% on issue of shares by the company in lieu of security deposit.(A. Y. 1998-99)CIT v. Late C.R.Dass (2011) 57 DTR 201 (Delhi)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend - Loan or advances – Shareholder - Loans in the ordinary course of business was not accepted- Allotment of shares of another company.Addition of deemed dividend under section 2(22)(e) by rejecting the explanation that the payment was made for allotment of shares in another company, was justified since no certificate from the ROC in support of his contention that shares had indeed been allotted to the investing companies was produced. The Court held that findings of the Tribunal are perverse and addition under section 2(22)(e) was sustainable. (A.Y. 2005-06).CIT v. Sunil Chopra (2011) 242 CTR 498 / 201 Taxman 316 / 58 DTR 305 (Delhi)(High Court)


S. 2(22)(e) : Dividend - Deemed dividend – Shares held in the name of partners of the firm - For purpose of S. 2(22)(e) firm is considered as “shareholder” though shares held in names of partnersIt was held that for secion 2(22)(e), a firm has to be treated as the “shareholder” even though it is not the “registered shareholder”. The first limb of section 2(22)(e) is attracted if the payment is made by a company by way of advance or loan “to a shareholder, being a person who is the beneficial owner of shares”. While it is correct that the person to whom the payment is made should not only be a registered shareholder but a beneficial share holder, the argument that a firm cannot be treated as a “shareholder” only because the shares are held in the names of its partners is not acceptable. If this contention is accepted, in no case a partnership firm can come within the mischief of section 2(22)(e) because the shares would always be held in the names of the partners and never in the name of the firm. This would frustrate the object of section 2(22)(e) and lead to absurd results. CIT v. National Travel Services (2011) 202 Taxman 327 (Delhi)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend - Compensation for keeping the property as mortgage - By way of advance or loan.Advance given by company to assessee shareholder by way of compensation for keeping his property as mortgage on behalf of company to reap benefit of loan could not be treated as deemed dividend within the meaning of section 2(22)(e). Phrase ‘ by way of advance or loan’ appearing in section 2(22)(e) must be construed to mean those advances or loans which a shareholder enjoys for simply on account of being a person who is beneficial owner of shareholding not less than 10 percent of voting power , but if such loan or advance is given to such share holder as a consequence of any further consideration which is beneficial to company received from such a share holder , such advances or loan cannot be treated to be deemed dividend with in the meaning of section 2(22)(e). (A.Y 1999-2000)Pradip Kumar Malhotra v. CIT (2011) 338 ITR 538 / 203 Taxman 110 / 64 DTR 378 (Cal.)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend - Not a share holder - Loan or advance.Assessee company took certain loan from two companies. Assessing Officer was of view that said loan was to be added to assessee’s income as deemed dividend under section 2(22)(e). The Court held that an assessee who is not a share holder of company, from which he received a loan or advance, cannot be treated as being covered by definition of word ‘dividend’ as provided in section 2(22)(e). (A. Y. 2006-07).CIT v. Navyug Promoters (P) Ltd. (2011) 203 Taxman 618 (Delhi)(High Court)

S. 2(22)(e) : Dividend - Deemed dividend - Advance given for the purpose of business.Assessee, Managing Director having received advances from the company, pursuant to resolution passed by it to enable the assessee to purchase land which was to be developed by the company in order to bifurcate the ownership of land from the development or construction of flats thereon so as to reduce the incidence of stamp duty on the ultimate customers, the transaction was motivated by assessee considerations and commercial expediency, therefore, the advances cannot be treated as deemed dividend.(A. Y. 2006-2007)ACIT v. Harsad V. Doshi (2011) 49 DTR 181 / 136 TTJ 351 / 130 ITD 137 (Chennai)(Trib.)

S. 2(22)(e) : Dividend - Deemed dividend – Debenture – Loan – Investment.Debenture is a loan account and therefore, debentures subscribed by the assessee shareholder are to be taken in to account for ascertaining his indebtedness to the company vis-à-vis the loan or advance taken by him and determining deemed dividend under section 2(22)(e).( A. Y. 2003-2004)Anil Kumar Agarwal v. ITO (2011) 51 DTR 251 / 132 ITD 314 / 138 TTJ 175 (Mum.)(Trib.)


S. 2(22)(e) : Dividend - Deemed dividend - Advances given to business purposes.Assessee, Managing Director, having received advances from the company, pursuant to resolutions passed by it to enable the assessee to purchase land which was to be developed by the company in order to bifurcate the ownership of land from the development or construction of flats thereon so as to reduce the incidence of stamp duty on the ultimate customers, the transaction was motivated by business considerations and commercial expediency and therefore, the advances can not be treated as deemed dividend under section 2(22)(e).(A. Y. 2006-07)ACIT v. Harsad V. Doshi (2011) 49 DTR 181 / 136 TTJ 351 / 130 ITD 137 (Chennai)(Trib.)

S. 2(22)(e) : Dividend - Deemed dividend – Transfer of sum from one company to another.Assessee is a director in two companies holding substantial shareholding in both. Certain sum was transferred from one company to another at instance of assessee. Assessee having substantial credit balance with company, cannot held as loan or deposit nor can be assessed as deemed dividend. (A. Ys. 2001-02, 2005-06).ACIT v. C. Rajini (Smt) (2011) 9 ITR 487 / 140 TTJ 218 / 58 DTR 554 (Chennai)(Trib.)Dy. CIT v. C. Subba Reddy (HUF) (2011) 9 ITR 487 / 140 TTJ 218 / 58 DTR 554 (Chennai) (Trib.)

S. 2(22)(e) : Dividend - Deemed dividend - Loan to a concern in which shareholder is a partner - Security deposit.Partners of the assessee firm and not the assessee firm being a share holder of the company AG Ltd. Amount received by the assessee firm from the company as security deposit can not be regarded as deemed dividend. Even other wise ,the amount received from AG Ltd. being security deposits under an agreement between the parties coupled with certain obligations, it cannot be regarded to be payment by the company by way of advance or loan and hence, it cannot be assessed to tax under section 2(22)(e). (A. Y. 2006-07).Dy. CIT v. Atul Engineering Udyog (2011) 57 DTR 433 / 133 ITD 1 / 142 TTJ 209 (Agra)(Trib.)

S. 2(22)(e) : Dividend - Deemed dividend - Share holder - Unsecured loan.Assessee company not being a shareholder in the company HEBPL, unsecured loan received by the assessee from that company can not be taxed as deemed dividend under section 2(22)(e) in the hands of the assessee company because a common share holder being more than 20 percent shares in both companies. (A. Ys. 2002-03 to 2005-06).ACIT v. Bombay Real Estate Development Company (P) Ltd. (2011) 64 DTR 137 (Mum.)(Trib.)

S. 2(22)(e) :Dividend- Deemed dividend - Share holder - Security deposit.Assessee company leased out its property to ‘M’ Ltd. for 22 years against an advance of Rs. 320 crores to be adjusted against rent payable by the lessee. A dispute arose between the assessee and M Ltd. and for amicable settlement, a new agreement was entered into between them agreeing thereby, that “M Ltd.” would pay security deposit of Rs. 3.80 crores to the assessee to be refunded at the end of lease period and after handing over the possession of the property to the assessee. Assessing Officer treated the security deposit as deemed dividend under section 2(22)(e) on the basis that two of the beneficial shareholders of the lease company i.e. M Ltd. were also shareholders and had substantial interest in the assessee company. The assessee submitted that it neither held any share in” M Ltd. nor had any beneficial interest in the said company and that deemed dividend in terms of section 2(22)(e) can be assessed only in hands of a person who is a shareholder of the lender-company and not in the hands of a person other than a shareholder. The


Tribunal accepted the contention of assessee and held that deemed dividend can be assessed only in the hands of a person who is a shareholder of lender company and not in hands of a person other than a share holder. Expression “share holder being person who is beneficial owner of shares” referred in first limb of section 2(22)(e), refers to both a registered share holder and beneficial share holder. If a person is a registered share holder but not beneficial then provision of section 2(22)(e) will not apply, similarly, if a person is a beneficial share holder but not registered shareholder then also provision of section 2(22)(e) will not apply. Accordingly the order of Commissioner (Appeals) who has deleted the addition was confirmed. (A. Y. 2003-04)Dy. CIT v. Madusudan Investment & Trading Co. (P) Ltd. (2011) 48 SOT 360 (Kol.)(Trib.)

S. 2(24) : Income – Mutuality - Non-occupancy charges - Co-operative Housing Society.The receipts of non-occupancy charges, transfer fees and voluntary contribution from its members by the co-operative housing society is not taxable.ITO v. Grand Paradi CHS Ltd., ITA No. 521/Mum/2010, dt. 27-08-2010, ITAT ‘G’, Mumbai Bench, BCAJ pg. 20, Vol. 42-B, Part 4, January 2011 (Trib.)

S. 2(24) : Income – Mutualiy – Trade - Professional Association. (S. 11)Since assessee had not been granted benefit of section 11 and it was also not an institution referred to in clause (21) or clause (23) or clause (23C) of section 10 , provision of section 2(24)(iia) cannot be applied. (A.Y.2005-06).Asst. DIT v. Hologram Manufacturing Association (2011) 48 SOT 39 (Delhi)(Trib.)

S. 2(28A) : Interest - Discounting of promissory note.Discounting of a promissory note does not involve creation of a debt or existence of a debtor – creditor relationship, the amount of discount cannot be termed as “interest” paid by seller of promissory note with in the meaning of section 2 (28A).ABC International Inc USA (2011) 199 Taxman 211 / 241 CTR 289 / 55 DTR 393 (AAR)

S. 2(31)(v) : Person - Association of persons – Individual – Assessment – HUF - Capital gains. (S. 4, 45)After the death of sole male member of the family, the only person left in the family was the widow of the deceased and three daughters were already married. The property of the deceased would devolve on the window and three married daughters in equal shares, since the property of the deceased was sold without dividing the same among the assessee and her three married daughters, the capital gains on the sale of the property would be assessable in the hands of the BOI consisting of the assessee and her three married daughters. (A. Y. 2005-06).ITO v. Shanti Dubey (2011) 139 TTJ 502 / 58 DTR 422 (Jab.)(Trib.)

S. 2(42A) : Short term capital asset - Capital gains - Short term capital loss - Colourable Transaction - Genuine transaction. In November, 1995 assessee company took over SKB with all its assets and liabilities including rights under contract for using trade mark of Pepsico Inc., USA for certain consideration which was paid through account payee cheques. However, assessee company could not run business of SKB for various reasons including necessity of making further investment, therefore it sold entire shares of SKB vide share purchase agreement dated 23-12-1995 at a loss of ` 8.60 crores. Assessing Officer took the view that assessee could have waited for more reasonable time for watching the market and could have invested further amount of ` 9 to 10 crores to revive business of SKB and period of one month was too short time for taking such a


major decision regarding disinvestment of shares of SKB. He further held that transaction was of a colourable nature and declined to allow claim of assessee towards short term capital loss. In appeal Commissioner of (Appeals) and Tribunal allowed the appeal of assessee. On appeal to High Court, the High Court up held the order of Tribunal. (A. Y. 1996-97)CIT v. Oberoi Hotels (P) Ltd. (2011) 334 ITR 293 / 198 Taxman 310 / 59 DTR 272 (Cal.)(High Court)

S. 2(47) : Transfer - Capital assets – Capital gains – Possession. (S. 45)After introduction of deemed transfer under section 2(47)(v), of the Act, if the contract, read as a whole, passes of or transfers complete control over the property in favour of developer, then the contract would be relevant to decide the year of chargeability. On the facts the actual possession of property was handed over on 30-5-1996, hence the capital gain will be chargeable in assessment year 1997-98. (A.Y.1996-97)CIT v. T. K. Dayalu (Dr.) (2011) 202 Taxman 531 / 60 DTR 403 (Karn.)(High Court)

S. 2(47) : Transfer – Capital assets - Capital gains – Possession of property. (S. 45)Assessee was given possession of property as per sale agreement dated 3-4-1999 and assessee also made part payment of the consideration , assets would be deemed to be transferred to assessee on 3-4-1999 and since land was sold on 4-4-2003 / 2-5-2003, it would be a long term capital asset and would be long term capital gains.Hasmukhbhai M. Patel v. ACIT (2011) 46 SOT 419 (Ahd.)(Trib.)

CHAPTER II BASIS OF CHARGE

S. 4 : Charge of Income-taxS. 4 : Income – Capital or revenue - Sales tax subsidy - Matter send back to High Court to decide the issue.The assessee received sales-tax incentive for setting up a new industrial undertaking in Patalganga. The assessee claimed that the said subsidy was a capital receipt. The Special Bench (DCIT v Reliance Industries Ltd. (2004) 88 ITD 273) upheld the assessee’s claim. On appeal by the department (for a subsequent year), the Bombay High Court held that as a finding had been recorded by the Special Bench that the object of the subsidy was to encourage the setting up of industries in the backward area by generating employment therein, by applying the “purposive test” in CIT v. Ponni Sugars and Chemicals Ltd. (2008) 306 ITR 392 (SC), the subsidy was a capital receipt and thus a substantial question of law did not arise. The department filed an appeal to challenge the judgment of the High Court. The Supreme Court held that the High Court ought not to have dismissed the appeals without considering the following questions, which, according to us, did arise for consideration. They are formulated as under … (C) Whether on the facts and circumstances of the case and in law the Hon’ble Tribunal was right in holding that sales tax incentive is a Capital Receipt?” Accordingly, the civil appeals are allowed, impugned orders are set aside and the cases are remitted to the High Court to decide the questions, formulated above, in accordance with law.CIT v. Reliance Industries Ltd. (SC) www.itatonline.orgEditorial: Refer CIT v. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom.) (High Court) Dy. CIT v. Reliance Indutries Ltd. (2004) 88 ITD 273 (SB)(Trib.)

S. 4 : Income - Capital or revenue - Subsidy for setting up Industry.Subsidy received for setting up agro based industrial unit in backward area was determined with reference to capital investment, is a capital receipt.CIT v. Siya Ram Garg (HUF) (2011) 49 DTR 126 / 237 CTR 321 (P&H)(High Court)


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S. 4 : Income - Capital or revenue – Interest - Pre–commencement.Interest on deposit of margin money for opening of letter for credit for import of machinery at the stage of setting up of industrial unit of the assessee is a capital receipt and the same is to be set off against pre-operative expenses.(A. Y. 1996-97)CIT v. Arihant Threads Ltd. (2011) 49 DTR 251 (P&H)(High Court)

S. 4 : Income - Capital or revenue – Compensation - Termination from land owner.Compensation received from the land owner on termination of development agreement was the deprivation of potential income and loss of future profits as mentioned in the settlement agreement and not for divesting the assessee of its earning apparatus as restrictive covenant in the said agreement only prohibited the assessee from undertaking a similar project in the vicinity of the existing project without consent of the land owner for the limited duration of three years, and therefore, the compensation was a revenue receipt. (A. Y. 2001-02)Ansal Properties & Industries Ltd. v. CIT (2011) 238 CTR 126 / 196 Taxman 45 / 49 DTR 78 (Delhi)(High Court)

S. 4 : Income - Assessment - Law Applicable - Financial Year - Assessment Year. (S. 143)Unless it is made clear in an amendment as to whether it comes in to effect for the assessment year or financial year, normally it is to be deemed that such benefit of the amendment is for the assessment year.(A. Y. 2000-01)Mukesh C. Patel v. CIT (2011) 238 CTR 332 / 51 DTR 62 (Karn.)(High Court)

S. 4 : Income – Accrual – Interest Income – Banks and Non-banking Financial Institutions – Non-performing Assets – Accrued interest to be excluded from income.Credit of accrued interest maybe excluded from the income of Bank and non banking financial institutions, where interest outstanding is attributable to assets characterised as a non-performing assets under the notification issued by the RBI. The High Court held that mercantile system of accounting recognises only income which is realisable. (A. Y. 1995-96 to 2000-01)CIT v. Coimbatore Lakshmi Inv. and Finance Co. Ltd. (2011) 331 ITR 229 (Mad.)(High Court)

S. 4 : Income – Capital or revenue – Excess refund – Interest subsidy – Capital receipt.Excise Refund and Interest Subsidy received by the assessee from Government of India in pursuance to a New Industrial Policy of Government which was aimed at acceleration of industrial development and generating employment in the State in public interest were held to be capital receipt in the hands of the assessee.Shree Balaji Alloys & Ors. v. CIT & Ors. (2011) 51 DTR 217 / 239 CTR 70 / 333 ITR 335 / 198 Taxman 122 (J&K)(High Court)

S. 4 : Income - Mutuality - Income of Club from surplus funds - Interest from fixed deposits and government securities.Assessee company is running a recreation club for its members the income earned from the members is exempt on the principle of mutuality. Income of the club from FDR’s in banks and Government securities, dividend income and profit on sale of investment is also covered by the doctrine of mutuality and is not taxable. (A. Y. 2003-04)CIT v. Delhi Gymkhana Club Ltd. (2011) 53 DTR 330 / 339 ITR 525 / 198 Taxman 207 (Mag.)(Delhi)(High Court)


S. 4 : Income - Interest earned – Performance guarantee.Interest income earned by the assessee on the fixed deposit for performance of guarantee of contract was held to be capital in nature and cannot be assessed as income from other sources. (A. Y. 2003-04)CIT v. Jaypee DSC Ventures Ltd. (2011) 335 ITR 132 / 53 DTR 305 (Delhi)(High Court)

S. 4 : Income – Method of accounting – Non-performing assets. (S. 145 )Income from non-performing assets should be assessed on cash basis and not on mercantile basis despite of the assessee maintaining accounts on mercantile basis.CIT v. Canfin Homes Ltd. (2011) 201 Taxman 273 (Karn.)(High Court)

S. 4 : Income – Accrual – Interest – Mortgage.Assessee advanced certain amount against mortgage. Right from date of granting loan borrowers had neither paid principal amount nor interest amount. The guarantor company has declared as sick company. Assessee has not shown the interest on the ground that enforceability of mortgage as a mode of recovery being complicated. The court held that, mere difficulty in successfully enforcing mortgage does not make debt bad, therefore interest was assessable on accrual basis in assessment years 2000-01 to 2002-03 and amount of such interest would be reduced from amount of interest offered in assessment year 2003-04. (A. Ys. 2000-01 to 2003-04).Rohini Holdings (P) Ltd. v. CIT (2011) 202 Taxman 341 / 64 DTR 360 (Mad.)(High Court)

S. 4 : Income - Income or capital - Capital receipt - Sales tax incentive.The object of the subsidy was to encouraging the setting up of industries in back ward area by generating employment therein, thus, the subsidy was on capital account and the sales tax incentive was a capital receipt. (A. Y. 1997-98).CIT v. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom.)(High Court)Editorial: Supreme Court set aside the matter to the High Court to frame the question and decide afresh. CIT v. Reliance Industries Ltd. www.itatonline.org.

S. 4 : Income - Capital or revenue - Subsidy for industrial development - 90% of sales tax paid.Subsidy received by assessee from the State Government under a scheme of industrial promotion, which was meant to provide financial assistance to specified industries for expansion of capacities, modernization and improving their marketing capabilities, is capital receipt, though the amount of subsidy is equivalent to 90 percent of the sales-tax paid by the beneficiary. (A. Y. 1995-96).CIT v. Rasoli Ltd. (2011) 245 CTR 667 (Cal.)(High Court)

S. 4 : Income – Capital or revenue - Share capital raised in foreign country and repatriated when required – Gains due to fluctuation in foreign exchange - Capital receipt. The assessee is a multiproduct company, had issued equity shares overseas by way of global depository receipts in US dollars, which was to be repatriated into the country as and when required for end uses as approved by the Ministry of Finance and Industry. It was intimated to the Government of India, that the share capital so raised abroad, 79% of which would be used to acquire assets and 21% for general corporate use. The balance amount not utilised were kept in fixed deposits in the UK and the same was reflected in the balance sheet at the exchange rate prevailing on March 31st The assessee for the relevant year had accounted in its balance sheet, the gains arising from exchange rate fluctuation of foreign currency. The Assessing Officer treated this entire foreign gain on exchange rate fluctuation as revenue receipt. On appeal to the High Court by the department the High Court while dismissing the appeal held that the


relevant consideration would be to see the source of funds held and not the utilizations of the funds. The High Court held that even in cases where money is raised in India, the money thus collected as share capital would be treated as capital receipt, and merely because part of the share capital was used for working capital, the same could not be treated as revenue receipt. (A.Y. 1997-98)CIT v. Jagatjit Industries Ltd. (2011) 337 ITR 21 / (2010) 191 Taxman 54 / (2009) 32 DTR 168 (Delhi)(High Court)

S. 4 : Income - Diversion of at source by overriding title – Application of income Assessee had availed various facilities from Madurai Bank over years, repayment of which was guaranteed by way of change on properties of assessee. As assessee failed to pay dues, bank filed a civil suit. Subsequently, out of settlement was reached at an amount of Rs. 160 lakhs. Vide Government resolution dt. 14-12-1994 and 19-7-1995, NSSK was permitted to buy spares, plant and machinery of assessee. It was to pay, on behalf of assessee a sum of Rs. 160 lakhs to Madhurai Bank towards settlement of amount due. The assessee claimed that as NSSK directly paid Madurai Bank it should be excluded from the sale consideration as that never became the income of the assessee as it stood diverted of overriding title and hence, should be ignored for the purpose of calculating capital gain. The Tribunal held that payment to bank is only application of income not a charge on income. The payment to bank and sale consideration of its assets are entirely two distinct transactions having no relation with each other except for the fact that there was a charge by bank on assets. Hence, amount not deductable from sale consideration. (A. Y. 1996-97) Shree Changdeo Sugar Mills Ltd. v. Jt. CIT (2011) 44 SOT 479 / 58 DTR 340 / 139 TTJ 646 (Mum.)(Trib.)

S. 4 : Income - Capital or revenue receipt - Compensation for premature termination of joint venture agreement.Consideration received for premature termination of the joint venture agreement constituted revenue receipt.(1999-2000)Ion Exchange (India) Ltd. v. ITO (2011)130 ITD 318 / 52 DTR 411 / 140 TTJ 576 (Mum.)(Trib.)

S. 4 : Income - Capital or revenue - Amount received from firm by widow of the partner is a capital receipt.Payment towards recognition of valued services rendered by partner during life time and a sort of relief to distressed family, and that too as per terms of partnership deed, could not be said to have a revenue character in assessee’s hands. Amount received by assessee, after death of her husband from firm, in which he was a partner, would be a capital receipt. (A. Y. 2005-06).Dy. CIT v. Lakshmi M. Aiyar (Mrs.) (2011) 131 ITD 436 / 142 TTJ 780 / 64 DTR 420 (Mum.)(Trib.)

S. 4 : Income - Interest awarded by High Court - Capital receipt - Income wrongly offered for tax – Powers of Commissioner (Appeals). (S. 139, 251)Interest awarded by High Court is a capital receipt and not taxable.Though the amount erroneously offered to tax in the return, the assessee is entitled to raise plea before Appellate Authorities against the assessment. The Assessing Officer cannot assess an amount which is not taxable under the law, though shown by the assessee in the return. (A.Y. 2005-06)Sushil Kumar Das v. ITO (2011) 11 ITR 17 (Kol.)(Trib.)

S. 4 : Income - Capital or revenue - Business income - Capital gains. (S. 28(i), 45)Assessee, administrator of the estate of deceased, having purchased the right to receive the sale proceeds of the estate by entering into an indenture with the legatee on account of close personal relations with her and not for overriding commercial considerations. The transaction cannot be construed as an adventure in the nature of trade. The said receipt cannot be taxed even as capital gains as the estate continued to be the


owner of the properties and as such payment did not result in extinguishment of assessee’s right hence there was no transfer of any capital asset. (A.Y. 2004-05).Dy. CIT v. Nusli Neville Wadia (2011) 61 DTR 218 / 141 TTJ 521 (Mum.)(Trib.)

S. 4 : Income – Chargeable - Interest on Income-tax refund - Set off against tax paid - Gross or net.Assessee earned interest income on income tax refund. It also paid interest on late payment of tax. Assessee claimed that interest paid by it was to be set off against interest received and it was only net interest was liable to tax. The assessing officer rejected the claim. The Tribunal confirmed the view of the Assessing Officer that the gross interest was liable to be assessed. (A. Y. 1992-93)Dy. CIT v. Sandvik Asia Ltd. (2011) 133 ITD 126 / (2012) 65 DTR 350 (Pune)(TM)(Trib.)

S. 4 : Income – Accrual - Housing project - Project completion method - Certificate of completion - Occupancy certificate - Handing over of possession.Assessee following the project completion method of accounting having completed the construction of flats in all respect according to the specifications and handed over to same to the purchasers only after the end of the financial year 2006-07, revenue in respect of the said flats is to be recognized in assessment year 2008-09 and not in the relevant assessment year i.e. 2007-08, though the occupancy certificates were obtained on 26th June, 2006 and 29th September, 2006. (A. Ys. 2002-03 to 2005-06).ACIT v. Bombay Real Estate Development Company (P) Ltd. (2011) 64 DTR 137 (Mum.)(Trib.)

S. 4 : Income – Court decree - Capital receipt - Income from other sources - Easement. (S. 56)In year 2004, the assessee had purchased certain land. On the eastern side of property, “P” a public company of developers, had trespassed assessee’s property by using a private road to reach their land located the said property. To get the encroached portion retrieved, the assessee filed civil suit for restraining that company’s entry on assessee’s land. As per the Court decree resulted in to by way of compromise between parties, the assessee permitted the use of private road enabling “P” to reach its property and in turn “P” paid certain amount to assessee. The assessee treated the said receipt as capital receipt. The assessing officer treated the said receipt as rent and taxable as income from house property. Commissioner (Appeals), reversed the finding of Assessing Officer. The Tribunal held that there being no relationship of land lord and tenant, between parties, amount received by assessee was only a capital receipt could not be taxed under the Act being an intangible asset having no cost. The Tribunal also held that the said receipt cannot be taxed as income from other sources. (A. Y. 2007-08).Dy. CIT v. T. Kannan (2011) 48 SOT 374 (Chennai)(Trib.)

S. 4 : Income – Cenvat credit Cenvat credit available to the assessee does not constitute income in the hands of the assessee. (A.Y. 2007-08)ACIT v. Murcury Rubber Mills (2011) 142 TTJ 1 (UO) (Delhi)(Trib.)

S. 4 : Income - Mutuality - Transfer fee - Non occupancy charges – Members - Housing Society. [S. 2(24)]Amount received in excess of the limits prescribed under the law from its members by the Housing Society is also exempt from tax on the principle of mutuality. (A. Y. 2005-06).ITO v. Damodar Bhuvan CHS Ltd. ITA No. 1610/Mum/2010 dated 16-9-2011 Bench ‘D’. 421 (2012) 43-B BCAJ. (2012) Jan 33


S. 5 : Scope of total incomeS. 5 : Income - Accrual - Advance receipt.Fees received in advance by the assessee from the clients of its beauty and slimming clinics which is attributable to “unexecuted packages” i.e. services are to be rendered in the succeeding year did not accrue in the relevant year. (A. Y. 1997-98).CIT v. Dinesh Kumar Goel (2011) 239 CTR 46 / 50 DTR 254 / 331 ITR 10 / 197 Taxman 375 (Delhi)(High Court)

S. 5 : Income – Accrual - Interest on enhanced compensation of land.Interest on enhanced compensation of land is liable to be taxed once it was received. (A. Ys. 2000-01 to 2002-03) Dy. CIT v. Gopal Ramnarayan Kasat (2010) 328 ITR 556 / (2011) 240 CTR 266 / 54 DTR 228 (Bom.)(High Court)

S. 5 : Income - Accrual of income - Waiver of interest - Method of accounting. (S. 145)Waiver of interest before end of accounting year , interest did not accrue to assessee. (A. Y. 1997-98).Bagoria Udyog v. CIT (2011) 334 ITR 280 / 60 DTR 386 / 244 CTR 339 (Cal.)(High Court)

S. 5 : Income – Accrual – Excise duty refund – Decision in case of a third party.Hypothetical income credited by the assessee in the profit and loss account in respect of excise duty refund based on a Supreme Court decision in case of a third party cannot be said to have accrued to the assessee. (A. Y. 1988-89).CIT v. Nuchem Ltd. (2011) 55 DTR 14 (P&H)(High Court)

S. 5 : Income - Accrual - Advance from customers towards booking of cruise tickets.Assessee being engaged in the business of travel agency as a representative of RCCL bookings tickets for the latter's cruise and entitled to base commission of 25% on all bookings as per the terms of the agreement between the parties, the commission accrues to the assessee with the booking of tickets against full payment as per the mercantile system of accounting followed by him; however, assessee is entitled to credit of 10% on account of travel agents commission which is payable by him. (A. Ys. 2003-04, 2005-06 & 2007-08)CIT v. Gautam R. Chadha (2011) 62 DTR 58 / 244 CTR 493 (Delhi)(High Court)

S. 5 : Income - Capital or revenue - Collection from buyers.Where assessee is collecting sum from every buyer towards flat owners association, such corpus fund cannot be assesses as income of assessee. (A. Ys. 2001-02 , 2005-06) ACIT v. C. Rajini (Smt.) (2011) 9 ITR 48 7 / 140 TTJ / 58 DTR 554 (Chennai)(Trib.)Dy. CIT v. C. Subba Reddy (HUF) (2011) 9 ITR 487 / 140 TTJ 58 / 58 DTR 554 (Chennai)(Trib.)

S. 5 : Income – Accrual - Tuition fees received in advance. (S. 145)Assessee in receipt of non-refundable advances from coaching students can be charged to tax only to the extent of receipt which accrued to the assessee as income during the relevant previous year and not the entire receipts. (A. Ys. 2005-06, 2006-07)Career Launcher (India) Ltd. v. ACIT ( 2011) 139 TTJ 48 / 131 ITD 414 / 56 DTR 10 (Delhi)(Trib.)

S. 5 : Income - Accrual - Earnest money - Sale of land.Earnest money received for transfer of land. Transaction not taking place in year. Earnest money received not to be treated as income in year under consideration. (A. Y. 2004-05).


Dy. CIT v. Shiv Sai Developers (2011) 10 ITR 80 (Mum.)(Trib.)

S. 5 : Income – Accrual - Dividend recovered - Right to receive income.Assessee a non banking finance company, it sold shares which it held as investment. Transfer of names of transferee was not recorded in register of members of company whose shares were transferred by assessee, therefore, dividend declared by companies on those shares was paid to assessee. The assessee has shown the said dividend as under the heading “Excess dividend received refundable”. Assessing Officer treated the same as income of the assessee. The Tribunal held that when there is right to receive income can be said to have been accrued and without legally enforceable right there can be no accrual of income. (A. Y. 2006-07).Dy. CIT v. Tata Investment Corporation Ltd. (2011) 46 SOT 359 / 61 DTR 473 (Mum.)(Trib.)

S. 5 : Income – Accrual - Fixed deposits in banks – Interest – Deduction at source - CertificateAssessee society held fixed deposits in banks for a term exceeding more than one year. It had not shown any interest income from said FDs during previous year on ground that income from FDs would be offered to tax on its receipt from bank on maturity on basis of certificate of TDS issued by bank. Assessing Officer added interest at 10% on estimate basis. The Tribunal held that the assessee was not liable to declare interest income accrued but not due to it in relevant assessment year in view of fact that said sum was not acknowledged by bank or by assessee itself. (A.Y. 2007-08).Puri District Co-op. Milk Producers’ Union Ltd. v. ITO (2011) 132 ITD 127 (Cuttack)(Trib.)

S. 5 : Income – Accrual - Fixed deposits in banks – Interest. Assessee society held fixed deposits in banks for a term exceeding more than one year. It had not shown any interest income from said FDs during previous year on ground that income from FDs would be offered to tax on its receipt on maturity on basis of TDS certificate issued by bank. It was held that the assessee was not liable to declare interest income accrued but not due in the relevant assessment year as the said sum was not acknowledged by bank or by the assessee. (A.Y. 2007-08).Puri District Co-op. Milk Producers’ Union Ltd. v. ITO (2011) 132 ITD 127 (Cuttack)(Trib.)

S. 5 : Income – Accrual – Builder – Slum rehabilitation project – Sale of TDR - Project completion method - Method of accounting. (S. 145)Assessee being a builder, had taken a slum rehabilitation project. Assessee had been allotted TDR in lieu of handing over possession of constructed transit building. Assessee has sold the TDR in two installments. Assessing Officer taxed the receipts of TDR as independent income. Assessee contended that as they are following project completion method as per AS. 7, income from project had to be computed in year of completion. The Tribunal directed the Assessing Officer to compute the income of project after taking into consideration entire expenditure and receipt from beginning of year including TDRs. In case the project was not found complete, Assessing Officer would set off TDR receipts against work in progress and no income would be assessed on account of TDR receipts separately. (A. Y. 2007-08).ACIT v. Skylark Build (2011) 48 SOT 306 (Mum.)(Trib.)

S. 5 : Income – Accrual – Security deposit - Method of accounting. (S. 145)Assessee company engaged in manufacturing of ice –creams, cheese, butter, etc., supplied freezers to venders after taking security deposits. On termination of agreement, assessee would own freezers and it would deduct certain percentage of cost of freezers from security deposit. Assessing Officer treated the deposit as income. The Tribunal held that the assessee could not treat these two amounts as receipts in


nature of income unless agreement terminated. Tribunal accepted the method of accounting followed by assessee. (A. Y. 2007-08).High Range Foods (P) Ltd. v. Dy. CIT (2011) 48 SOT 453 (Coch.)(Trib.)

S. 5 : Income – Salary – Non-resident – On board of Ship. (S. 9(1)(ii), 15)Salary earned by non-resident for services performed during his stay of 225 days outside India working on board on ship which was outside India, did not accrue or arise in India and as such the same was not taxable in India. (A. Y. 2005-06)DIT v. Prahlad Vijendra Rao (2011) 51 DTR 95 / 239 CTR 107 / 198 Taxman 551 (Karn.)(High Court)

S. 6(1) : Residence in India – Non-resident - Residential Status - Business - Profession.For purpose of Explanation (a) to section 6(1)(c), “employment” include self employment like business or profession taken up by assessee abroad. (A. Y. 1989-90)CIT v. O. Abdul Razak (2011) 337 ITR 267 / 198 Taxman 1 / 241 CTR 485 / 56 DTR 133 (Ker.)(High Court)

S. 6(1)(c) : Residence in India – Non-resident – Deputation - Period of visit to India.Assessee was in India for a period of 78 days during the relevant assessment year and more than 365 days during the past four years. Tribunal held that the assessee was on deputation from April 2004 to January 2005 and his stay from 18th Aug 2004 to 6th September 2004 was in respect of a visit to India and this is to be excluded while computing the applicability of section 6(1)(c), his status was to be non-resident. High Court affirmed the order of Tribunal. (A.Y 2005-06).DIT v. Manoj Kumar Reddy Nare (2011) 62 DTR 358 / 201 Taxman 30 (Karn.)(High Court)

S. 9 : Income deemed to accrue or arise in India - Finance Act, 2010.Since by Finance Act, 2010, section 9 has been amended with effect from 1-6-1976, department was permitted to move to High Court by way of review petition against its judgment in Jindal Thermal Power Co. Ltd. v. Dy. CIT (2009) 182 Taxman 252 (Kar.)Dy. CIT v. Jindal Thermal Power Co. Ltd. (2011) 196 Taxman 495 (SC)

S. 9 : Income deemed to accrue or arise in India - Sale of shares by Mauritius Co. can be treated as sale by 100% USA parent. Sale of shares of foreign company taxable if object is to acquire the Indian assets. (S.148, 163, 195)(i) The argument that s. 163 applies only with respect to income “deemed to accrue or arise” in India under section 9 and not to income “accruing or arising” is not acceptable. Pursuant to CIT v. Eli Lilly and Co. (India) P. Ltd. (2009) 312 ITR 225 (SC), the income accruing or arising in India to NCWS, USA on transfer of a capital asset situate in India, (shares of Idea Cellular) is deemed to accrue or arise in India to NCWS and can be assessed either in the hands of NCWS or in the hands of the payer as agent of the non-resident u/s 163;(ii) The argument that the Assessing Officer having issued a NOC under section 195(2) permitting Aditya Birla Nuvo to remit the sale proceeds without TDS could not recover the tax from the payer by treating it as agent is not acceptable because the said order was obtained by “suppressing material facts” relating to the circumstances in which the shares of Idea Cellular were issued in the name of AT&T Mauritius. As the payer had obtained the section 195(2) Certificate by making a representation which was incorrect to its knowledge, it could not claim that the section 195(2) Certificate was validly issued. Further, the proceedings under section 163 & 195 operate in different fields;(iii) The argument that once the Assesing Officer exercises his option under section 166 to assess the non-resident NCWS USA directly by issuing notice under section 148, the proceedings initiated against the payer


must come to an end is not acceptable because there is nothing in the Act to suggest that the option to assess either in the hands of the representative assessee or in the hands of the non-resident must be exercised at the threshold itself and not at the end of the assessment proceedings. While ordinarily, the Assessing Officer must not proceed against the representative assessee once proceedings are initiated against the non-resident, in exceptional cases like the present one where complex issues are involved and the Assessing Officer is unable to make up his mind on account of suppression of material facts, it is open to the Assessing Officer to continue with the assessment proceedings against the representative assessee and the non-resident simultaneously till he decides to assess either of them;(iv) NCWS’ argument that the section 148 notice is without jurisdiction is not acceptable because the prima facie belief of the Assessing Officer that the transaction was in fact a transaction for transfer of a capital asset situate in India (shares of Idea Cellular) was with substance. It is open to NCWS to prove to the contrary by placing all material facts in the assessment proceedings; (v) Tata Industries’ argument that no gains are taxable in India as the subject matter of sale were shares of AT&T Mauritius and not the shares of Idea Cellular is not acceptable because prima facie it appears that the transaction for sale of shares of AT&T Mauritius was a “colourable transaction” and was in fact for sale of the shares of Idea Cellular. Aditya Birla Nuvo Limited v. DDIT (2011) 200 Taxman 437 / 59 DTR 1 / 242 CTR 561 (Bom.)(High Court)

S. 9 : Income deemed to accrue or arise in India – Permanent establishment - DTAA – India-UK. (S. 5 (2), Art. 5)Assessee was British Company. It supplied certain parts and equipments to Indian customers. RRIL was assessee’s 100% subsidiary set up in India through which it carried out marketing and selling of goods to Indian customers. Assessing Officer after holding RRIL as PE of assessee, attributed 100% of profits earned from sale of goods to Indian customers to activities carried on in India. The Tribunal restricted such attribution to 35% holdings that profits attributed to manufacturing activity and research and development activities, i.e. 50 % and 15%, respectively had to be excluded. Assessee filed appeal before the High Court contending that net research and development expenses should also be reduced while computing operating profits; and that Tribunal had not considered objections and documents filed by it on aspect of PE properly and, therefore, matter should be remanded for reconsideration. Held that expenses on research and development were already taken care of when remuneration at rate of 35% was attributed to marketing activities in India on which global profits was apportioned. From the order of the Tribunal it was clear that while holding that RRIL constituted PE of assessee, it had undertaken critical analysis of material on record including objections and documents filed by the assessee and therefore there was no reason to remand the case back to the Tribunal. (A.Ys. 1997-98 to 2003-04).Rolls Royce PLC v. DIT (International Taxation) (2011) 339 ITR 147 / 202 Taxman 309 / 244 CTR 372 / 61 DTR 145 (Delhi)(High Court)

S. 9 : Income deemed to accrue or arise in India - Fees for technical Services – DTAA - India-Canada – [S. 115A, 234B, Art. 12(4)]The assessee was a non-resident company engaged in the business of providing consultancy for infrastructure projects. It had entered into an agreement with the National High way Authority of India and under the agreement the asseseee was to provide technical drawings and reports to NHAI to enable it to use the technology for its infrastructure projects which was founded by the World Bank. The contention of the assessee was that the fee received from NHAI was to be treated as “fees for included services” as prescribed in article 12(4) of the Double Taxation Avoidance Agreement between India and Canada. In terms of this article, the tax chargeable is at 15%. However the Assessing Officer was of the opinion that fee


charged for the aforesaid project did not include “fee for included services”. He accordingly is of the opinion that the income was derived as fee for technical services was chargeable to tax under the provisions of section 9(1)(viii) read with section 115A of the Act. According to this section the tax is chargeable was at 20 percent. The Tribunal accepted the contention of assessee. In appeal the High Court affirmed the view of the Tribunal. The amount received by the assessee was taxable under Article 12 of the Indo-Candian treaty. The assessee was not liable to pay advance tax and therefore, interest under section 234B was not chargeable. DIT v. SNC Lavalin International, Inc. (2011) 332 ITR 314 (Delhi)(High Court)

S. 9 : Income deemed to accrue in India – No income deemed to arise even if revenue arises due to viewers in India - International Taxation. For income to be taxable under section 9(1)(i), the carrying of operations in India is a sine qua non. It was held that merely because the footprint area included India and programmes were watched by Indian viewers, it did not mean that the assessee was carrying out business operations in India. The transponder used was in orbit and merely because its footprint was on India did not mean that the process had taken place in India. Ishikawaima-Harima Heavy Industries 288 ITR 408 (SC) followed. It was further observed that the payment by the telecast operators outside India to the assessee cannot be taxed on the basis that the end consumers are in India.Asia Satellite Telecommunication Co. Ltd. v. DIT (2011) 51 DTR 1 / 238 CTR 233 / 197 Taxman 263 / 332 ITR 340 (Delhi)(High Court)

S. 9 : Income deemed to accrue or arise in India - Business Connection - Offshore supply of equipment - International Taxation.Consideration for the offshore supply of equipment by the assessee, a Korean company, to an Indian company cannot be deemed to have accrued or arisen in India as the terms of the agreement stipulated transfer of title / property in the goods as soon as the goods were loaded on the ship at the port of shipment i.e. outside India, and there is no material to show that the accrual of income from this sale was attributable to any operations carried out in India or that the PE of the assessee in India had any role to play in the off shore supply of equipment. (A. Y. 2002-03)DIT v. LG Cable Ltd. (2011) 237 CTR 438 / 50 DTR 1 / 225 Taxation 386 / 197 Taxman 100 (Delhi)(High Court)Editorial:- LG Cable Ltd. v. Dy. DIT (2008) 119 TTJ 34 (Delhi), affirmed.

S. 9 : Income deemed to accrue or arise in India – Fact of “Office PE” under Article 5(2) irrelevant if there is no “Construction Site PE” under Article 5(3) - DTAA – India – Netherlands. [Art. 5(3), 5 (2)]The assessee had a “site” or “project” in India. Under Article 5(3) of the treaty, such a “site” or “project” is a PE only if it continues for a period of more than six months. As the assessee’s contract was completed in two months, there was no PE under Article 5(3). The argument that the Mumbai office was a PE under Article 5(2) is not acceptable because while Article 5(2) is a general provision, Article 5(3) is a specific provision which prevails over Article 5(2). (A. Y. 1994-95)CIT v. BKI/HAM V.O.F. (2011) 63 DTR 108 / 203 Taxman 58 (Uttarakhand)(High Court)

S. 9 : Income deemed to accrue or arise in India - Dependent agent permanent establishment - Fees for technical services – DTAA - India-Singapore. {Art . 5(9)]The assessee, a Singapore company, rendered repair and maintenance services and supplied spares to customers in India. While the income from repairs was offered to tax as “fees for technical services“, the income from supply of spares was claimed to be not taxable on the ground that it had accrued outside


http://www.itatonline.org/pdf/Ishikawajima_Supreme_Court_Order.pdf

India. The Assessing Officer, CIT (A) and Tribunal took the view that the assessee had a “permanent establishment” on the basis that it had a “dependent agent” in India under Article 5(9) of the India-Singapore DTAA and that the income earned from supplying spare parts was taxable in India. On appeal to the High Court, held that(i) To constitute a “Dependent Agent Permanent Establishment” under Article 5(9) of the DTAA it has to be seen whether the activities of the agent are “devoted wholly or almost wholly on behalf of the assessee“. While the issues as to (a) whether the agent is was prohibited from taking competitive products and (b) whether the assessee exercised extensive control over the agent were relevant, they are not conclusive. It is not correct to say that merely because the agent is prohibited from taking a competitive product means that it is not an agent of independent status. What has to be seen is whether the “activities” of the agent are devoted wholly or almost wholly on behalf of the assessee. If the assessee can show that it was not the sole client of the agent and that activities of the agent were not devoted wholly or almost wholly on behalf of the assessee, there may be no DAPE. The income earned by the agent from other clients and the extent of such income is very relevant to decide whether the criteria stipulated in Article 5(9) is satisfied or not. (Matter remanded for fresh consideration);(ii) While in principle it is correct that if a fair price is paid by the assessee to the agent for the activities of the assessee in India through the DAPE and the said price is taxed in India at the hands of the agent, then no question of taxing the assessee again would arise, this is subject to a Transfer Pricing Analysis being undertaken under sectpm 92. The Transfer Pricing analysis to determine the “arms length” price has to be done by taking the “Functions, Assets used and Risk involved” (FAR). As this has not been done, the assessee’s argument on “arms length” price is not acceptable (iii) As the commission paid by the agent to the DAPE is not at “arms length“, the estimation that 10% of the profits on sales of spare parts were attributable to the activities carried out by the agent in India and taxable is reasonable. The test is “profits expected to make” and has to be determined bearing in mind the fact that the agent was merely rendering support services and had no authority to negotiate and accept contracts and also assumed limited risk. (A. Ys. 2000-01 & 2004-05)Rolls Royce Singapore (P) Ltd. v. ADCIT (2011) 64 DTR 95 (Delhi)(High Court)

S. 9 : Income deemed to accrue or arise in India - Business connection - Permanent establishment – Royalty - Profits from offshore supply of equipment & software not taxable in India – DTAA - India-Swish. (Article 13)The assessee, a Swedish company, entered into contracts with ten cellular operators for the supply of hardware equipment and software. The contracts were signed in India. The supply of the equipment was on CIF basis and the assessee took responsibility thereof till the goods reached India. The equipment was not to be accepted by the customer till the acceptance test was completed (in India). The assessee claimed that the income arising from the said activity was not chargeable to tax in India. The Assessing Officer & CIT(A) held that the assessee had a “business connection” in India under section 9(1)(i) & a “permanent establishment” under Article 5 of the DTAA. It was also held that the income from supply of software was assessable as “royalty” under section 9(1)(vi) & Article 13. On appeal, it was held that as the equipment had been transferred by the assessee offshore, the profits therefrom were not chargeable to tax. It was also held that the profits from the supply of software was not assessable to tax as “royalty”. On appeal by the department to the High Court, HELD dismissing the appeal held that (i) The profits from the supply of equipment were not chargeable to tax in India because the property and risk in goods passed to the buyer outside India. The assessee had not performed installation service in India. The fact that the contracts were signed in India could not by itself create a tax liability. The nomenclature of a “turnkey project” or “works contract” was not relevant. The fact that the assessee took “overall responsibility” was also not material. Though the supply of equipment was subject to the


“acceptance test” performed in India, this was not material because the contract made it clear that the “acceptance test” was not a material event for passing of the title and risk in the equipment supplied. If the system did not conform to the specifications, the only consequence was that the assessee had to cure the defect. The position might have been different if the buyer had the right to reject the equipment on the failure of the acceptance test carried out in India. Consequently, the assessee did not have a “business connection” in India. (ii) The argument that the software component of the supply should be assessed as “royalty” is not acceptable because the software was an integral part of the GSM mobile telephone system and was used by the cellular operator for providing cellular services to its customers. It was embedded in the equipment and could not be independently used. It merely facilitated the functioning of the equipment and was an integral part thereof. The fact that in the supply contract, the lump sum price was bifurcated is not material. There is a distinction between the acquisition of a “copyright right” and a “copyrighted article”. DIT v. Ericsson AB (2012) 66 DTR 1 / 204 Taxman 192 (Delhi)(High Court)

S. 9 : Income deemed to accrue or arise in India - Foreign agent – Commission - Business connection -Permanent establishment. (S. 4(1), 40(a)(ia), 195)Where a foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him. Such commission is not received by him or in his behalf in India, then such agent is not liable to income tax in India on commission received by him. As there was no right to receive income earned in India nor there was any business connection between assessee and ETUK, therefore, when income was not chargeable to tax in India under section 4(1), there was no question of invoking provisions of section 195 hence no disallowance can be made under section 40(a)(ia). (A.Y. 2007-08).Dy. CIT v. Eon Technology (P) Ltd. (2011) 46 SOT 323 (Delhi)(Trib.) Editorial: Affirmed by CIT. Eon Technology (P) Ltd. (2011) 203 Taxman 266 / 64 DTR 257 (Delhi)(High Court)

S. 9 : Income deemed to accrue or arise in India - Deduction at source - Technical services. (S. 40(a)(i), 194J)Assessee was a dealer for Xerox India Ltd. (XIL), authorized to sell and otherwise, promote latter in specified territories. Apart from sales, assessee was also required to render service support to customers, i.e. purchasers of product of XIL. Assessee claimed that payments made to XIL could not be treated as “fees for technical services”. Tribunal held that the payment in question amounted to fees for technical services hence disallowance made by the lower authorities were justified. (A. Y. 2007-08)Divya Business Systems (P) Ltd. v. ACIT (2011) 43 SOT 155 / 138 TTJ 582 / 155 DTR103 (Cochin)(Trib.)

S. 9 : Income deemed to accrue or arise in India-Principles on “splitting of turnkey contracts” - Offshore supply – DTAA - India-Korea. [Art. 5(1), 5(2)]The assessee, a Korean company, entered (together with L&T) into a contract dated 28.2.2006 with ONGC for the “surveys, design, engineering, procurement, installation” etc of a project on turnkey basis. On 24.5.2006, the assessee opened a Project Office which constituted a ‘Permanent Establishment’. The assessee claimed, relying on Ishikawajima-Harima 288 ITR 408 (SC) & Hyundai Heavy Industries 291 ITR 482 (SC) that the revenue from “offshore supply” and “offshore services” was not assessable to tax in India as no part of it was attributable to the PE. The Assesing Officer & DRP rejected the claim on the basis that (i) the assessee had actively participated in pre-bid meetings and the project office was in existence even at the stage of the “kick-off” meeting, on appeal by the assessee to the Tribunal, The Tribunal held (i) The contract was not divisible into one part for the fabrication of platform and the other for installation &


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commissioning. Its terms showed that it was a composite contract from surveys of pre-engineering to start-up and commissioning of the entire facilities; (ii) The opening of the Project Office was a condition precedent before the commencement of the activity of the contractor. The scope of the Project Office was not restricted either by the assessee or by the RBI. Also, the resolutions of the assessee showed that the Project Office was opened for coordination and execution of project. It was clear that all the activities to be carried out in respect of the contract were to be routed through the Project Office;(iii) Hyundai Heavy Industries (2007) 291 ITR 482 (SC) is not applicable because there (a) the project office was to work only as a liaison office and was not authorized to carry on any business activity and (b) the contract was divisible into two parts and so the argument that the PE does not come into existence till the fabrication work is done was accepted;(iv) The argument that if an “installation PE” is to come into existence under Article 5(3), one cannot have regard to the PE under Articles 5(1) & 5(2) is not acceptable. The Project Office constituted a PE under Article 5(1) and an “Installation PE” was not necessary;(v) The onus is on the assessee to show that office did not play a role in the project. On the other hand, the contract proceeds on the basis that the PO played a vital role in the execution of the project; (vi) The attribution to India of profit from off-shore supply has to be based on material and done based on the extent of activity done by the PO (matter remanded). (A.Y 2007-08)Samsung Heavy Industries Co. Ltd. v. ADCIT (2011) 63 DTR 65 / 142 TTJ 564 / 133 ITD 413 / 11 ITR 513 (Delhi)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Royalties - Fees for included services - Permanent establishment – DTAA - India-USA. [Article 12(3)]Assessee was non resident incorporated as corporation under Laws of USA. Main object of assessee was to provide high quality medical training and enhance quality of patient care and research by teaching training and sharing medical and technological know how with scientists and health care professionals in various countries. During the relevant assessment years the assessee received certain amount from hospitals located in India. Assessing Officer held that 90 percent of receipts taxable as royalty under Article 12(3) of DTAA between India and USA and 10 percent of payment was in nature of Fees for included services (FIS) taxable under Article 12(4). The Tribunal held that consideration received by assessee could not be said to be royalty as it was not a payment for right to use any copy right, trade mark or industrial, commercial or scientific experience. Assessee also did not make available any technical knowledge, experience, skill for included services. Therefore, it could be concluded that entire payment received by assessee from WHL was in the nature of business profits and since assessee did not have permanent establishment in India, same could not be brought to tax in India. The assessee received certain amount as reimbursement of expenses. Assessing Officer was of the view that reimbursement of expenses was also part of consideration for rendering the services he applied the same ratio. The Tribunal held that if it is held to be business income the same cannot be taxable in India applying as the assessee does not have any permanent establishment. If it is held to be other income the same cannot be brought to tax in view of Article 23(1) of DTAA. Accordingly the Tribunal deleted the addition made by the Assessing Officer. (A. Ys. 2002-03 and 2003-04).Jt. DIT v. Harward Medical International, USA (2011) 48 SOT 623 (Mum.)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Permanent establishment - Cargo consolidation – Agent - DTAA - India-Singapore. [S. 163, Article 5(9)]One “W” Ltd. was engaged in the business of Cargo Consolidation. It received Cargo from various shippers / consignors at Mumbai Port / Container Freight Station Mumbai / JNPT for shipments to various


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destinations world wide. A delivery schedule of Cargo had to be strictly adhered to. Assessing Officer noticed that “W” Ltd. had payment to assessee, a company located at Singapore on which no tax was deducted at source. Assessing Officer issued show cause notice to “W” Ltd. calling upon to why it should not be treated as an agent of Non-resident under section 163. Assessing Officer estimated profitability at 10 percentage of freight income earned by assessee and same was treated as business income. Commissioner of (Appeals) confirmed the order of Assessing Officer. Tribunal found that “W” Ltd. was acting on behalf of several non-residents and therefore, Article 5(9) was not attracted as the “W” Ltd. had no permanent Establishment in India, even if income accrued or arose to it in form of business income, same could not be taxed in India. (A. Ys. 2002-03 and 2003-04). WSA Shipping (Bombay) (P) Ltd. v. ADIT (IT)(2011) 48 SOT 551 / (2012) 65 DTR 226 / 143 TTJ 423 (Mum.)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Permanent establishment - Liaison office of non-resident - Permanent establishment.Liaison office of non-resident assessee in India carrying out activities of selection of right goods and negotiation of price as part of purchasing process as per instructions of assessee could not be considered as permanent establishment of assessee in India and therefore profit attributable to liaison office could not be held to have accrued or arisen in India. (A. Ys. 2004-05 and 2005-06).Dy. DIT v. M. Fabricant & Sons Inc. (2011) 48 SOT 576 (Mum.)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Business connection - Permanent Establishment – DTAA - India-UKNon-resident lessor does not have permanent Establishment (PE) or business connection in India on account of leased assets used in India but delivered outside India, provided the lease agreement is entered on principal to principal basis.Dy. CIT v. Calcutta Test House P. Ltd. (ITA No. 1782/Del/11) Dated 28-10-11, BCAJ, December – 2011, Pg. 37, Vol 43-B, Part 3 (Delhi)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Business connection - Activities of liaison office in India. [S. 5(2)(b)]Since the Indian Office of the non resident assessee-company practically carry out all operations of the business of the commission agent except the formation of the contract between the vendors and the buyers, it cannot be argued that no income accrues or arise in India from the commission, however, as the CIT(A) has overstated the role of the Indian Offices in the overall conduct of business, instead of allocation of commission at 30 percent commission income is allocated to the Indian operations at 50 percent. (A. Ys. 1999-2000 to 2005-06).Linmark International (Hong Kong) Ltd. v. Dy. CIT (2011) 57 DTR 340 / 139 TTJ 697 (Delhi)(Trib.)

S. 9 : Income deemed to accrue or arise in India- Non-resident, with “business connection”, taxed only in respect of business operations carried out in India – canvassing agent – not `business connection’, fair fee extinguishes non-residents liability to tax. (i) The expression ‘business connection’ does not cover mere canvassing for business by an agent in India. It postulates a real and intimate relation between business activity carried on outside India and business activity within India, the relation between the two contributing to the earning of income by the non-resident in his business activity. The business operations carried out outside India and inside India must have such a relationship as to contribute to business operations as a whole.


(ii) The scope of deeming fiction under section 9(1)(i) which prima facie appears to be an extension of the classical source rule of taxation is in fact confined to the simpliciter taxability of an income earned in a tax jurisdiction because ‘while the main provision of the deeming fiction seems to be taking a rather aggressive view of the source rule, the Explanations to the deeming fiction considerably narrow down the scope of the same’ and to that extent there is overlapping of section 9(1)(i) and section 5(2)(b). Further, while section 9(1)(i) provides that an income with ‘business connection’ in India is chargeable to tax no matter in which part of the world it accrues or arises, the income which can be subjected to tax in India can never exceed the income attributable to operations carried out in India – by the non-resident or by the agent. This is made clear by clause (a) of Explanation 1 to section 9(1)(i) and Explanation 3. The result is that if the agent (“the business connection”) has been compensated with fair remuneration, there cannot be further income of the non- resident which can be brought to tax under section 9(1)(i) r.w.s. 5(2)(b). (A. Y. 2006-07) Addl. CIT v. Star Cruise India Travel Services Pvt. Ltd. (2011) 59 DTR 418 / 140 TTJ 561 (Mum.)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Purchase of technical know how – Royalty - Permanent Establishment - Business Receipt – International Taxation - Tax Deduction at Source. (S. 195)Purchase of technical know how by foreign company, was business receipt. As there was no permanent establishment in India, the same was not liable to be taxed in India, though the same was treated as ‘royalty’. (A. Y. 1991-92).Vesil SPA Italy v. Jt. CIT (2011) 43 SOT 137 / 138 TTJ 357 / 54 DTR 316 (Hyd.)(Trib.)

S. 9 : Income deemed to accrue or arise in India – DTAA - India-Netherlands. (Art. 12 )One of the group companies of assessee, located at Netherlands had acquired musical recording rights from other repertoire companies and granted commercial exploitation rights of such musical track in India to “U” Ltd. The assessee received royalty for four years from “U” Ltd. The royalty agreement was approved by Government of India. Further assessee had filed a certificate from tax authority of Netherlands having Jurisdiction over it in which it was certified that assessee was beneficial owner of royalty income received from “U” Ltd, within the meaning of article 12 of DTAA. Thus, the assessee was beneficial owner of royalty and same had to be taxed at rate of 10 percent for all the years. (A. Ys. 2000-01 to 2003-04).Asst. DIT v. Universal International Music BV (2011) 141 TTJ 364 / 45 SOT 219 / 55 DTR 348 (Mum.)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Software embedded in off-shore supply may be taxable even if supply not taxable.The assessee, a USA company, entered into two separate contracts with AAI, one for supply of equipment and the other for rendering installation and training services. The Assessing Officer & CIT(A) held (i) that the two contracts were an “indivisible works contract“, (ii) that as the supply involved embedded software, the income had to be bifurcated between “supply of equipment” and “royalty” in the ratio of 30:70, (iii) that the equipment-supply profits had accrued on completion of contract and not at the time of transfer of title, (iv) that 50% of the equipment-supply profits was attributable to the assessee’s PE in India and this was taxable at the global profit rate of 13.4%. On appeal to the Tribunal, HELD:(i) The two contracts constitute one agreement because (a) the essential purpose of both contracts was to set up the ATS, (b) the contract for supply of equipment and software would have been of no consequence without installation and performance services, (c) the dates of payment for the supply contract were connected with the service contract and (d) it was difficult to segregate the contract from installation/service contract (Ishikawajima-Harima Heavy Industries Ltd. v. Director of Income-tax (2007) 288 ITR 408 (SC) referred);



(ii) The PE came into existence on clearance of the goods in India because after transfer of title outside India, the possession was handed over to the assessee for safe custody, installation etc. This required storage space and supervision which cannot be said to be preliminary or auxiliary activities in nature as the equipments were required to be installed;(iii) The bifurcation of revenue into supply of equipment and software in the ratio of 30:70 had to be upheld because (a) though the software was embedded in the equipment and supplied as one package for one price, it was permissible to segregate the composite consideration into different components and (b) the assessee had not shown the segregation done by the customs authorities for imposing duty on the equipment and software (Rotem Company (2005) 279 ITR 165 (AAR) & Motorola Inc v. Dy.CIT (2005) 95 ITD 269 (SB) referred);(iv) In a turnkey contract, in which the assessee is under obligation to supply the equipment and the software and also install them, the 1profit is taxable on completion of each milestone and not at the time of handing over the functioning system to the contracting party. The department’s argument that in a works contract, mere supply of equipment and software is of no consequence till installation and so profits should be taxed at that stage is not correct because even if “turnkey”, the taxable events in the execution of a contract may arise in several stages in several years if the obligations under the contract are distinct ones. The supply profits are consequently not taxable as it accrued on supply outside India;(v) On facts, as the supply of equipment and software constituted a milestone in the contract, the income therefrom arose in the year of shipment which was in an earlier year. It did not accrue or arise in the present year. As the PE came into existence when the equipment was handed over to it by the AAI, the profits from installation contract and services was taxable. (A. Y. 1999-2000) Raytheon Company v. DDIT (2011) 142 TTJ 137 / 62 DTR 1 (Delhi)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Salary to staff at Netherland. (S. 40(a)(iii), 192)Assessee did not deduct tax at source on salary payments made to staff at Netherlands. Assessing officer invoked the provisions of 40(a)(iii), and disallowed the payments made on the ground that the tax was not deducted under section 192. The Tribunal held that since salaries had been paid to non-residents for services rendered abroad, provisions of Explanation to section 9(1)(ii) were not applicable to assessee. Since salary paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India, provisions of section 192 cannot be applied hence disallowance made by applying the provisions of section 40(a)(iii) were liable to be deleted. (A. Y. 2003-04).Dy. CIT v. Mother Dairy Fruits & Veg (P) Ltd. (2011) 45 SOT 186 / 141 TTJ 97 / 60 DTR 220 (Delhi)(Trib.)

S. 9 : Income deemed to accrue or arise in India - Royalty or fee for technical services - Band width charges paid to foreign companies for data communication. (S. 40(a)(i), 195) Where the assessee had made payments to service providers such as AT&T or MCI Telecommunications for use of band width provided for down linking signals in United States and it was found that the payments were not in the nature of managerial, consultancy or technical services nor was it for use or right to use industrial, commercial or scientific, equipment. The payment was not in the nature of royalty or fee for technical services assessee was not liable to deduct tax at source. (A. Y. 2004-05).Infosys Technologies Ltd. v. Dy. CIT (2011) 45 SOT 157 / 139 TTJ 18 (Bang.)(Trib.)

S. 9 : Income deemed to accrue and arise in India - Royalty or fee for technical services - For “Equipment Royalty” u/s 9(1)(vi), control of equipment by payer essential(i) The word “use” in relation to equipment occurring in clause (iva) of Expl to section 9(1)(vi) is not to be understood in the broad sense of availing of the benefit of an equipment. The context and collocation of


the two expressions “use” and “right to use” followed by the word “equipment” indicate that there must be some positive act of utilization, application or employment of equipment for the desired purpose. If an advantage was taken from sophisticated equipment installed and provided by another, it could not be said that the recipient/customer “used” the equipment as such. The customer merely made use of the facility, though he did not himself use the equipment. What is contemplated by the word “use” in clause (iva) of Expl. 2 to section 9(1)(vi) is the customer came face to face with the equipment, operated it or controlled its functions in some manner. But if it did nothing to or with the equipment and did not exercise any possessory rights in relation thereto, it only made use of the facility created by the service provider who was the owner of the entire network and related equipment and there was no scope to invoke clause (iva) in such a case because the element of service predominated (ISRO Satellite Center (ISAC) (2008) 307 ITR 59 (AAR), Dell International Services (Indai) P. Ltd. (2008) 305 ITR 37 (AAR) & Asia Satellite Tele Comminications Co. Ltd. v. Director of Income-tax (2011) 332 ITR 340 (Delhi) followed; Frontline Soft Ltd. v. Dy. CIT (2008) 12 DTR 131 (Hyd) held not good law);

(ii) On facts, the banner advertisement hosting services did not involve use or right to use by the assessee any industrial, commercial or scientific equipment and no such use was actually granted by Yahoo (Hong Kong) Ltd to the assessee. Uploading and display of banner advertisement on its portal was entirely the responsibility of Yahoo (Hong Kong) and the assessee was only required to provide the banner Ad to Yahoo (Hong Kong) for uploading the same on its portal. The assessee had no right to access the portal of Yahoo (Hong Kong) and there was nothing to show any positive act of utilization or employment of the portal of Yahoo (Hong Kong) by the assess. (A. Y. 2004-05)Yahoo India Pvt. Ltd. v. DCIT (2011) 59 DTR 1 / 140 TTJ 195 (Mum.)(Trib.)

S. 9 : Income deemed to accrue or arise in India – Permanent establishment - Royalty and fees for technical services – DTAA - India-USA. (S.9(1)(vii) & 90)In the contract of the kind undertaken by the assessee, if there is a composite consideration, the same can be conveniently segregated in different components. If the profits from supply contract are held to be taxable separately, as the supply is a milestone in the whole contract, then the treatment meted out to profits on sale of equipment and consideration received for supply of software will have to be different, as the two assets are of different nature involving different profitabilities. The Assessing Officer bifurcated in the ratio of 30:70. As the assessee was unwilling to give the details the bifurcation made by the Assessing Officer was justified. (A. Y. 1999-2000) Raytheon Company v Dy. CIT (2011) 62 DTR 1 / 142 TTJ 137 (Delhi)(Trib)

S. 9 : Income deemed to accrue or arise in India – Liaison office – DTAA – India-US. On facts, Liaison office purchasing diamonds for export to Head Officer does not constitute PE under India-US DTAA and it was covered under explanation 1(b) to section 9(1)(i) of Income Tax Act. (A.Y. 1999–2000 to 2002-03 & 2003)ADIT v. M. Fabrikant & Sons Ltd., (2004) BCAJ pg. 42, Vol. 43-A, Part 2, May 2011(Trib) S. 9 : Income deemed to accrue or arise in India - Business income - Discounting of promissory note –DTAA - India-USA. (Art. 7)It was not in dispute that income arising to applicant from discounting promissory note payable in India, is business income taxable in India. However, article 7 of DTAA, profits of an enterprise of a contracting State shall be taxable only in State unless enterprise of a contracting state, through a permanent establishment situated therein. It is assumed for the purpose of this Ruling that applicant has no permanent


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establishment in India, it has to be ruled that income of applicant from discounting of promissory note would not be taxed in India. Even other wise, discounting of a bill of exchange or promissory note being a purchase of instrument as it were and especially when it discounted without recourse, applicant is not liable to tax in India in view of DTAA between India and USA.ABC International Inc. (2011) 199 Taxman 211 / 241 CTR 289 / 55 DTR 393 (AAR)

S. 9 : Income deemed to accrue or arise in India - Royalties and fees for technical services – DTAA - India-USA. (S. 195, Art. 12)Applicant a wholly owned subsidiary of US company, procured the services of US based personnel who are under the employment of GTE-OC, and affiliate of its parent company. Personnel secondment agreement specifically provides that the seconded employees shall remain the employees of GTE-OC and continue to get their salaries from GTE-OC as long as they remain in its employment. The authority held that (1) Amounts reimbursed by the applicant represent income accruing to GTE–OC (ii) The amounts reimbursed by the applicant are taxable as “Fees for Included Services (FIS)” under the DTAA and also under the Act. (iii) Fees for Included Services (FIS) is taxable at the rate of 20 percent as provide under article 12(4)(b) of the DTAA. Accordingly TDS would be deductible as per section 195.Verizon Data Services India (P) Ltd. (2011) 199 Taxman 242 / 241 CTR 393 / 56 DTR 81 / 337 ITR 192 (AAR)

S. 9 : Income deemed to accrue or arise in India - Business connection - Offshore supply of equipments - Deduction at source – Non-resident.Non-resident company is not liable to tax in India in respect of payments for off shore supply of equipments under the composite contracts for setting up transmission lines and consequently, no tax is required to be deducted at source from the payments made to it for the supply of equipments.Deepak Cables (India) Ltd. (2011) 242 CTR 469 / 337 ITR 127 / 59 DTR 95 (AAR)

S. 9 : Income deemed to accrue or arise in India – Business connection - Offshore supply of equipments materials – DTAA - India-Korea. [S. 245R(2)] Applicant, a Korean company, having entered a separate contract for off shore supply of equipments and materials along with two other contracts for on shore supply and on shore services for various projects in India, and the consideration for the sale is separately specified, it can be separated from the whole, and since the transaction of sale and the transfer of ownership and property in goods took place out side Indian territory, applicant is not liable to tax in respect of off shore supplies.LS Cables Ltd. (2011) 59 DTR 216 / 337 ITR 35 / 243 CTR 60 (AAR)

S. 9 : Income deemed to accrue or arise in India – Business connection - Liaison office of foreign company – DTAA - India-USA. (Art. 5, 7)Liaison office of the applicant foreign company operating in India carrying on various activitiesit can not be said that the operations of the liaison office are confined to purchase of goods in India for the purpose of export and its income is not covered by Explanation ((b) to section 9(1)(i), even though no product of the applicant is sold in India. The liaison office can be termed as permanent establishment with in the meaning of Article 5(1) of the Indo-USA DTAA and cannot be excluded from the definition of Permanent establishment by reason of clause (d) and (e) of Article 5(3), hence, the applicant is liable to tax in India in terms of Article 7(1).Columbia Spotswear Company (2011) 337 ITR 407 / 59 DTR 233 / 243 CTR 42 / 201 Taxman 214 (AAR)


S. 9(1)(vi) : Income deemed to accrue or arise in India - Income from license of software assessable as “royalty”- Deduction at source. (S. 195)The assessee imported “shrink-wrapped”/ “off-the-shelf” software from suppliers in foreign countries and made payment for the same without deducting tax at source under section 195. The Aseessing Officer & CIT(A) held that the payments were assessable to tax as “royalty” under section 9(1)(vi) / Article 12 and that the assessee was liable to pay the tax under section 201. On appeal, the Tribunal relied on the judgment of the Supreme Court in Tata Consultancy Services v State of AP (2004) 271 ITR 401 (SC) and held that the assessee had acquired a “copyrighted article” but not the “copyright” itself and so the amount paid was not assessable as “royalty“. On appeal by the department, HELD reversing the Tribunal:(i) Under section 9(1)(vi) of the Act & Article 12 of the DTAA, “payments of any kind in consideration for the use of, or the right to use, any copyright of a literary, artistic or scientific work” is deemed to be “royalty“. Under the Copyright Act, 1957, a software programme constitutes a “copyright”. A right to make a copy of the software and use it for internal business by making copy of the same and storing it on the hard disk amounts to a use of the copyright under section 14(1) of that Act because in the absence of such a license, there would have been an infringement of the copyright. Accordingly, the argument that there is no transfer of any part of the copyright and the transaction involves only a sale of a copyrighted article is not acceptable. The amount paid to the supplier for supply of the “shrink-wrapped” software is not the price of the CD alone nor software alone nor the price of license granted. It is a combination of all. In substance unless a license was granted permitting the end user to copy and download the software, the CD would not be helpful to the end user;(ii) There is a difference between a purchase of a book or a music CD because while these can be used once they are purchased, software stored in a dumb CD requires a license to enable the user to download it upon his hard disk, in the absence of which there would be an infringement of the owner’s copyright. [TCS v State of AP (supra) distinguished as being in the context of sales-tax]; (A.Ys. 1999-2000 to 2001-02)CIT v. Samsung Electronics Co. Ltd. (2011) 203 Taxman 477 / 245 CTR 481 / 64 DTR 178 (Karn.)(High Court)

S. 9(1)(vi) : Income deemed to accrue or arise in India - Royalties and fees for included services - Data base – DTAA - India-USA - Non-resident - Deduction at source. (S. 195, Art. 12) Assessee made certain payments to a non-resident ‘G’ USA/ Ireland, on which no tax was deducted under section 195, on the ground that the payment was akin to making a subscription for a journal or magazine of a foreign publisher and though the journal contained information concerning commercial, industrial or technical knowledge, payee made no attempt to impart same to payer and thus, payment fell outside scope of clause (ii) of Explanation 2 to section 9(1)(vi) as well as article 12 of Indo-US DTAA. Assessing Officer held that payments made to ‘G’ was ‘royalty’ within the meaning of Explanation 2 to section 9(1)(vi) and in alternative ‘fees for technical services’(Included services) both of which were liable for tax in India in terms of section 195, read with section 9(1)(vi) and (vii) and relevant provisions of DTAA. The Court held that ‘G’ had maintained a data base and it had granted online access of same to assessee therefore, the payment made by assessee for licence to use data base maintained by ‘G’ was to be treated as royalty. Since assessee failed to deduct tax at source while making payment of royalty to ‘G’ impugned order passed by Assessing Officer was up held. (A. Ys. 2001-02 to 2003-04).CIT v. Wipro Ltd. (2011) 203 Taxman 621 (Karn.)(High Court)

S. 9(1)(vi) : Income deemed to accrue or arise in India - Copyrighted software - Non-resident – Royalty - Double taxation avoidance agreement - India-Mauritius. (Art. 12) Both the assessee companies did not have permanent establishment in India. The payments received against sale of software could not be treated as income from royalty either under the Income-tax Act, 1961


or under the terms of the Double Taxation Avoidance Agreement because payments were made for sale of copyrighted articles. (A. Y. 2005-06)Velankani Mauritius Ltd. v. Dy. CIT (2011) 7 ITR 171 / (2010) 42 DTR 193 / 132 TTJ 124 (Bang.)(Trib.)

S. 9(1)(vi) : Income deemed to accrue or arise in India - “Equipment-Use” Royalty If payer has no control over equipment – DTAA - India-UK. [Art. 12(3)(b)]The activity of transmitting raw data to user, processing of the data by such user by using software belonging to assessee and transmission of such data to assessee does not involve “use of any process” so as to constitute royalty under Article 12(3)(a).In order to constitute ‘use of equipment’, the customer should actually have domain or control over the equipments it should be at its disposal. (A. Y. 2004-05)Standard Chartered Bank v. DDIT (2011) 11 ITR 721 / 61 DTR 370 (Mum.)(Trib.)

S. 9(1)(vi) : Income deemed to accrue or arise in India – Royalty - Income from license of software not assessable as “royalty”. Gracemac not followed; Motorola still good law – DTAA - India-Israeli.The assessee, an Israeli company, entered into an agreement with Reliance Infocomm for supply and license of software for RIL’s wireless network in India. The assessee received Rs. 3 crores which it claimed to be “business profits” and not taxable for want of a permanent establishment (PE) in India. The Assessing Officer took the view that the said sum was assessable as “royalty”. This was reversed by the CIT(A) following Motorola Inc. (2005) 96 TTJ 1 (Delhi)(SB). In appeal before the Tribunal, the department argued that in view of Gracemac Corp. (2010) 42 SOT 550 (Delhu), the use of software was assessable as “royalty”. The Tribunal dismissing the appeal held that, (i) Under Article 12(3) of the India-Israel DTAA, royalty is defined inter alia to mean payments for the “use of” a “copyright” or a “process”. There is a distinction between “use of copyright” and “use of a copyrighted article”. In order to constitute “use of a copyright”, the transferee must enjoy four rights viz: (i) the right to make copies of the software for distribution to the public, (ii) The right to prepare derivative computer programmes based upon the copyrighted programme, (iii) the right to make a public performance of the computer programme and (iv) The right to publicly display the computer programme. If these rights are not enjoyed, there is no “use of a copyright”. The consideration is also not for “use of a process” because what the customer is paying for is not for the “process” but for the “results” achieved by use of the software. It will be a hyper technical approach totally divorced from ground business realities to hold that the use of software is use of a “process”. (Motorola Inc. (2005) 96 TTJ 1 (Delhi)(SB) and Asia Sat (2011) 332 ITR 340 (Delhi) followed. Gracemac Corp. (2010) 42 SOT 550 (Delhi) not followed);(ii) It is well settled that a DTAA prevails over the Act where it is more favourable to the assessee. The view taken in Gracemac, relying on Gramophone Co. AIR 1984 SC 667, that the Act overrides the treaty provisions where there is irreconcilable conflict is not acceptable because (a) it is obiter dicta, (b) contrary to Azadi Bachao Andolan 263 ITR 706 (SC) and (c) Gramophone Co. not applicable to Income-tax Act, 1961 as it dealt with law in which specific enabling clause for treaty override did not exist. (Ram Jethmalani v. UOI (2011) 339 ITR 107 also considered) (A. Y. 2006-07). Addl. DIT v. TII Team Telecom International (P) Ltd. (2011) 60 DTR 177 / 140 TTJ 649 / 12 ITR 688 (Mum.)(Trib.)

S. 9(1)(vi) : Income deemed to accrue or arise in India - Payment for “live telecast” of event is not “royalty” nor arising from “business connection”.The assessee entered into an agreement with Nimbus, a Singapore entity, for receiving and broadcasting matches that were to be played in Bangladesh. The signals to be broadcast were on account of live matches as well as recorded matches. The assessee applied for a certificate under section 195 in which it


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accepted that the payment on account of recorded matches was in the nature of “royalty” but claimed that the payment towards live matches was not “royalty”. The Assessing Officer held that there was no distinction between the payment for live matches and that for recorded matches and both were assessable as “royalty”. He also held that as the matches were to be broadcast in Indian Territory and the income by way of advertisements and subscription was to be received by the assessee, there was a “business connection” between Nimbus and receipt in India. On appeal, the CIT(A) upheld the Assessing Officer’s finding on “business connection” though he reversed the finding that the payment for live matches was “royalty”. On further appeal by the department, the assessee filed application under Rule 27, challenging, the issue of “business connection”. The Tribunal held deciding both issues in favour of the assessee that :(i) Expl 2 to 9(1)(vi) defines “royalty” to mean consideration for “the transfer of all or any rights in respect of any copyright.” Under the Copyright Act, the term “copyright” means the exclusive right to use the “work” in the nature of cinematography. The question of granting exclusive right to do any work can arise only when such “work” has come into existence. The existence of “work” is a precondition and must precede the granting of exclusive right for doing of such work. Unless the work itself is created, there is no question of a copyright of such work. The result is that there is no copyright in live events and depicting the same does not infringe any copyright. Accordingly, the amount paid for broadcast of live matches is not assessable as “royalty” (clause 314 (220) of the Direct Tax Code Bill, 2010 referred to which proposes to define “royalty” to include “live coverage of any event”);(ii) The department’s argument that because the matches will be broadcast in India and the assessee will earn advertisement & subscription income, Nimbus has a “business connection” in India is not correct because Nimbus has merely given a license for the live broadcast of the matches and continues to retain the rights in such broadcast. The mere act of allowing the assessee broadcast the matches for consideration does not constitute a “business connection” in India. In order to constitute a “business connection”, it is necessary that some sort of business activity must be done by the non-resident in the taxable territory of India (CIT v. R. D. Aggarwal and Co. and Anr. (1965) 56 ITR 20 (SC) referred) (A. Y. 2008-09).ADIT v. Neo Sports Broadcast Pvt. Ltd. (2011) 133 ITD 468 (Mum.)(Trib.)

S. 9(1)(vi) : Income deemed to accrue or arise in India – Non-resident - Assignment of software developed by Indian Company – Compensation - Capital or revenue receipt. (S. 4, 195)Compensation paid by the Satyam to the applicant, a non-resident company as per terms of settlement agreement for severing their business relationship, deficiency in the patents assigned to the applicant by Satyam and for grant of perpetual world wide royalty fee license by the applicant on all its patents is capital receipt but not capital gain, except the portion of the amount ascribable to the consideration for licensing of the right to use the patented software. Assessing Officer is directed to determine the portion of the compensation amount that may be attributable to royalty and thereafter to consider the question whether it is taxable in terms of section 9(1)(vi).Unpaid Systems Ltd. (2011) 338 ITR 517 / 244 CTR 465 / 62 DTR 153 / 203 Taxman 28 (AAR)

S. 9(1)(vi) : Income deemed to accrue or arise in India – Royalty - Software. Consideration received by the applicant, a Sri Lankan Company, from ICEL for giving it the right to use its copyrighted software and use it for latter’s own purposes whenever and wherever needed by it is taxable in India as royalty under cl. (v) of Expln. 2 of section 9(1)(vi) as well as under Art.12.2 of the Indo-Sri Lanka DTAA and consequently, provision of withholding tax under section 195 is applicable. Millennium IT Software Ltd., In Re (2011) 62 DTR 1 / 338 ITR 391 / 202 Taxman 510 / 244 CTR 233 (AAR)


S. 9(1)(vi) : Income deemed to accrue or arise in India - Fees for technical services - Avoidance of tax - Transfer pricing - Provision of support services to maintain group standard - Makes available technical knowledge, skills, etc. - Fees for technical services – DTAA - India-Netherland. (Article. 12.5) The applicant, a company based in Netherlands is in the business of manufacture and sale of sugar confectionary and gum and also provides operational and other support services for the benefit of Perfetti Van Melle Group companies. It is providing these support services to Perfetti Van Melle India Pvt. Ltd. (Perfetti India) and invoicing on cost to cost basis. The employees and other personnel of applicant does not visit India for providing these services. The question arises as to whether the payment made by Perfetti India for the services will not be chargeable to tax in India as per the provisions of DTAA?If the answer to (a) above is negative, whether the cost to be allocated to Perfetti India will not be in nature of income and not chargeable to tax in India?If the Applicant is not taxable in India for the costs to be allocated, whether Perfetti India will not be liable to withhold taxes under section 195?Assuming that the Applicant has no other taxable income in India, whether the Applicant will be absolved from filing a tax return and whether the transfer pricing provisions of section 92 to section 92F will be applicable to the Applicant?Applicant submits that the functions in respect of which costs will be allocated are managerial and not technical or consultancy in nature and Perfetti India will not get equipped with the knowledge or expertise for application in future. Being managerial services, these are outside the purview of Article 12 and in the absence of a specific clause of service PE in the DTAC, the question of service PE for the services to be rendered by the Applicant does not ariseThe Revenue argued that these services will enable Perfetti India to manage its services efficiently based on the reports, codes and procedures without further help from the Applicant. The services are in the nature of managerial and consultancy services since there is no technical services, the phrase “make available‟ would have no application.Authority placed reliance on the decisions in case of Intertek Testing Services (2008) (307 ITR 418) and G.V.K. Industries (228 ITR 564) and held that the services are of technical in nature. The fruits of the services remain available to the person utilizing the services in some concrete shape such as technical knowledge, experience, skills, etc. The decision in case of Raymond Ltd. (86 ITD 791) is relied upon.Trademark Technology and Know-how License Agreement (TTLA) gives right to manufacture and the service agreement brings the efficiency in such manufacture. The two agreements are inextricably attached to each other or atleast complimentary to each other. The meaning of make available cannot be drawn from the DTAA between India and US. Thus it was held by the Authority that services under the Service Agreement when read with TTLA, fall within the purview of Article 12.5(a) of the DTAC as such services “are ancillary and subsidiary to the application or enjoyment of the right, property or information for which a payment described in paragraph 4 of this Article is received”.The payment will be taxable in India under Article 12.5(a) and 12.5(b). Thus appropriate taxes are required to be deducted and the tax return is to be filed in India. Also the provisions of transfer pricing would be applicable.Perfetti Van Melle Holding B.V. (2012) 65 DTR 12 / 246 CTR 8 / 204 Taxman 166 (AAR)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for Technical Services - Technology advanced in countries - Income Tax Department - Technical Experts - Deduction at source - International Taxation.In cases requiring examination by technical experts, the department ought not to proceed only by the contracts placed before the officers. The department ought to examine technical experts so that the matters could be disposed off expeditiously. In the instant case, a cellular provider under an agreement


paid interconnect / access / port charges to BSNL / MTNL, the question whether the cellular provider has rendered technical services and has to deduct tax at source, depended on whether the charges were for technical services and this involved determination of whether any human intervention was involved, which could not be determined without technical assistance. The decision of Delhi High Court in CIT v Bharati Cellular Ltd. (2009) 319 ITR 139, set aside and matter remanded to the Assessing Officer with directions. CIT v. Bharati Celluar Ltd. 2011) 330 ITR 239 / 234 CTR 146 / 193 Taxman 97 / 44 DTR 190 (SC) / CIT v. Hutchison Essar Telecom Ltd. (2011) 330 ITR 239 / 234 CTR 146 / 193 Taxman 97 / 44 DTR 190 (SC)

S. 9(1)(vii) : Income deemed to accrue or arise – Validity challenged - Parliament’s power to make laws with extra - Territorial effect.The constitutional validity of section 9(1)(vii)(b) was challenged by way an appeal to the Supreme Court so as to determine the extent to which laws enacted by Parliament can have extra-territorial effect under Article 245. The Constitution Bench held that Parliament is constitutionally restricted from enacting legislation with respect to extra-territorial aspects or causes that do not have, nor expected to have any, direct or indirect, tangible or intangible impact(s) on or effect(s) in or consequences for: (a) the territory of India, or any part of India; or (b) the interests of, welfare of, well-being of, or security of inhabitants of India, and Indians. In all other respects, Parliament may enact legislation with extra-territorial effect. All that is required is that the connection to India be real or expected to be real, and not illusory or fanciful. Parliament can only make laws for India and any law which has no impact on or nexus with India would be ultra-vires. GVK Industries Ltd. v. ITO (2011) 332 ITR 130 / 239 CTR 113 / 197 Taxman 337 / 52 DTR 1 / 162 Caom Case 574 (SC) (5 Member Bench)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for technical services.Income received by a US company, by way of fees for technical services could not be deemed to have accrued or arisen in India as the services under the agreement were not rendered with in India even though services received from it may have been utilized by the Indian company in India. (A. Y. 1991-92).Grasim Industries Ltd. & Ors. v. CIT (2011) 58 DTR 47 / 242 CTR 166 / 199 Taxman 184 / 332 ITR 276 (Bom.)(High Court)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for technical services – DTAA - India-Australia - Permanent Establishment - Foreign companies – Royalties - Even if not assessable as “fees for technical services” under DTAA, bar in section 44D against deduction of expenses will apply. [S. 44D, 115A, Article 7(3)]The assessee, an Australian company, set up a permanent establishment (PE) in India to render technical services for evaluation of coal deposits and conducting feasibility studies for transportation of iron ore. The Assessing Officer & CIT(A) held that the payments received by the assessee were taxable as “fee for technical services” under section 9(1)(vii) read with section 115A on a gross basis without any deduction in view of section 44D at the rate of 20%. On appeal, the Tribunal held that as the assessee had a PE in India, the receipts were chargeable to tax as “business profits” after deduction of expenses under Article 7 of the DTAA and section 44D & 115A did not apply. On appeal by the department, HELD partly reversing the Tribunal:(i) As the assessee had a PE in India from which the income arose, the income was chargeable to tax as “business profits” under Article 7 of the DTAA and not as “fees for technical services” under Article 12;(ii) Article 7(3) permits a deduction of expenditure “in accordance with and subject to limitations of the law” relating to tax in India including executive and general administrative expenses so incurred regardless


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whether they have incurred in India or elsewhere. The words “in accordance with and subject to limitation of the law relating to tax” applies not only to the “executive and general administrative expenses” but to all expenditure;(iii) The income received by the assessee, though not assessable as “fees for technical services” under the DTAA, is “fees for technical services” under Explanation 2 to section 9(1)(vii) because it is for providing technical information and does not arise from a “project”. Consequently, section 44D, which provides that no deduction shall be admissible while computing income of the nature of “fees for technical services” shall apply. DIT v. Rio Tinto Technical Services (2012) 340 ITR 509 (Delhi)(High Court)

S. 9(1)(vii) : Income deemed to accrue or arise in India – Royalty - Computer Software - Copyrighted Article - Deduction at Source - International Taxation – DTAA - India-USA – Art. 7 and 12. (S. 195)Where the payment is made in respect of the software which is granted on terms of non-exclusive, perpetual, irrevocable, royalty free worldwide license to use the number of copies of the software enumerated in the agreement solely for internal operation, and not directly accessible to third party could not be considered as a “Royalty” under the Act. As the payment was “business income” of the party receiving the payment, as that non-resident party did not have a Permanent Establishment in India and thus as per D.T.A.A. the same cannot be taxed in India. The assessee is not liable to deduct tax at source.Dy. DIT v. Reliance Industries Ltd. (2011) 43 SOT 506 (Mum.)(Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for Technical Services - International Taxation - DTAA - India-DenmarkAmount received by assessee, a Danish shipping company, from its agents in India towards their share of cost of global telecommunication facility provided to the agents to enable them to have access to variety of information regarding tracking of cargo, transportation schedule, etc., to facilitate international shipping business being only reimbursement of cost and not involving any profit element, cannot be considered as fees for technical services. (A. Y. 2001-02 and 2002-03)Dampskibsselskabet AF 1912 A/S Akties Iskabet v. Addl. DIT (2011) 51 DTR 148 / 142 TTJ 70 / 130 ITD 59 (Mum.)(Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for Technical Services - Permanent establishment - Deduction at source – DTAA - India-Italy. (S. 90, 195, Arts 5, 7, 13)Consideration paid to foreign company was only for supervising the erection of machines which can not be said to be a payment for assembly of machines to fall within the exclusion clause of Explanation 2 to section 9(1)(vii). However, as persons who rendered services were not present in India for the required number of days as envisaged by Art. 5(j) of the DTAA read with Art. 13(5), income was not chargeable to tax in India and there was no obligation to deduct tax at source on such payment. (A. Y. 2006-07). Aditya Birla Nuvo Ltd. v. ADIT (2011) 56 DTR 100 / 11 ITR 812 / 44 SOT 601 (Mum.)(Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for technical services - Developing tooling - Validating new process for manufacture - Deduction at source – DTAA - India-USA. [S. 195, 201, Art 12 (4)]Assessee is engaged in the manufacture of steel wheels for commercial vehicles, passenger cars, utility vehicles, earth moving construction equipment, agricultural tractors and defence vehicles. Assessee developed the new process of manufacturing steel wheels for trucks etc., however, it did not have requisite know how for designing the machine capable of manufacturing the product as patented process. Assessee approached the two US Companies which had the required knowledge. Assessee made advance


payment in respect of entire services under the agreement were rendered outside India and hence no income chargeable to tax in India. The Tribunal held that in terms of Article 12(4) of India US tax treaty, payment made to US company for ‘developing tooling’ and ‘validating new process for manufacture’ of wheels for commercial vehicles is ‘fees for included services’. (A.Y. 2005-2006).Wheels India Ltd. v. ITO, ITA No. 1792/Mds./2006, dt.19-04-2011, Chennai ITAT, BCAJ pg. 29, Vol. 43-A, Part 3, June 2011.

S. 9(1)(vii) : Income deemed to accrue or arise in India - Deduction at source - Payment to non-resident - Training its personnel - Fees for technical service - Income deemed to accrue or arise in India. (S. 40(a)(i),195)Assessee company during relevant assessment year made payment to non resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment. The payment made could not be said to be fees for technical services and not liable for deduction of tax at source. (A. Y. 2007-08).ACIT v. PCI Ltd. (2011) 46 SOT 183 (Delhi)(Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for technical services – DTAA - India-USA. (Art. 12)Assessee running business of Hotel making payments to US based interior Landscaping consultants M. Work done by M is basically inspection of hotel, reviewing of the facilities, comparing the same with M’s standards and suggesting improvements / change wherever required to M standard, which did not amount to technical services and therefore, no tax was deductible at source. Similarly, fees paid to UK company A was also for work of design, documentation and did not fall under Art. 13 of Indo–UK DTAA, likewise, fees paid to Thailand company BD, for rendering services of landscape architectural consultancy was not assessable in India. (A. Y. 2003-04 to 2005-06).ACIT v. Viceroy Hotels Ltd. (2011) 60 DTR 1 (Hyd.)(Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Royalties – Fees for technical services – DTAA - India-United Kingdom. [Article 13(4)(c)]Assessee company, incorporated in London, operated as a recongnized insurance broker and it was licensed to intermediate insurance business by Financial Services Authority (FSA) of United Kingdom. It entered in to an agreement with “N” Ltd., in India to reinsurance on an excess loss basis, catastrophe risk arising from its primary insurance cover in conjunction with “J” “M” “A” and “G” Ltd. For services rendered, assessee along with other insurance brokers acting as an intermediary in reinsurance process for “N” Ltd. would be entitled to 10 % brokerage. Assessing Officer held that the service provided by assessee would be consultancy in nature and payments received by assessee would fall within definition of “fees for technical services”. The Tribunal held that since the service rendered assessee did not involve technical expertise, nor assessee made available any technical know how expertise, skill, etc., and was merely acting as an intermediary in process of finalization of reinsurance suggesting various options to Indian Insurance company for their consideration and acceptance, it could not be said that payment received by assessee from insurance company in India was fee for technical services, therefore, it could not be brought to tax in India. (A. Y. 2006-07). Guy Carpenter & Co. Ltd. v. Addl. Income-tax (2011) 48 SOT 463 (Delhi)(Trib.) S. 9(1)(vii) : Income deemed to accrue or arise in India - Permanent establishment - Fees for technical services - Double taxation relief – DTAA - India-Singapore. (S. 90, Art. 5)


Assessee had no fixed place or service permanent establishment in India with in the meaning of Art. 5 of DTAA between India and Singapore and assessee’s receipts from PB production and generation of live television signals were in the nature of “fees for technical services” and not by way of “business income” since assessee had no PE in India, receipts were taxable @ 10 percent as per Art. 12(2), advertisement revenue received by the assessee in Singapore for matches played abroard was not taxable in India. (A. Ys. 2003-04 & 2004-05).Nimbus Sport International Pte. Ltd. v. Dy. CIT (2011) 63 DTR 374 (Delhi)(Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India – Fees for technical servicesIn the absence of revenue having brought anything on record to show that assessee was doing construction work, consideration received by assessee was not from doing construction work and consequently, did not fall within the exclusion of Explanation 2 to section 9(1)(vii). Therefore, the income of assessee was liable to tax in terms of section 115A @ 10%.Joint Stock Company Zangas v. ADIT, ITA No. 3399/Ahd/2010, Dated 19-8-11, BCAJ, December – 2011, Pg. 37, Vol 43-B, Part 3 (Trib.)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Fees for technical services - Deduction at source – DTAA - India-UK. (S. 90, 195)Services rendered by the UK company to the applicant Indian Company pursuant to the data processing services agreement being in the nature of routine data entry, application sorting document handing and data capturing services, cannot be said to be managerial or technical services with in the meaning of Art. 13 of the Indo–UK DTAA or Explanation 2 to section 9(1)(vii) and therefore, consideration received for such services is not taxable in India and accordingly, there is no question of withholding tax under section 195.R. R. Donnelley India Outsource (P) Ltd. (2011) 335 ITR 122 / 241 CTR 305 / 199 Taxman 255 / 56 DTR 1 (AAR)

S. 9(1)(vii) : Income deemed to accrue or arise in India - Installation project - Permanent establishment –DTAA - India-Singapore. (Art. 5.3)Four installation projects undertaken by the applicant, a Singaporean company, in India requires setting up, fitting, placing and positioning projects covered under Art. 5.3 of the Indo–Singapore DTAA, and all these projects being independent projects with no interconnection and interdependence amongst them. It cannot be said that the applicant has a Permanent establishment in terms of Art. 5.2 of the DTAA provided that the duration of each of the projects does not exceed 183 days in one financial year and therefore, income earned by the applicant form its activities of execution of the installation project is not liable to tax in India.Tiong Woon Project & Contacting Pte Ltd. (2011) 61 DTR 337 / 338 ITR 386 / 202 Taxman 491 / 244 CTR 121 (AAR)

CHAPTER IIIINCOME WHICH DO NOT FORM PART OF TOTAL INCOME

S. 10(10CC) : Exempt incomes - Perquisite - Tax borne by Employer.Tax paid by employer in respect of salary paid to employees would constitute a non-monetary perquisite eligible for exemption under section 10(10CC). (A. Y. 2004-2005).Transocean Discoverer v. ACIT (2011) 44 SOT 248 (Delhi)(Trib.)

S. 10(20) : Exempt incomes - Local Authority - Notified Area - Surat - MunicipalityThe assessee was a notified area in Surat for industrial development. It had been notified by the State


Government under Gujarat Industrial Development, 1962. The assessee had been entrusted with the work of collection of tax under a notification issued by Gujarat Municipality Act, 1963. On the facts of the present case, the assessee was regarded as a ‘municipality’ under section 10(20) and therefore its income was exempt under the said section. (A. Y. 2003-04)ITO v. Sachin Notified Area (2011) 43 SOT 411 / 7 ITR 699 / 132 TTJ 610 / 42 DTR 478 / 128 ITD 211 (Ahd.)(Trib.) S. 10(22) : Exempt incomes - Educational Institution - Purpose of profit. [S. 11(1)(a), 13(1)(c), 13(3)]Exemption under section 10(22) is available only if the assessee is running an educational institution solely for educational purposes and not for purposes of profit : Exemption under section 10(22) is not allowable to the assessee as its objects include establishing small-scale industries of all kind and to aid and assist the poor, the grief-stricken, the destitute, and persons and animals suffering from calamities. (A. Ys. 1983-84 to 1985-86).CIT v. Gurukul Ghatkeswar Trust (2011) 332 ITR 611 / 58 DTR 122 / 243 CTR 154 (AP)(High Court)

S. 10(23C) : Exempt incomes - Charitable purpose – Education - Subsidy grant from Government. [S. 2(15)]A grant coming from Government will qualify for exemption from taxation if same has been granted for a particular purpose of public utility or public importance or to alleviate a situation affecting general public and cannot be used for any other purpose. Assessee which is Government company within the meaning of section 617 of Companies Act ,1956 , which is engaged in business of printing, sale of text book and job works relating to printing, etc., the income will be exempt. The activity of assessee were covered by expression “education” as well as “advancement of any other object of general public utility” occurring in definition of “Charitable purpose” under section 2(15). (A. Y. 2005-06)Bihar State Text Book Publishing Corporation v. CIT (2011) 199 Taxman 196 / 241 CTR 403 / 56 DTR 178 / 2011 TAX.L.R. 845 (Patna)(High Court)

S. 10(23C) : Exempt incomes - Educational institutions - Charitable purpose - Adult education - Sports. (S. 2(15), 12)The petitioner filed application for seeking exemption under section 10(23C)(vi). The petitioners application was rejected on the ground that the object of the petitioner does not exist solely for educational purpose. The rejection order was challenged before the High Court. The High Court held that, the ‘education’ means process of training and developing, knowledge, skill, mind and character of students. Activities such as maintaining, library, conducting classes of stitching, weaving, embroidery and adult education, fall within ‘education’. Sports and recreational activities also fall with in modern concept of education. Educational society running school having such other objects cannot be denied approval under section 10(23C)(vi) on ground that society is not existing solely for educational purpose.Little Angles Shiksha Samiti Dal Bazzar, Gwalior & Anr. v. UOI (2011) Tax L.R. 941 (MP)(High Court)

S. 10(23C) : Exempt income - Educational institutions - Order of court to withdraw utilization and invested in funds in terms of section 11(5) – Assessee complied with direction – Entitled to exemption. In the instant case the assessee had complied with the direction of the High Court on its earlier writ petition of withdrawing the amount invested in IEML and placing the amount in a scheduled bank in accordance with section 11(5) of the Income-tax Act, 1961. However the DGIT did not grant exemption to the assessee for the relevant year under consideration even after the assessee had complied with the order of the High Court. On a petition to the High Court again, the High Court while allowing the petition held that the DGIT could not have refused exemption for the relevant year, when the assessee had complied with the High Court Order. The Original order passed by the High Court had held that the second application would be


moved by the assessee pursuant to the order of the High Court, would be treated as having been filed was to be an entire substitute of the original application, and therefore exemption was to given for A.Y. 2008-09. (A. Y. 2008-09)Export Promotion Council for Handicrafts and other v. DGIT (Exemption) (2011) 337 ITR 26 / (2010) 40 DTR 73 (Delhi)(High Court)

S. 10(23C)(iv) : Exempt incomes - Charitable purpose - Coaching classes and conduct of examination - Applicability of proviso. [S. 2 (15), 11(5)]Assessee Institute has given the duty and function to approve academic courses, conduct examination for enrolment, prescribe fee, make regulation for registration for encouragement, training of articled and audit clerks, prescribe qualification for registration, grant or refuse to grant certificate of practice and regulate and maintain the standards of members. Section 30A of the Chartered Accountants Act empowers the Central Government to give direction or special directions to the Council constituted under section 9 to ensure compliance. There is clear distinction between coaching classes conducted by private coaching institutions and the courses and examinations which are held by the petitioner Institute. The court held that the Director General was not justified in refusing exemption under section 10(23C)(iv) by cryptic order on the ground that by holding coaching classes for fee ,it was engaged in “business” without considering whether it was engaged in “trade commerce or business” with in the meaning of first proviso to section 2(15) and further without considering the plea of assessee that it had not violated section 11(5) or third proviso to section 10(23C)(iv) . The Court remanded the matter for consideration afresh keeping in view the observations made. (A. Ys. 2006-07 to 2009-10). The Institute of Chartered Accountants of India & Anr. v. DGIT (Exemption) (2011) 245 CTR 541 / 64 DTR 226 (Delhi)(High Court)

S. 10(23C)(vi) : Exempt incomes - Educational institutions - Registration under Andhra Pradesh Charitable and Hindu Religious Institutions and Endowments, Act, 1987 – Seminars – Symposiums - Work shops – Application of income - Advance of money to another educational institutions.In order to be eligible for exemption, under section 10(23C)(vi), it is necessary that such institution must exist solely, for educational purposes , and institution should not exist for purpose of profit. Registration under section 43A of A.P. Act is not a condition precedent for seeking approval, Chief Commissioner has to examine independently. Object of Society to conduct seminars, symposiums, workshops and invite experts from India and abroad to improve quality of education and to support students to elevate themselves to international standards is incidental and ancillary object to primary objects of carrying on educational activities. Money advanced to another educational institution cannot be treated as application of income solely for the purpose of education. (A.Y. 2009-10)New Noble Education Society v. CCIT (2011) 334 ITR 303 / 201 Taxman 33 / 242 CTR 266 / 58 DTR 63 (AP)(High Court)

S. 10(23C)(vi) : Exempt incomes - Educational institutions - University existing for educational purposes - Haryana Private Universities Act, 2006.Petitioner university created under section 3 of Haryana Private University Act, 2006 having obtained recognition from the Bar Council of India as well as University Grants Commission and also set up infrastructure for starting law courses, it is an existing educational institution and therefore entitled to approval. Rejection on the ground that petitioner is yet to commence educational activities is set aside and the Commissioner was directed to pass an order granting approval under section 10(23C)(vi). (A. Y. 2008-09).


O. P. Jindal Global University v. CCIT (Exemption) (2011) 64 DTR 22 (P&H)(High Court)

S. 10(23C)(vi) : Exempt incomes – Educational Institutional.The assumption that for exemption there should not be any surplus and if it is otherwise the institution society exists for profit and not charity is not justified. Thus, exemption cannot be rejected merely because there is a surplus. Vanita Vishram Trust v. CCIT (2010) 327 ITR 121 (Bom.), Maa Saraswati Educational Trust v. UOI (2010) 194 Taxman 84 (HP) and Pinegrove International Charitable Trust v. UOI (2010) 327 ITR 73 (P&H) followed). (A. Y. 2008-09)St. Lawrence Educational Society v. CIT (2011) 53 DTR 130 / 197 Taxman 504 (Delhi)(High Court)

S. 10(23C)(via) : Exempt incomes – Hospital – Application - Beyond time. Application under section 10(23C)(via) filed beyond time. Accounts not maintained properly. No evidence regarding activities. Registration under section 80G and exemption under section 12A in prior years not conclusive. Rejection of application was justified. All India J. D. Educational Society v. DGIT (2010) 48 DTR 353 / (2011) 338 ITR 218 / 237 CTR 9 / 198 Taxman 443 (Delhi)(High Court)

S. 10(23FB) : Exempt incomes - Venture capital fund - Income from other sourcesIt was held that exemption claimed with respect of any income from any VCF prior to 1/4/2008 was exempt as the amendment to section 10(23FB), which restricted to the exemption to income from investment by VCF, is with effect from 1/4/2008 and is prospective.(A. Y. 2006-07) ITO v. Kshitij Venture Capital Fund (2011) 131 ITD 290 / 10 ITR 136 / 140 TTJ 6 / 58 DTR 403 (Mum.)(Trib.)

S. 10(23FB) : Exempt incomes - Income of venture capital company - Interest on deposits with banks.Assessee trust has been registered under the provisions of Registration Act, 1908 and also registered under SEBI as per Securities and Exchange Board of India (Venture Capital Funds) Regulations, 1996. The assessee deposited certain amount on deposit with banks and earned interest on said deposits. The assessee contended that the entire income must be exempt. Assessing Officer held that investment in fixed deposit has violated the conditions. The Tribunal held that the assessee Trust registered under the provisions of Registration Act 1908, as well as under SEBI (Venture Capital Funds) Regulations, 1996 hence interest income from fixed deposit will be exempt under section 10(23FB) of the Income-tax Act. The Tribunal held that it is only from the Assessment year 2008-09 on wards the income from investment in specified undertakings would be exempt and other income will be taxable. (A. Ys. 2001-02 to 2005-06).ITO v. Gujarat Information Technology Fund (2011) 64 DTR 169 (Hyd.)(Trib.)

S. 10(26AAB) : Exempt incomes - Income of agricultural produce market - Local authority. [S. 10(20)]Section 10(26AAB) inserted by the Finance Act, 2008 w.e.f. 1st April 2009 cannot be applied retrospectively w.e.f. 1st April 2003 and is applicable w.e.f 1st April 2009 and shall apply for the A. Y. 2009-10 and for the subsequent assessment years. Assessee were not entitled to exemption under section 10(26AAB) for the A. Ys. 2003-04 to 2008 -09).CIT v. Agricultural Market Committee Tansuku & Ors. (2011) 337 ITR 299 / 63 DTR 119 (AP)(High Court)

S. 10(38) : Exempt incomes - Capital gains - Income arising from transfer of shares - Security Transaction Tax (STT) not paid - Listed Security. (S. 45, 112)Assessee was a promoter–director of a company “PLL”. PLL issued shares for public subscription through initial public offer (IPO) as per SEBI guidelines, which permitted existing shareholders also to sell their


http://itatonline.org/archives/index.php/pinegrove-international-charitable-trust-vs-uoi-p-h-high-court-s-1023cv-benefit-cannot-be-denied-merely-because-there-are-profits-in-computing-the-profits-capital-expenditure-has-to-be-deducted

http://itatonline.org/archives/index.php/vanita-vishram-trust-vs-ccit-bombay-high-court-s-1023cvi-surplus-does-not-mean-trust-ceases-to-be-solely-for-educational-purposes-and-not-for-profit

shares in IPO for diluting their equity holding. Assessee sold certain shares of “PLL” and received certain amount as sale consideration. Assessee claimed that said gains were not includible in his total income. Assessee has not paid Securities Transaction Tax (STT) on said shares. Assessing Officer has not allowed the exemption on the ground that the assessee has not paid STT on said shares and the Shares of PLL were not listed on any stock exchange on the date of sale. The Tribunal confirmed the order of Assessing Officer and held that the assessee was liable to be taxed at 20 percent. (A. Y. 2006-07).Uday Punj v. Dy. CIT (2011) 133 ITD 354 (Delhi)(Trib.)

S. 10(38) : Exempt incomes - Capital gains - Income arising from transfer of shares - Security Transaction Tax – Stock-in-trade. (S. 112)Exemption under section 10(38) can be allowed only on sale of shares held as capital asset which has suffered Securities Transaction Tax (STT). If on date of sale, shares are converted into stock-in-trade, exemption would not be available under section 10(38). Provisions of section 10(38) are applicable only to capital assets and not in case of business transaction. (A. Y. 2006-07).Alka Agarwal (Smt) v. ADIT (2011) 48 SOT 493 (Delhi)(Trib.) S. 10A : Exempt incomes - Free trade zone - Competent authority – FEMA – RBI.The assessee made an application to the RBI on 7-10-2004 seeking extension of time for realisation of the export proceeds. The RBI granted approval in realisation of exports proceeds but said approval was issued in the context of the provisions of the FEMA and there was no formal approval was granted by the RBI under section 10A. The Tribunal held that once the assessee had applied for extension and had completed all the formalities and in response the RBI had taken the remittances on record, then non issuance of formal letter of approval by the RBI could not be held against the assessee, it must be held that the extension had been granted in substance and therefore the benefit of section 10A had to be allowed. The court upheld the order of the Tribunal. (A. Y. 2004-05).CIT v. Morgan Stanley Advantage Services (P) Ltd. (2011) 202 Taxman 40 / 62 DTR 351 / 245 CTR 121 / 339 ITR 291 (Bom.)(High Court)

S. 10A : Exempt incomes - Free trade Zone - Convertible foreign exchange - Local sales.Section 10A provides for exemption only on profits derived on export proceeds received in convertible foreign exchange. Benefit cannot be extended to local sales made by units in special Economic Zone, whether as part of domestic tariff area sales or as inter unit sales within zone or units in other Zones.( A.Y. 2004-05).CIT v. Electronic Controls & Discharge Systems (P) Ltd. (2011) 202 Taxman 33 / 64 DTR 40 / 245 CTR 465 (Ker.)(High Court)

S. 10A : Exempt incomes – Free trade Zone -- Exemptions under sections 10A,10B continue to “exempt” profits & so loss of other units (eligible & non-eligible, including B/f loss) not liable for set-off against sections 10A,10B profits.Two issues where before the High Court for A.Y. 2001-02 & onwards, (i) Whether the loss incurred by a non-eligible unit & (ii) whether the brought forward unabsorbed loss & unabsorbed depreciation of the eligible unit has to be set-off against the profits of the eligible unit before allowing deduction under section 10A/10B. Held that (a) section 10A allows deduction “from the total income”. The phrase “total income” in section 10A means “the total income of the STP unit” and not “total income of the assessee“. Consequently, section 10A deduction has to be given before computing the “profits & gains of business” under Chapter


IV. Though section 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III and was not moved to Chapter VI-A. The result is that even now section 10A is in the nature of an “exemption” provision and the profits of the eligible unit have to be deducted at source level and do not enter into the computation of income.(b) Section 10A(6) as amended by the FA 2003 w.e.f. 1.4.2001 provides that depreciation and business loss of the eligible unit relating to the A.Y. 2001-02 & onwards is eligible for set-off & carry forward for set-off against income post tax holiday. This amendment does not militate against the proposition that the benefit of relief under section 10A is in the nature of exemption with reference to commercial profits. However, to give effect to the legislative intention of allowing the carry forward of depreciation and loss suffered in respect of any year during the tax holiday for being set off against income post tax holiday, it is necessary that a notional computation of business income and the depreciation should be made for each year of the tax holiday period. Such loss is eligible to be carried forward. But, as the income of the section 10A unit has to be excluded at source itself before arriving at the gross total income, the question of setting off the loss of the current year’s or the brought forward business loss (and unabsorbed depreciation) against the section 10A profits does not arise. CIT v. Yokogawa India Ltd. (2012) 204 Taxman 305 / 246 CTR 226 (Karn.)(High Court)

S. 10A : Exempt incomes - Free trade zone - ReconstructionAssessee was a 100 percent captive centre providing software design and development services to its parent company. Assessee claimed benefit under section 10A from 1-1-2003 to 31-3-2003 after getting approval from Director of soft ware Technology Park of India (STPI) on 31-12-2002 . Assessing authority declined to grant benefit under section 10A on ground that application filed before STPI was seeking approval to establish a new unit and not for recognizing an existing unit. In Appeal the CIT(A) and Tribunal has held that the undertaking of assessee in question was not formed by splitting hence entitled to under section 10A. High Court held that it was not a case of reconstruction which was supported by Circular no 1/05 dated 6-1-2005 hence confirmed the order of Tribunal.( A.Y.2003-04).CIT v. Maxim India Integrated Circuit Design (P) Ltd. (2011) 202 Taxman 365 (Karn.)(High Court)

S. 10A : Exempt incomes - Free trade zone - Total turnover - Export turn over - Communication charges. (Sec. 263)The Assessing Officer in the original assessment proceedings had not included the communication charges in the figure of total turnover for computing eligible deduction under section 10A. Commissioner passed the revision order under section 263. On appeal the Tribunal up held the order of Commissioner however on merit the Tribunal, held that the communication charges had to be excluded from the total turnover for the purpose of computing the deduction under section 10A. The High Court held that when export turnover was component of total turnover and consequently, when telecommunication charges had been specifically excluded from export turn over, it being a component of total turnover, it stood to reason that telecommunication charges had also to be excluded from total turnover, hence, the Tribunal was justified in directing that the Assessing Officer to exclude communication charges out of total turnover for computing eligible deduction under section 10A. (A. Y. 2004-05).CIT v. Genpat India (2011) 203 Taxman 632 (Delhi)(High Court)

S. 10A : Exempt incomes - Free trade zone - Foreign Trade (Development and Regulation) Act, 1992 - Allocation of expenses.Where assessee’ entire income is from STP unit and it is governed under a scheme promulgated by section 3(1) of Foreign Trade (Development and Regulation) Act, 1992, it was held by the Tribunal that Foreign


Trade (Development and Regulation) Act, 1992, does not contain any provision overriding provisions of Income Tax Act, therefore, the assessee can get the exemption only as per section 10A of the Income Tax Act. Where travel expenses, telecommunication charges, professional charges and professional consultancy charges as reduced from “export turnover” bore no element of profit which would require allocation by apportionment, the said charges would stand to be excluded from computation of “Total Turnover” as well. (A. Y. 2001-02 to 2004-2005)Dy. CIT v. IBS Software Services (P) Ltd. (2011) 129 ITD 21 / 137 TTJ 54 / 52 DTR 179 (Cochin)(Trib.)

S. 10A : Exempt incomes - Free tradezone - Interest from bank deposits - Turnover - Freight Charges.Interest received from bank deposit and other income shall not form part of “profit from business” for the purpose of computation of deduction under section 10A. After substitution of sub section (4) of section 10A by Finance Act, 2001, total turnover for relevant assessment years shall comprise of total turnover of business carried on by eligible “undertaking” only and not total turnover of all units of assessee for the purpose of calculation of deduction under section 10A. For the purpose of calculating deduction under section 10A, export turnover has to be reduced by freight charges, telecommunication charges or insurance charges attributable to delivery of articles or things or computer software outside India or expenses if any incurred in foreign exchange, in providing technical services out side India. Commission charges that are deducted from export turnover should also be deducted from total turnover. (A. Ys. 2003-2004 to 2005-06)Miracle Software Systems India (P) Ltd. v. ACIT (2011) 44 SOT 203 / 59 DTR 333 / 140 TTJ 703 (Visakhapatanam)(Trib.)

S. 10A : Exempt incomes – Free trade zone – Deduction - Interest on Bank - STP Unit - Total turnover.Interest on bank deposit exemption under section 10A, is not eligible. When the amount to be proportioned did not include the unrealized sale proceeds, the same would also be included in the total turnover under section 10A. When assessee excluded travel expenses telecommunication charges and professional consultancy charges in the computation of “export turnover”, the same has to be reduced from the figure of ‘total turnover”, for the purpose of section 10A. (A. Ys. 2001-02 to 2004-2005).Dy. CIT v. IBS Software Services (P) Ltd. (2011) 137 TTJ 54 / 52 DTR 179 / 129 ITD 21 (Coch.)(Trib.)

S. 10A : Exempt incomes - Free trade zone - Adjustment of loss against taxable profit of other unit - Export turn over.From Assessment year 2001-02 section 10A is no longer an exemption provision and it allows only deduction from total income, loss from 10A unit has to be adjusted against taxable profit of other unit after deduction under section10A has been allowed in respect of eligible units. Assessee had incurred data line cost being telecommunication charges in respect of its unit and same was included in export turnover for purpose of deduction under section 10A. Assessing Officer excluded the data line cost from export turnover. Since expenses incurred on development of software in India could not be considered as expenses attributable to delivery of computer soft ware out side India, such expenses could not be excluded from export turn over. (A. Y. 2006-07).Capgemini India (P) Ltd. v. Addl. CIT (2011) 46 SOT 195 / 141 TTJ 33 (UO)(Mum.)(Trib.)

S. 10B : Exempt incomes - -Export oriented undertaking - Actual export.Assessee hundred percent export oriented undertaking (EOU), which has commenced production prior to 1st April 1994, exemption under section 10B was allowable even if its export was less than seventy five percent as under the pre amended provisions, the benefit was available by mere obtaining a certificate of EOU under the IDR Act. (A. Y. 1999-2000)


CIT v. Baehal Software Ltd. (2011) 240 CTR 316 / 339 ITR 368 / 54 DTR 185 (Karn.)(High Court)

S. 10B : Exempt incomes – Export oriented undertaking Job work done by sister concern - Outsourcing job.Assessee, an EOU, approved by NEPZ authorities, being engaged in manufacture of articles and exporting the same cannot be denied exemption under section 10B only because, it was getting some job work done from its sister concern. ( A.Y. 2003-04).CIT v. Continental Engines Ltd. (2011) 60 DTR 40 / 338 ITR 290 (Delhi)(High Court)

S. 10B : Exempt incomes - Export oriented undertaking - Export out of India - Delivering machines in India to 100 percent EOU.Transaction of manufacturing machines in India by EOU and delivering them in India to another 100 percent EOU , which is alleged be the agent of a foreign buyer does not amount to “export out of India” either under the Customs Act or under the Income Tax Act, hence the assessee is not entitled to exemption under section 10B. (A.Y. 2007-08)Swayam Consultancy (P) Ltd. v. ITO (2011) 63 DTR 205 / 336 ITR 189 / 245 CTR 583 (AP)(High Court)

S. 10B : Exempt incomes - Export oriented undertaking – Computation - Brought forward unabsorbed depreciation. [S. 32(2)]Deduction under section 10B, has to be granted with reference to the profit of the industrial unit computed under the provisions of the Act, which includes set off of unabsorbed depreciation carried forward from earlier years. (A.Ys. 2001-02 to 2005-06).CIT v. Patspin India Ltd. (2011) 62 DTR 364 / 203 Taxman 47 / 245 CTR 97 (Ker.)(High Court)

S. 10B : Exempt incomes – Export oriented undertaking - Change of ownership of unit - Reconstruction of existing unit.Firm converted in to company, change of ownership of unit not a reconstruction hence, deduction under section 10B is available. (A. Y. 2007-08).ITO v. Veto Electropowers (2011) 8 ITR 76 / 56 DTR 313 / (Tax World) Feb., 2011 P. 66 (Jaipur)(Trib.)

S. 10B : Exempt incomes – Export oriented undertaking – Export turnover.Expenses incurred in connection with development of software by the employees at foreign branch should not be excluded from the export turnover for computing deduction under the section 10B. (A. Y. 2003-04)Zylog Systems Ltd. v. ITO (2011) 128 ITD 105 / 135 TTJ 129 / 7 ITR 348 / 49 DTR 1 (Chennai)(SB)(Trib.)

S. 10B : Exempt incomes - Export oriented undertaking - Option - Declaration.If an assessee files a declaration to avail option of not claiming deduction under section 10B, then provisions of section would not be applicable for any relevant assessment year. Filing of declaration is mandatory and time limit is directory. (A. Y. 2003-04)Wipro BPO Solutions Ltd. v. Dy. CIT (2011) 44 SOT 353 (Bang.)(Trib.)

S. 10B : Exempt incomes – Export oriented undertaking - Computation - Transaction with related concern. [S. 80IA(10)]Assessee engaged in manufacturing of precious and semi precious stones. GP rate assessed was much higher as compared to another concern i.e. V.R. Exports. Assessing Officer clubbed the turnover of both the concerns and determined the average GP rate after considering the direct expenses and reduced


deduction under section 10B. The Tribunal held that since there is no business between the assessee and VR Exports, provisions of section 80IA(10) are not applicable and net profit rate of the two concerns cannot be apportioned in the ratio of turnover of both concerns. (A. Y. 2005-06).ITO v. Kanchan Tara Exports (2010) 47 DTR 420 / (2011) 138 TTJ 592 (JP)(Trib.)

S. 10B : Exempt incomes – Export oriented undertaking - Splitting up or reconstruction of existing business – Lease of undertaking.Assessee company claimed the deduction under section 10B on the basis of the lease arrangement between the assessee company and the predecessor, the Tribunal held that such claim of benefit under section 10B for the balance unexpired period was not allowable because the claim was not based on the establishment of new industrial undertaking. (A. Ys.2006-07 & 2007-08).Synergies Casting Ltd. v. Dy. CIT (2011) 57 DTR 503 / 139 TTJ 627 (Hyd.)(Trib.)

S. 10B : Exempt incomes – Export oriented undertaking - Export of computer software - Back office operation –Computation - Transaction with related concerns. [S. 80IA(10)] Activities of software programming carried on by the assessee company to render quality and testing assurance services to foreign clients and transmitting the same through internet are in the nature of back office operations covered by CBDT Notification no 890 (E) dt 26th September, 2000 issued for the purpose of Explanation 2 to section 10B and therefore, assessee company registered as a 100 percent EOU with STPI is entitled to deduction under section 10B. The assessee company had raised the bills for the services rendered by it in consonance with the terms of agreement settled between it and its clients from time to time and STPI having certified that such services, it cannot be said that profits shown by the assessee are on the higher side and therefore, profits of the assessee company could not be reworked by applying the provisions of section 80IA(10) for the purpose of allowing exemption under section 10B. (A. Ys. 2005-06 to 2007-08).Bebo Techlogies (P) Ltd. v. Jt. CIT (2011) 57 DTR 402 / 139 TTJ 428 (Chd.)(Trib.)

S. 10B : Exempt incomes - Export oriented undertaking - ‘Manufacturing’ includes ‘any Process’ - Conversion of gherkin in to gherkin pickles – Manufacture - Law applicable when business started.Assessee agricultural products processing company was engaged in manufacturing of gherkin pickles by purchasing raw gherkin and putting them through various process. Assessing officer held that the assessee is not doing the manufacturing hence not entitled to exemption under section 10B. The Tribunal held that the assessee started its business on 1-4-1999, and current assessment years fell within the permissible period of 10 years, therefore the provision of section 10B as it stood before its substitution, section 10B and explanation thereto had categorically held that manufacture include any ‘ process’, therefore assessee is entitled exemption under section 10B. (A.Ys. 2005-06 to 2007-08)Sterling Agro Processing (P) Ltd. v. ACIT (2011) 48 SOT 80 (Chennai)(Trib.)

S. 10B(6) : Exempt incomes – Export oriented undertaking - Depreciation – Unabsorbed - Carry forward and set off.Unabsorbed depreciation of earlier assessment years in which no deduction was claimed under section 10B is available for set off against other taxable income of the subsequent assessment years. (A. Ys. 2001-02 , 2002-03, 2004-05).Patspin India Ltd. v. Dy. CIT (2011) 51 DTR 57 / 129 ITD 35 / 136 TTJ 377 (Cochin)(Trib.)(TM)


S. 10B(6) : Exempt incomes – Export oriented undertaking - Depreciation – Unabsorbed - Carry forward and set off - Exempted income - Income from other sources. [S. 32(2), 56, 72(2)]Assessee being entitled to deduction under section 10B up to asst year 2005-06, provisions of section 10B(6) are not applicable in the relevant asst year ie 2004-05 and therefore unabsorbed depreciation brought forward from asst year prior to asst year 2000-01 can be set off against business income or against any other head of income including income from other sources. (A. Y. 2004-05).Dy. CIT v. Akay Falvours & Aromatics (P) Ltd. (2011) 55 DTR 1 / 130 ITD 41 / 138 TTJ 513 (Coch.)(TM)(Trib.)

S. 11 : Exempt incomes - Charitable purposes - Application of Income – Depreciation.Depreciation claim is nothing but application of income, hence, depreciation should be reduced from the income for determining the percentage of funds which had to be applied for the purposes of the trust. (A. Y. 2005-06)CIT v. Tinny Tots Education Society (2011) 330 ITR 21 (P&H)(High Court)

S. 11 : Exempt incomes - Charitable purposes – Set off of loss.The excess of application of the current year / Past year can be set off against the income of subsequent / current year. Raghuvanshi Charitable Trust and others v. DIT (2011) 221 Taxation 250 (Delhi)(High Court)

S.11 : Exempt incomes - Charitable purposes - Application of income - Legal expenses to defend member of society in contempt proceedings. [S. 12, 37(1)]Legal expenses incurred by the assessee Society to defend its member in contempt of Court Proceedings cannot be said to be for promoting the objects of the association nor for the benefit of the association, therefore, could not be allowed as deduction. (A. Ys. 2004-05, 2005-06 and 2006-07).CIT v. IAS Officers Association (2011) 335 ITR 254 / 241 CTR 574 / 56 DTR 239 (Karn.)(High Court)

S. 11 : Exempt incomes- Charitable purposes - Property sub let.In order to carry out the charitable activity of the trust in effective manner if the property of the trust is sub-let and rental income is received thereon the exemption under section 11 cannot be denied by the assessing officer invoking provisions of section 11(4A) of the Income-tax Act, 1961. (A. Y. 1991-92).DIT v. Sahu Jain Trust (2011) 56 DTR 402 / 243 CTR 131 (Cal.)(High Court)

S. 11 : Exempt incomes - Charitable purpose - Advance of money to treasurer. (S. 12A, 13)Assessee a registered society under section 12A, advanced certain sum without any security to its treasurer. It could not furnish any detail about rate of interest and mode of recovery of loan and same was also not reflected in its books as well as audit report except resolution which could not be relied upon. It was a clear case of violation of section 13 and exemption had been rightly denied to it. (A. Y. 2001-02).CIT v. Audh Educational Society (2011) 203 Taxman 166 (All)(High Court)

S. 11 : Exempt incomes - Charitable purpose – Depreciation - Application of income - Expenditure incurred in earlier year. (S. 32)Assessee charitable trust is entitled claim for depreciation on the assets owned by it. If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of trust. Expenditure incurred in the earlier year can be met out of the income of the subsequent year and utilization of such income for meeting the expenditure of the earlier year


would amount to such income being applied for charitable or religious purposes. (A. Ys. 2004-05 to 2006-07).CIT v. Shri Gujarati Samaj (Regd.) (2011) 64 DTR 76 (MP)(High Court)

S. 11 : Exempt incomes - Charitable purpose - Contribution from institutional members. [S. 13(1)(c)]Assessee was set up under sponsorship of Government of India for sole purpose of providing physical environment to various institutions for carrying out their activities. Assessee claimed the exemption under section 11 which was granted by the Assessing Officer. Commissioner under section 263 set aside the order of Assessing Officer on grounds that institutional members fell within category of substantial contributors in terms of section 13(3) and since space in superstructure had been allotted to organizations below market price, provisions of section 13(1)(c) read with section 13(3)(b) were attracted and therefore the assessee was not entitled to exemption. The Tribunal reversed the finding of Commissioner. On appeal the Court held that in view of fact that funds received from institutional members were shown in balance sheet of assessee as liabilities and not as contributions towards “corpus”, there is no violation of section 13(3). Since allotment of space was subject to approval of Government and was based on a self financing model, there could be no question of allotment of super structure at price below market price hence there is no violation of section 13(1)(c). Accordingly the High Court up held the order of Tribunal. (A. Y. 1990-91).DIT v. India Habitant Centre (2011) 203 Taxman 510 (Delhi)(High Court)

S. 11 : Exempt incomes - Charitable purposes - Accumulation of income - Form No. 10 was filed before assessment.Form No. 10 was available with the assessee before passing of the original assessment order, hence claim of the assessee for accumulation of income cannot be rejected merely on the ground that form no 10 was not filed along with the return of income. Matter remanded with the direction to verify whether assessee has made investment in accordance with the condition of cl (b) of section 11(2). ( A.Y. 1994-95).Kandla Dock Labour Board v. ITO (2011) 62 DTR 234 / 133 ITD 156 (Rajkot)(Trib.)

S. 11 : Exempt incomes - Charitable purpose - Accumulation of income - Form No. 10.Tribunal held that the filing of form No. 10 before assessment is not an empty formality, benefit of accumulation of income under section 11(2) cannot be availed in the absence of filing of form No. 10 before completion of assessment. (A. Y. 2007-08).Hans Raj Samarak Society v. ADIT (2011) 133 ITD 530 (Delhi)(Trib.)

S. 11 : Exempt incomes - Charitable purpose - Income from property. (S. 2(15), 12AA)Assessee authority was formed with object to promote and secure development of certain area according to plan. For said purpose assessee had power to acquire hold manage and dispose of land and other property. The assessee had the registration under section 12AA of the Income-tax Act. The assessee filed the return of income claiming exemption under section 11. Assessing Officer held that the nature of activities carried on by the assessee were in the nature of carrying on of business hence surplus of said activity was liable to tax. It was argued before the Tribunal that since assessee carried on a business which was incidental to attaining of its main object. The Tribunal held that in such situation, exemption under sub sections (1)(2)(3)(3A) of section 11 would be available to assessee only if it maintained separate books of account for said business. Since aforesaid aspect had not been examined by authorities below, matter was to be remanded back to Assessing Officer for fresh disposal. (A. Y. 2007-08).ITO v. Moradabad Development Authority (2011) 133 ITD 485 (Delhi)(Trib.)


S. 11 : Exempt incomes - Charitable purpose - Educational institution - Loan to another Society. [S. 12, 12AA, 13 (1)(d)]Assessee running a educational institutions was registered under section 12A. It had filed its Income-tax return declaring nil income. Assessee had given loan of Rs. 1.28 crores to another society which was also engaged in charitable activities of education. Assessing Officer and Commissioner (Appeals) held that as assessee had violated provisions of section 13(1)(d) invoked the provisions of section 11(5) and denied the exemption under section 11 and 12. Tribunal held that assessee neither invested impugned amount nor deposited same otherwise than in any one of forms or modes specified in section (5) of section 11 because loan was neither an investment nor a deposit, provisions of section 13(1)(d) were not applicable hence the Assessing Officer was directed to allow the exemption (A. Y. 2006-07). Kanpur Subhash Shikasha Samiti v. Dy. CIT (2011) 133 ITD 182 (Luck.)(Trib.)

S. 11 : Exempt incomes - Charitable purpose – Survey - Capitation fee - Voluntary contribution - In Voluntary contributions - Denial of exemption. (S. 12)During survey Assessing Officer observed that assessee had collected capitation fee from students and no receipt were given for such collection. Assessing Officer was of the view that what is exempted from taxation under section 11 and 12 were are only voluntary contributions and not contributions collected against allotment of seats. However, there was no material on record to show that assessee had accepted capitation fee against allotment of seats, in view of decision of earlier year the exemption was allowed. The Tribunal further held that there is no difference between voluntary contributions and involuntary contributions, only distinction is that voluntary contributions are to be treated as income under section 12 and corpus donations are to be treated as capital receipt under section 11. If the said income is applied for the charitable purpose the exemption to be allowed. (A. Ys. 2002-03 to 2008-09).ACIT v. Balaji Educational & Charitable Public Trust (2011) 48 SOT 281 (Chennai)(Trib.)

S. 12A : Exempt incomes - Charitable purposes – Registration – Genuineness of Trust.Registration under section 12A of the Act cannot be denied to a trust which is newly formed on the ground that it had not commenced any activity. While granting registration under section 12A of the Act only the objects of the trust is to be examined to ascertain the genuineness of the trust. (A. Y. 2004-05)DIT v. Meenakshi Amma Endowment Trust (2011) 50 DTR 243 (Karn.)(High Court)

S. 12A : Exempt incomes - Charitable purpose - Telecasting and broad casting programmes - Registration. [S. 2(15)]The assessee company was formed with object of to telecast and broad cast programmes and to as an agent, broker liasiner et.c, will not make the object clause charitable. Activities of the company are purely commercial activities not exclusively intended for advancement of any object of general public utility, assessee is not entitled to be registered as charitable institution. Subsequent amendment to the constitution is not relevant for the registration of relevant year. Order of Tribunal was reversed and order of Commissioner confirming the refusal of registration was confirmed. CIT v. A. Y. Broadcast Foundation (2011) Tax L.R. 892 / (2011) 199 Taxman 376 / 58 DTR 167 / (2012) 340 ITR 166 / 246 CTR 301 (Ker.)(High Court)

S. 12A : Exempt incomes - Charitable purposes – Cancellation of Registration – Exemption. [S. 10(23C)]Rejection of application under section 10(23C)(vi) cannot be a reason to cancel registration under section 12A.Sunbeam English School Society v. CIT (2011) 129 ITD 299 / 56 DTR 52 / 139 TTJ 81 (All.)(Trib.)


S. 12A : Exempt incomes - Charitable Purpose – Registration - Activity of giving micro finance and earning Interest. [S. 2 (15), 11]Where an assessee is registered under section 25 of Companies Act, 1956, it in itself shows that the company intends to apply its profit in promoting charity. And where the object of the assessee states that it shall promote micro finance services to poor person and help them arise out of poverty. Mere surplus from such micro finance service cannot by itself be a ground to say that no charitable purpose exists. Followed ACIT v. Thanthi Trust (2001) 247 ITR 785 (SC) and Agricultural produce and market committee (2007) 291 ITR 419 (Bom.) Dish India Micro Credit v. CIT (Delhi)(Trib.) Source: www.itatonline.org

S. 12A : Exempt incomes - Charitable purposes - Registration as Public Trust not necessary for S. 12A “Charity” registration.Registration as a Public Trust is not a condition precedent for grant of registration under section 12A. There is no requirement in the Income-tax Act, 1961 that the institution constituted for advancement of charity, must be registered as a turst under the Public Trusts Act. Agriculture Produce and Market Committee (2007) 291 ITR 419 (Bom) & Disha India Micro Credit (Delhi), followed. Grameen Initiative for Women v. DIT (E), (Mum.)(Trib.) www.itatonline.org

S. 12A : Exempt incomes - Charitable purpose - Stock exchange - Benefit to individual stock broker or members or employees – No exemption granted under section 11.When a stock exchange carries out any activity for sole benefit of its members or ex members or employees or ex employees or their dependents and not for benefit of general public which is distinguished from class or community consisting of its members, ex-members, employees or ex-employees or their dependents and connections, it would not be entitled for exemption under section 11. Members of exchange being integral part of constitution of exchange who are interested persons as per provisions of section 13(1)(c), they are precluded from taking any undue advantages from assessee exchange. Assessee being registered under section 12A , benefit of assessee–exchange would be for public at large and not for benefit of individual stock brokers or members of Governing body of stock exchange. Since the assessee incurred expenditure for benefit of its members and subsidiary company only, provisions of section 13(1)(c) read with section 13(2)(b) and 13(3)(cc) was applicable to fact of case and consequently, assessee was not entitled for exemption under section 11. (A. Ys. 2001-02 to 2006-07).Hyderabad Stock Exchange Ltd. v. ADIT (2011) 46 SOT 1 (Hyd.)(Trib.)

S. 12A : Exempt incomes - Charitable purposes - Registration of Trust. (S. 80G)Application for renewal of exemption certificate rejected for the reason that changes made in object clause of trust without following the required procedure, hence the trust became invalid. The Tribunal observed that only one addition was made in the object clause, and even that remained charitable and did not cause any detriment to original object. There was no statutory requirement of intimating the changes except the one mentioned in the Form 10A, and even there was no time limit. Held that revenue was not justified in refusing to renew exemption certificate. Mehata Jivraj Makandas & Parekh Govindji Kalyani Modh Vanik Vidyarthi Public Trust v. DIT(E) (2011) 131 ITD 462 (Mum.)(Trib.)

S. 12A : Exempt incomes - Charitable purpose - Registration - Propagation of Vedas.



Assessee trust formed for propagation of Vedas was entitled to registration under section 12A, in status of religious and charitable trust. (A.Y. 2008-09).Kasyapa Veda Research Foundation v. CIT (2011) 131 ITD 370 / 139 TTJ 641 / 11 ITR 468 / 57 ITD 329 (Cochin)(Trib.)

S. 12A : Exempt incomes - Charitable purpose – Deduction – Donation - Requirement of form No. 10A. (S. 80G)In instant case trust had been registered as a charitable institution under section 12A vide order dated 27-11-1975. Subsequently, in view of the order dated 17-3-1994 of the Charity Officer under section 50A(1) of the BPT Act, objects of the Trust were amended. The Case of the revenue was that objects of trust could not be amended without the approval of the High Court. It was also argued that the changes in the objects of trust was not intimated to the department as provided in the Form No. 10A. The assessee contended that the when the change in the object clause approved by the Charity Commissioner under section 50A(1) approval of High Court is not required. Requirement of intimation of changes to department was provided only in Form no 10A , which was not a statutory requirement and in case the assessee had intimated the said change to department later on. Even the amended objects remained charitable and had not caused any detriment to original objects. The Tribunal held that the assessee trust continued to be eligible for registration under section 12A and thus, impugned order of DIT(E) rejecting for renewal of approval under section 80G could not be sustained.Mehata Jivraj Makandas & Parekh Govindji Kalyani Modh Vanik Vidyarthi Public Trust v. Director of Income–tax (2011) 131 ITD 462 (Mum.)(Trib.)

S. 12A : Exempt incomes - Charitable purposes - Commercial activities.Registration under section 12A was rightly refused to the trust where the trust has carried out commercial activity and did not apply the income to fulfil the object of the trust.Society for the Small & Medium Exporters v. DIT (2011) 139 TTJ 218 / 131 ITD 561 / 57 DTR 154 (Delhi)(Trib.)

S. 12A : Exempt incomes - Charitable purposes – Registration. [S.11(4A)]Assessee engaging manufacturing and trading activities. Assessee converting incidental objects as main objects. Assessee not satisfying first condition of section 11(4A). Cancellation of registration valid. Aurolab Trust v. CIT (2011) 12 ITR 74 (Chennai)(Trib.)

S. 12A : Exempt incomes - Charitable purpose – Registration – Cancellation. [S. 12AA(3)]Objects of the assessee society having been considered and found to be charitable in nature when the registration under section 12A was granted, said registration could not be cancelled by Commissioner by invoking the provisions of section 12AA(3) in the absence of anything on record to show that there was any change in the objects of the society or that its activities were not in accordance with those objects. Proceedings under section 80G and proceedings under section 12A are separate distinct and independent of each other and therefore, proceedings under section 80G cannot form basis for initiation of proceedings under section 12AA(3). Maulana Mohammad Ali Jauhar Trust v. CIT (2011) 63 DTR 416 (Luck.)(Trib.)

S. 12A : Exemption - Charitable purpose – Registration. [S. 12AA(3)] Objects of the assessee society having been considered and found to be charitable in nature when the

registration under section 12A was granted, said registration could not be cancelled by CIT by invoking the provisions of section 12AA(3) in the absence of anything on record to show that there was any change in the objects of the society or that it activities were not in accordance with those objects; proceedings under


section 80G and proceedings under section 12A are separate, distinct and independent of each other and, therefore, proceedings under section 80G cannot form basis for initiation of proceedings under section 12AA(3).Maulana Mohammad Ali Jauhar Trust v. CIT (2011) 63 DTR 416 (Lucknow)(Trib.)

S. 12AA : Exempt incomes - Charitable purposes - Registration granted under section 12A cannot be withdrawn in section 12AA(3).Assessee trust got registration under 12A in December 1974 and on that basis got exemption of income tax for the Asst years 1996-97 to 2005-06. DIT (Exemptions) denied exemption and cancelled registration under section 12AA(3) with effect from assessment year 2002-03. The Court held that registration granted under section 12A in December 1974 to assessee could not be withdrawn. (A. Ys. 2002-03 to 2006 -07)DIT v. Mool Chand Khairati Ram Trust (2011) 339 ITR 622 / 199 Taxman 1 / 58 DTR 254 / 243 CTR 245 (Delhi)(High Court)

S. 12AA : Exempt incomes - Charitable purpose – Registration - Educational institutions on commercial line. (S. 2(15), 11, 12)Assessee trust was formed to run educational institutions. It applied for registration under section 12AA. DIT(E) rejected the application on ground that probable fees to be collected from students was having a component for future expansion of institution and same component was in nature of profit and thus ,objects of trust would also include profit motive. The Tribunal held that since the object of trust was to establish a number of educational institutions in a brand name and run those institutions on commercial line, it could not be regarded as charitable activity, therefore, DIT (Exemption) was justified in rejecting assessee’s application seeking registration under section 12AA.Rajah Sir Annamali Chettiar Foundation v. DIT (2011) 48 SOT 502 (Chennai)(Trib.)

S. 12AA : Exempt income - Charitable purpose – Registration of trustThe DIT refused to grant registration for the reason that the assessee was claiming exemption under section 11 even though it had not complied with the mandatory provisions of registration. According to it, the lapse by the assessee cannot be visited with the consequence of its being declined registration later also, which approach was not supported either by any specific legal provisions or plain logic or rationale. The DIT was only required to examine if the objects of the trust were charitable and the activities were bona fide.Sudhir Thackersey Charitable Trust v. Dy. CIT, ITAT ‘H’ Bench, dated 26-8-11, ITA No. 5031/M/10, BCAJ, October – 2011, Pg.26, Vol. 43-B, Part 1 (Trib.)

S. 13 : Exempt incomes - Charitable purpose - Religious trust - Benefit of Dawoodi Bohra community. (S. 11)The assessee was religious trust for benefit of Dawoodi Bohra community. The Commissioner rejected registration of trust on ground that assessee trust was not established for benefit of general public and had violated the provisions of section 13(1)(a) and 13(1)(b). The assessee contended that said section 13(1)(b) would not be applicable to religious trust. The Tribunal held that since the benefit of Trust was available to all persons of Dawoodi Bohra community .i.e., benefit was available to a section of people and was not confined to some specific individuals, it could not be said that assessee trust was established for private religious purpose, therefore assessee is entitled for registration. Shiya Dawoodi Bohra Jamat v. CIT (2011) 133 ITD 271 (Ahd.)(Trib.)


S. 13 : Exempt incomes - Charitable purpose – Religious purpose – Registration - Minorities and back word classes. (S. 12A)The assessee trust were formed for charitable and religious purposes, the beneficiaries of the trust were the financially poor minorities and other back ward classes in Tellicherry Municipality and its suburbs. The Assessee applied for registration under section 12A. The Commissioner found that the trust was established for the benefit of a particular religious community or caste and thus hit by section 13(1)(b). It was further held that Explanation (2) below section 13(7), which provides an exception to section 13(1)(b) for schedule castes, back word class schedule tribes or women and children, would not be applicable in the instant case as the word “minority” cannot be applicable in the instant case as the word “minority” cannot be categorized as either scheduled caste or back ward community. He accordingly, rejected assessee’s application for grant of registration. The Tribunal held that the by reading the Trust deed as a whole the word ‘Minority to mean the religious minorities hence section 13(1)(b) would stand automatically attracted, hence the order of Commissioner was up held.Tellicherry Minority Welfare Trust v. CIT (2011) 48 SOT 313 (Coch.)(Trib.)

CHAPTER IVCOMPUTATION OF TOTAL INCOME

Head of Income

S. 14A : Business expenditure – Disallowance - Exempt Income - Borrowed Funds – Interest - Disallowance of Interest on borrowings on ground that the assessee ought not to have used own funds for tax - Free Investments invalid.It was held by Hon’ble High Court that the assessee has sufficiently explained that a majority of the investment in the tax-free security was made before the borrowing. The assessee had demonstrated that it had other sources of investment and that no part of the borrowed fund could be stated to have been diverted to earn tax free income. As borrowed funds were not used for earning tax-free income, applying section 14A was not justified. CIT v. Gujarat Power Corporation Ltd. (Guj.)(High Court) Source: www.itatonline.org

S. 14A : Business expenditure – Disallowance - Exempt Income - Apportionment of Expenses - Rule 8D - Pre Asst. Year 2008-09.For pre A.Y. 2008-09, the assessee earned tax free dividend income from investments in units, bonds, shares, etc. The assessee did not maintain separate books of account for tax free securities but claimed that the same had been invested from its own funds and no part of the interest paid by the assessee on its borrowings together with the administrative expenses could be disallowed. Assessing Officer took the view that the interest paid on borrowings and administrative expenses could be disallowed under section 14A. On appeal, the Tribunal held that as no rule had been made prescribed for computing the disallowance no disallowance under section 14A could be made. On appeal by the department, the Court held that in the absence of any precise formula for proportionate disallowance, no disallowance is called for in respect of administrative cost attributable to earning of tax free income until Rule 8D came in to force.CIT v. Catholic Syriyan Bank Ltd. & Ors. (2011) 237 CTR 164 / 49 DTR 57 (Ker.)(High Court)Editorial:- Godrej & Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom.) Dhanalakshmi Bank (2007) 12 SOT 625 (Coch.)

S. 14A : Business expenditure – Disallownce - Exempt Income - Despite Proviso to S. 14A, disallowance can be made for earlier years.



The protection of proviso to section 14A w.r.t. A.Y. 2001-02 & earlier years was inserted w.e.f. 11/05/2001. Thus, where order of CIT under section 263 was passed earlier i.e. on 29/12/1999, the protection under the proviso is to available. (A. Y. 1995-96). Mahesh G. Shetty & Ors. v. CIT (2011) 51 DTR 104 / 238 CTR 440 / 198 Taxman 224 (Karn.)(High Court)

S. 14A : Business expenditure – Disallowance - Exempt income - Interest on borrowed capital - Direction of Tribunal.During the course of assessment proceedings, the Assessing Officer made a query in respect of disallowance under section 14A of the Income-tax Act, 1961, however, no disallowance was made. Revenue had not challenged the non applicability of section 14A. Tribunal gave direction to consider applicability of section 14A. The direction of Tribunal was quashed.Topstar Mercantile P. Ltd. v. ACIT (2011) 334 ITR 374 / 225 CTR 351 / 28 DTR 215 (Bom.)(High Court)

S. 14A : Business expenditure – Disallowance - Exempt income - Investment in tax free income.If the investment in tax free income yielding securities is made from interest free funds, no disallowance can be made under section 14A. (A.Y. 2001-02).CIT v. LubiSummersibles Ltd. (ACAJ Vol. 35 Part 5 August-2011 P. 319)(Guj.)(High Court)

S. 14A : Business expenditure – Disallowance - Exempt income - Real expenditure - Disallowance without showing how assessee’s calculation is wrong, only real expenditure can be disallowed. (Rule 8D)The High Court had to consider two issues: (a) whether interest paid on funds borrowed to acquire “trading shares” is hit by section 14A given that the profits there from are assessable to tax as “business profits” and the dividend is incidental and (b) whether Rule 8D has retrospective operation. HELD by the Court:(i) The argument that if the dominant and main objective of the expenditure was not the earning of ‘exempt’ income then, the expenditure cannot be disallowed under section 14A is not acceptable. The expression “in relation to” cannot be given a narrow meaning and simply means “in connection with” or “pertaining to”. If the expenditure has a relation or connection with or pertains to exempt income, it cannot be allowed as a deduction even if it otherwise qualifies under the other provisions of the Act; (ii) The expression “expenditure incurred” in section 14A refers to actual expenditure and not to some imagined expenditure. If no expenditure is incurred in relation to the exempt income, no disallowance can be made under section 14A (Hero Cycles Ltd. (2010) 323 ITR 518 referred).(iii) The Assessing Officer cannot proceed to determine the amount of expenditure incurred in relation to exempt income without recording a finding that he is not satisfied with the correctness of the claim of the assessee. This is a condition precedent. While rejecting the claim of the assessee with regard to the expenditure or no expenditure in relation to exempt income, the Assessing Officer will have to indicate cogent reasons for the same;(iv) Rule 8D comes into play only when the Assessing Officer records a finding that he is not satisfied with the assessee’s method. Though section 14A(2) & (3) were inserted w.e.f. 1.4.1962, Rule 8D was inserted on 24.03.2008. Accordingly, Rule 8D would operate prospectively. (Godrej and Boyce Mfg. Co. Ltd 328 ITR 81 (Bom) followed); (v) For periods prior to Rule 8D, the Assessing Officer will have to adopt a reasonable method on the basis of objective criteria to determine the expenditure. However, here also, he will have to show why he is not satisfied with the correctness of the assessee’s claim (argument that Rule 8D exceeds the mandate of section 14A left open).Maxopp Investment Ltd. v. CIT (2011) 203 Taxman 364 (Delhi)(High Court)


S. 14A : Business expenditure – Disallowance - Exempted income - Method of computation – Reasonableness - Rule 8D - Prospective.Section 14A(2), 14(3) and Rule 8D are prospective. For earlier years the Assessing Officer is required to reject the claim of assessee with regard to the extent of such expenditure for cogent reasons and then determine the amount of such expenditure on the basis of reasonable and acceptable method of apportionment. (A. Y. 1998-99 to 2005-06).Maxopp Investment Ltd. & Ors. v. CIT (2011) 64 DTR 122 (Delhi)(High Court)CIT v. Escorts Finance Ltd. & Ors. (2011) 64 DTR 122 (Delhi)(High Court)

S. 14A : Business expenditure – Disallowance - Exempted income – Dividend - No expenditure incurred.When no expenditure in fact incurred in earning dividend income, no disallowance permissible. (A. Y. 1997-98).CIT v. Reliance Industries Ltd. (2011) 339 ITR 632 (Bom.)(High Court)

S. 14A : Business expenditure – Disallowance - Exempted income - Interest paid.Assessee bank borrowed certain funds, which were invested in purchase of tax free bonds for meeting SLR requirement of RBI. Assessing Officer disallowed the interest under section 14A. The Tribunal deleted the disallowance. On appeal High Court held that the object or purpose of investment does not affect operation of section 14A in as much as any expenditure incurred for earning tax free income is not an allowable expenditure, therefore, even though purchase of tax free bonds was for meeting SLR requirements, interest and other expenses incurred on borrowals for investment in tax free bonds was to be disallowed.CIT v. State Bank of Travancore (2011) 203 Taxman 639 (Ker.)(High Court)

S. 14A : Business expenditure – Disallowance – Exempt income – No expenditure incurred for earning the exempted income. When no expenditure is incurred for earning exempted income disallowance under section 14A cannot be made. ACIT v. Pradip N. Desai, ITA No. 2488/AHD/2008 A.Y. 2005-06 Bench ‘A’ dt. 28/12/2010, Ahmedabad Chartered Accountants Journal, Vol. 34 Part 10 January 2011, Pg. 478 (Trib.)

S. 14A : Business expenditure – Disallowance - Exempt Income - Appellate Tribunal – Power - Applicability of provision of section 14A for the first time before Tribunal. [S. 254(1)]Issue of disallowance under section 14A, cannot be raised for the first time before the Tribunal where the provision of section 14A, was not invoked against the assessee by the Assessing Officer while making disallowance of interest expenditure under section 36(1)(iii) and CIT(A) also at no stage considered the application of section 14A. (A. Y. 2003-04)ACIT v. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 / 128 ITD 146 (Mum.)(Trib.)

S. 14A : Business expenditure – Disallowance - Exempt Income – Apportionment of Expenditure.Assessee made investment for earning tax free income from mix funds and it is not possible to ascertain as to whether the investment in tax free was out of assessee’s own funds and the Assessing having not established the nexus between the borrowed funds and investment in tax free funds disallowance on pro rata basis was not proper. (A. Y. 2003-04 )Dy. CIT v. Maharashtra Seamless Ltd. (2011) 52 DTR 5 / 138 TTJ 244 (Delhi)(Trib.)


S. 14A : Business expenditure - Disallwance - Exempt Income - Interest on Borrowed Funds used to buy shares for trading purposes.In case of assessee, engaged in trading and investment of shares and received tax-free dividend income of in A.Y. 2004-05. It was held by Tribunal that Rule 8D does not apply prior to A.Y. 2008-09 (Godrej & Boyce Mfg. Co. Ltd. (2010) 328 ITR 81 (Bom.) followed). It was further observed that the expression “in relation to” in section 14A means dominant and immediate connection or nexus with the exempt income. In order to disallow expenditure under section 14A, there must be a live nexus between the expenditure incurred and the tax-free income. Disallowance cannot be made on presumptions and estimation by the Assessing Officer. When it is possible to determine the actual expenditure “in relation to” the exempt income or where no expenditure is incurred “in relation to” the exempt income, the principle of apportionment embedded in section 14A has no application. (A. Y. 2004-05)Yatish Trading Co. Pvt. Ltd. v. ACIT (2011) 129 ITD 237 / 50 DTR 158 (Mum.)(Trib.)

S. 14A : Business expenditure – Disallowance - Exempt Income - Disallowance cannot be made for “depreciation”.It was held that section 14A permits a disallowance of “expenditure incurred by the assessee” and not of “allowance admissible” to him. There is a distinction between “expenditure” and “allowance”. The expression “expenditure” does not include allowances such as depreciation allowance. Accordingly, depreciation cannot be the subject matter of disallowance under section 14A (ratio of Nectar Beverages P. Ltd. v. Dy. CIT (2009) 314 ITR 314 (SC) followed);Similarly, it was further held that the deduction under section 80D is not expenditure for earning tax-free income but is a permissible deduction from gross total income under Chapter VIA.Hoshang D. Nanavati v. ACIT (Mum.)(Trib.) Source: www.itatonline.org

S. 14A : Business expenditure – Disallowance - Exempt Income - Interest on borrowings on ground that assessee ought to have repaid borrowings instead of investing in tax-free investments invalid. Where borrowed funds were utilized for business purposes and investment in shares is made out of own funds, then disallowance under section 14A of interest on borrowed fund was not permissible. CIT v. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) (A. Y. 2005-06) Godrej Industries Ltd. v. Dy. CIT (Mum.)(Trib.) Source: www.itatonline.org S. 14A : Business expenditure – Disallowance - Exempt income – Separate Books.The assessee is maintaining separate books of account for the purpose of business. The tax-free investments are in his personal capacity. As the Assessing Officer has not disallowed any expenditure of personal nature out of the business income, the expenditure claimed in the business of share dealings cannot be correlated to the incomes earned in personal capacity that too on dividend, PPF interest and tax free interest on RBI bonds. Accordingly, the estimation of expenditure of Rs. 20,000 out of business expenditure as being incurred for earning tax free income is not acceptable. (A. Y. 2005-06)Pawan Kumar Parmeshwarlal v. ACIT, ITA No. 530/Mum/2009, dt. 11-1-2011, ITAT Mumbai ‘C’ Bench, BCAJ pg. 27, Vol. 42-B, Part 5, February 2011 (Trib.)

S. 14A : Business expenditure – Disallowance - Exempt income – No disallowance if assessee has no tax-free income. Section 14A uses the words “for the purpose of computing the total income under this Chapter ……. expenditure incurred in relation to income which does not form part of the total income under this Act”.



http://itatonline.org/archives/index.php/godrej-boyce-vs-dcit-bombay-high-court-rule-8d-r-w-s-14a-2-is-not-arbitrary-or-unreasonable-but-can-be-applied-only-if-assessees-method-not-satisfactory-rule-8d-is-not-retrospective-and-applies

Thus for the applicability of section 14A there must be (a) taxable income and (b) tax-free income. If either one is absent, section 14A has no applicability. If there is no claim for tax-free income, there cannot be any disallowance under section 14A. If the transaction of lending monies between the assessee and the AE is in foreign currency and the transaction is an international transaction, it has to be evaluated by applying the commercial principles applicable to international transaction. Siva Industries & Holdings Ltd. v. ACIT (2011) 59 DTR 182 (Chennai)(Trib.) Editorial:- CIT v. Walfort Share and Stock Brokers P. Ltd. (2010) 326 ITR 1 (SC), Godrej & Boyce Mfg. Co. Ltd. v. Dy. CIT (2010) 328 ITR 81 (Bom.) & Winsome Textile (2009) 319 ITR 204 (P&H) referred (A. Y. 2006-07)

S. 14A : Business expenditure – Disallowance - Exempt income – Investment - Dividend income.For the applicability of section 14A there must be (i) income which is taxable under the Act, for the relevant assessment year and (2) there should also be income which does not form part of total income under the Act during relevant assessment year. If either one is absent, then section 14A has no applicability. (A.Y. 2006-07).Siva Industries & Holdings Ltd. v. ACIT (2011) 59 DTR 182 (Chennai)(Trib.)

S. 14A : Business expenditure – Disallowance - Exempt income - Old investments - Own funds.Investments in shares were made by the assessee from own funds, no disallowances were made in earlier years. No disallowance can be made for the relevant year. (A.Y. 2005-06).G. D. Metsteel (P) Ltd. v. ACIT (2011) 47 SOT 62 / 64 DTR 161 / 142 TTJ 641 (Mum.)(Trib.)

S. 14A : Business expenditure – Disallowance – Exempt income - No nexus between investment in tax-free securities and borrowed funds - No disallowance to made - Disallowance under section 14A cannot exceed exempt income.In A.Y. 2007-08, the assessee received dividend of in respect of investment in shares made in earlier years. No investments were made during the year. It was claimed that the investment in the earlier years was made out of reserves & surplus and that there was no expenditure incurred during the year to earn the dividend. The Assessing Officer held that as in the earlier years, the assessee had borrowed funds, section 14A applied. It was held that if there is no nexus between borrowed funds and investments made in purchase of shares, disallowance under section 14A is not warranted. (A.Y. 2007-08). ACIT v. Punjab State Co-op & Mktg. (2011)(Chandigarh)(Trib.) (www.itatonline.org)

S. 14A : Business Expenditure – Disallowance – Exempt income – Rule 8D to be applied only after showing how assessee’s method is incorrect.It is a pre-requisite that before invoking Rule 8D, the Assessing Officer must record his satisfaction on how the assessee’s calculation is incorrect. The Assessing Officer cannot apply Rule 8D without pointing out any inaccuracy in the method of apportionment or allocation of expenses. Further, the onus is on the Assessing Officer to show that expenditure has been incurred by the assessee for earning tax-free income. Without discharging the onus, the Assessing Officer is not entitled to make an ad hoc disallowance. A clear finding of incurring of expenditure is necessary. No disallowance can be made on the basis of presumptionsDy. CIT v. Jindal Photo Limited ITA No. 814/Del dt. 29-11-11, BCAJ Dec. 2011 P. 33 Vol. 43-B Part 3 (2011) (Delhi)(Trib.)(www.itatonline.org)

S. 14A : Business expenditure – Disallowance - Exempted income – Proviso - First assessment – Reassessment. (S. 143(1), 147)


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On facts of the assessee, assessment proceedings initially completed under section 143(1). Subsequently Assessing Officer initiated reassessment proceedings in course of which he made certain disallowance under section 14A. Since notice under section 148 was issued to make an assessment at first instance, Assessing Officer was justified in dealing with issue arising under section 14A. Bar stated in proviso to section 14A does not operate in a case of first assessment. (A. Y. 1999-2000).ACIT v. Tube Investments of India Ltd. (2011) 133 ITD 79 (Chennai)(TM)(Trib.)

S. 14A : Business expenditure – Disallowance - Exempted income - Interest free funds.If there were funds available, both interest free and interest bearing, then a presumption would arise that interest free funds have been generated for investments and no disallowance of interest could be made under section 14A. (A. Y. 2004-05).Bunge Agribusiness (India) (P) Ltd. v. Dy. CIT (2011) 64 DTR 201 / 32 ITD 549 (Mum.)(Trib.)

S. 14A : Business expenditure – Disallowance - Exempted income – Dividend - Interest UTI Bonds - Rule 8D.Assessee claimed that no expenditure was incurred for earning for earning tax free income. Assessing Officer held that some expenditure must have been incurred to earn said income and he estimated 1 percent of tax free income and disallowed Rs. 42,130 under section 14A. Commissioner (Appeals) by applying Rule 8D retrospectively, disallowed Rs. 10.29 lakhs. Assessee before Tribunal challenged applicability of Rule 8D. The Tribunal held that Rule 8D was not applicable, however, went into reasonableness of estimation and quantification before Tribunal, estimation as made by Assessing Officer was to be up held. (A. Y. 2004-05).Dy. CIT v. Philips Carbon Black Ltd. (2011) 133 ITD 189 (Kol.)(TM )(Trib.)

A-. SalariesS. 15 : Salaries – Perquisites - Tax paid by employer in respect of salary. (S. 17, Rule 3).Tax paid by employer in respect of salary paid to expatriate employees is salary under Rule 3 of the Income tax Rules, 1962, for purpose of computing value of perquisites in respect of rent free accommodation provided to said employees. (A. Ys. 1996-97 to 1998-99).Mitsubishi Corporation v. CIT (2011) 200 Taxman 372 / 337 ITR 498 / 62 DTR 265 (Delhi)(High Court)

S. 15 : Salaries – Perquisites - Profits in lieu of salary - Tips collected and paid to employees. [S. 2(24), 17(1)(iv), 17(3) ]Payment of banquet and restaurant tips to the employees of assessee in its capacity as employer constitutes salary with in the meaning of section 15 read with section 17(3). (A. Ys.19999-2000 to 2005-06). CIT v. ITC Ltd. (2011) 338 ITR 598 / 59 DTR 312 / 243 CTR 114 / 199 Taxman 412 (Delhi)(High Court)

S. 17(2) : Salaries – Perquisites - Deduction at source - Free education facilities towards of teachers and staff members - Rule 3(5). (S. 192). Assessee school was providing free educational facilities to wards of teachers / staff members and cost of education was less than Rs. 1000 per month per child, assessee was entitled to benefit of proviso to Rule (3)(5) and consequently, could not be treated as assessee in default.CIT v. Delhi Public School (2011) 203 Taxman 81 / 63 DTR 325 (Delhi)(High Court)

S. 17(2)(iiia) : Salaries – Perquisites - Employees stock option - Equity warrant certificates.Warrant issued in February 1999 and assesse exercising option in April 1999.


Perquisites arise and taxable in financial year 1999-2000 relevant to assessment year 2000-2001. Date of exercise of option is date of acquisition of shares and not date of certificate. (A.Y. 2000-01).Dy. CIT v. Vijay Gopal Jindal (2008)13 DTR 490 / 118 TTJ 676 / 27 SOT 175 / (2009) 120 ITD 589 / (2011) 11 ITR 451 (Delhi)(Trib.)

S. 17(3) : Salaries – Perquistes - Profits in lieu of salary – Ex-gratia payment.Assessee took up post retirement as secretary of a club for a period of three years. Club also provided accommodation to assessee. Disputes arose between club and assessee. Assessee filed a police complaint for forcibly removing from club premises. Employment was terminated after end of first year. Termination provided withdrawal of allegations vacate premises allotted to assessee as service accommodation and club would pay Rs. 7.5 lakhs which was equivalent to salary for rest of period of three years. Assessee claimed said amount as exgratia as capital receipt. The Tribunal held that since the amount given to assessee for compensating loss of salary for 25 months. Same would fall with in the ambit of expression “ any compensation” used in sub clause (i) of section 17(3) relating to “profits in lieu of salary” and taxable under said provisions. (A.Y. 2001-02).Yatinder Kumar v. ITO (2011) 133 ITD 237 (Pune)(Trib.)

C-. Income from house property S. 22 : Income from house property - Ownership - Building constructed on land taken on lease and let out - Deemed owner. [S. 23, 27(iii)]Assessee having constructed the building on land taken on lease from NDMC, which is owner, further in view of the provisions of section 27(iii) it is the sub licensee who would be “deemed owner” of those premises which the sub licenses transferred to the occupiers and those occupiers are paying rent/ license fee to the sub-licensees and assessee only collected interest free security deposits from sub licensees and no rent, therefore, provisions of section 23 are not applicable. (A. Y. 1999-2000)CIT v. C. J. International Hotels Ltd. (2011) 53 DTR 92 / 97 Taxman 230 (Delhi)(High Court)

S. 22 : Income from house property - Business income – Sub-let of Property. [S. 28(i)]Where the assessee was engaged in business of manufacturing and sale of food items acquired property on lease for a long period and in turn sub let the same, the income therefrom, was held to be taxable under the head income from house property and not business income as letting out property was not its business activity. Further the letting out was not temporary arrangement. (A. Y. 2003-04)Sheetal Khurana Foods P. Ltd. v. ITAT (2011) 335 ITR 1 / 51 DTR 129 (P&H)(High Court)

S. 22 : Income from house property - Business income - Rental income. [S. 28(i)]Assessee letting out flats in a multi storeyed complex. Assessee was nether in possession of the property nor doing any business there. Income was rightly taxes as income from house property. (A. Y.1996-97)CIT v. Saran Holdings (P) Ltd. (2011) 57 DTR 82 / 241 CTR 527 (Patna)(High Court)

S. 22 : Income from house property - Compensation.Where the assessee was assessed to tax under the head income from house property with respect to notional income of rent deemed to have earned by the assessee after the expiry of lease period, year after year. Thereafter, the compensation actually received by the assessee from the lessee under a settlement agreement, for the occupation of the leased premise after lease period cannot be taxed under a different head than income from house property. Jasmine Commercials Ltd. v. CIT (2011) 56 DTR 159 / 200 Taxman 338 (Cal.)(High Court)


S. 22 : Income from house property - Ownership.Where the builder had received full consideration against the sale of shops and flat the annual value of the property cannot be assessed in the hands of the builder even though the sale deed of the shops and flat were not registered. (A.Y. 1987-88)CIT v. Babu Khan Builders & Ors. (2011) 55 DTR 329 (AP)(High Court) S. 22 : Income from house property - Business income – Partnership firm. Exemption under section 22 in respect of a property now owned by the partnership firm cannot be availed of by an individual co-owner merely because he happens to be a partner of a firm in occupation of a part of the property; therefore, the assessee cannot pray for exclusion of income of the impugned portion in occupation of a partnership firm. Prodip Kumar Bothra v. CIT (2011) 62 DTR 47 / 244 CTR 366 (Cal.)(High Court)

S. 22 : Income from house property - Business income - Leasing.The assessee leased out one of its’ premises to Citibank and shifted its’ own office but continued its’ business. And it obtained an interest-free loan from Citibank i.e. a higher income resulted from exploiting its’ properties. And hence income from leasing ought to be assessed as ‘business income’. (A. Ys. 1989-90 to 1993-94)Scientific Instrument Co. Ltd. v CIT (2011) 202 Taxman 536 (All)(High Court)

S. 22 : Income from house property - Business income - Business of construction and development of residential - Commercial unit. [S. 28(i)]In case where assessee who is engaged in constructions and development of residential/commercial units and where there was no material on record to show that leasing of residential/commercial units was one of the principal objects of the company and that lease rent received by it was from exploitation of property by way of complex activities, the rent income derived as owner of property will be assessed as ‘Income from House Property’. (A. Y. 2003-04)Roma Builders (P) Ltd. v. Jt. CIT (2011) 131 ITD 91 / 60 DTR 231 / 11 ITR 503 (Mum.)(Trib.)

S. 22 : Income from house property - Annual value - Second property - Rent control Act.Assessee having two self occupied properties. In case of the second property, relevant provisions of the Rent control Act were applicable. The Assessing Officer is bound to determine the standard rent of the premises in accordance with provisions of Act. However, where the standard rent has not been determined by the rent control authority, the Assessing Officer is duty bound to do the excise him self and determine the standard rent as per the provisions of the relevant Rent Control Act.Jayantibhai Meghibhai v. Addl. CIT (ACAJ Vol 35 Part 5. August 2011 P. 320) (Ahd.)(Trib.)

S. 22 : Income from house property – Business income - Terrace rent. Income received on lease of a portion of terrace of the building and a wall of the building for the purpose of fixing of hoarding, neon sign, etc, is assessable under the head `Income from House property’Mahalaxmi Sheela Premises CHS Ltd v. ITO, ITAT “B” Bench Mumbai, ITA No. 784, 785 and 786/M/2010 dated 30-8-2011, BCAJ, October– 2011, pg.24, Vol. 43-B, Part 1 (Mum.)(Trib.)

S. 22 : Income from house property – Business income - Letting out premises.


Rental income for letting out premises, which are duly notified as IT Park and can be used only for a specific purpose along with provision of complex service facilities and infrastructure for operation such business is chargeable to tax under the head ‘income from business’. Krishna Land Developers P. Ltd. v. Dy. CIT, ITAT G Bench, Mumbai, ITA No. 1057/M/10, dated 12-8-11, BCAJ, October – 2011, Pg.25, Vol. 43-B, Part 1 (Trib.)

S. 23 : Income from house property - Annual Letting value - Maintenance and other charges.Maintenance and other charges are deductible from rent while calculating annual letting value. (A. Ys. 1996-97 -2000-01).CIT v. R. J. Wood P. Ltd. (2011) 334 ITR 358 (Delhi)(High Court)

S. 23 : Income from house property - Annual value - Property let-out - Licencee- Sub-let Higher value - Tax Planning transaction not “Sham” if parties assessed - Double taxation.The assessee let out its premises to Minicon pursuant to a leave and license agreement. Minicon thereafter let out the said premises to various third parties. One director was common between the assessee and Minicon.It was held that save and except the fact that one of the directors of the assessee company was also a director in Minicon, there is nothing on record to show that the transaction between the assessee and Minicon is a sham transaction. Accordingly, the decision of the Tribunal that the amounts received by Minicon on account of letting out the premises is liable to be assessed in the hands of the assessee on the ground that the transaction between the assessee and Minicon is a sham and bogus transaction cannot be accepted. CIT v. Akshay Textile Trading and Agencies P. Ltd. (2008) 304 ITR 401 (Bom.)(High Court) followed. (A. Ys. 1998-99 to 2002-04) Sahney Kirkwood Pvt. Ltd. v. Dy. CIT (2011) 140 TTJ 338 / 131 ITD 341 / 51 DTR 83 / 9I ITR 51 (Mum.)(Trib.)

S. 23 : Income from house property - Annual value - Interest free deposit.Interest free security deposit taken by assessee highly disproportionate to monthly rent charged. This being the device to circumvent liability to income tax, notional interest on security deposit to be treated as income from house property. (A.Y. 1995-96).CIT v. K. Streetlite Electric Corporation (2011) 336 ITR 348 / 62 DTR 141 / 244 CTR 647 (P&H)(High Court)

S. 23 : Income from house property - Annual value - Vacancy allowance.Where property has not been let out at all during previous year under consideration assessee is not entitled for vacancy allowance as provided under section 23(1)(c). (A.Y 2002-03)Vivek Jain v. ACIT (2011) 202 Taxman 499 / 63 DTR 174 / 337 ITR 74 / 245 CTR 329 (AP)(High Court)

S. 23(1)(a) : Income from house property – Annual value – Notional rent - Interest free depositFor applying provisions of section 23(1)(a) of the Act, municipal valuation / ratable value should be the determining factor. Since the rent received by the assessee was more than the sum for which the property might reasonably be expected to be let from year to year, the actual rent received should be the annual value of the property under section 23(1)(b) of the Act. Notional interest on interest – free security deposit/rent received in advance should not be added to the same.Dy. CIT v. Reclamation Realty India Pvt. Ltd., ITA No. 1411/Mum. 2007, dt. 26-11-2010, ITAT ‘D’ Bench, BCAJ pg. 25, Vol. 42-B, Part 5, February 2011 / Source: www.itatonline.org (Trib.)


S. 23(1)(a) : Income from House Property - Annual Value - Notional Interest - Deposit - Municipal Ratable Value - For Annual Value under section 23, notional interest on deposit not includible. Municipal value is ordinarily ALV for section 23 though Assessing Officer entitled to depart for sufficient cause.Section 23(1)(a) requires determination of the “fair rent” being “the sum for which the property might reasonably be expected to let from year to year”. If on inquiry Assessing Officer finds that the actual rent received is less than the “fair/market rent” because the assessee has received abnormally high interest free security deposit, he can undertake necessary exercise in that behalf. However, by no stretch of imagination, the notional interest on the interest free security can be taken as determinative factor to arrive at the “fair rent”. The ALV fixed by the Municipal Authorities can be the basis of adopting the ALV for purposes of section 23. Also in determining the reasonable/fair rent, extraneous circumstances may inflate/deflate the “fair rent”. (A. Y. 2001-02)CIT v. Moni Kumar Subba (2011) 333 ITR 38 / 199 Taxman 301 / 53 DTR 289 / 240 CTR 97 (Delhi)(High Court)(FB)Editorial:- Refer Dy. CIT v Reclamation Reality India Pvt. Ltd. (ITAT Mumbai) Source: www.itatonline.org(Trib.)

S. 23(1)(a) : Income from House Property - Annual value - Not bound by standard rent, rateble value & can adjust if interest-free deposit reason for low actual rent.It was held that for purpose of determining the ALV under section 23(1)(a) the Assessing Officer has to determine the fair / reasonable rent expected to be fetched by the property. Various factors must be considered by Assessing Officer. Therefore, Notional Interest on interest free security cannot be considered as determinative factor to arrive at fair sent. In the instant case, the matter was remanded back as no inquiry was made by Assessing Officer to determine fair rent under section 23(1)(a). (A. Y. 1992-93, 1993-94)Tivoli Investment and Trading Co. P. Ltd. v. ACIT (2011) 130 ITD 521 / 58 DTR 84 / 139 TTJ 520 (Mum.)(Trib.)

S. 24 : Income from house property – Deduction - Brokerage.Brokerage paid was not an admissible expenditure under section 24. (A. Y. 1997-98) Aravali Engineers P. Ltd. v. CIT (2011) 335 ITR 508 / 237 CTR 312 / 49 DTR 68 (P&H)(High Court)

S. 24 : Income from house property – Deduction - Interest on Loans raised for repayment of original loan - Maintenance charges – Lift - Lighting - Sweeping Charges. (S. 22, 23).Loan raised for repayment of original loan taken to purchase house property partakes the character of original loan and therefore interest paid on such subsequent loan is deductible under section 24 from the rental income of property. Charges paid to the society for the facilities of generator, lift, lighting, etc. were deductible from the gross rent received by the assessee. (A. Y. 2004-05). ACIT v. Sunil Kumar Agarwal (2011) 8 ITR 304 / 139 TTJ 49 (Lucknow)(UO)(Trib.)

S. 24(1)(iv) : Income from house property – Deduction - Annual charge.Remuneration payable to Shebaits by the assessee deity does not amount to annual charge on the property and thus, no deduction under section 24(1)(iv) is permissible. (A. Y. 1997-98).Estate of Sree Sreeradha Kishan Jew v. CIT & Anr (2011) 58 DTR 131 / 243 CTR 137 (Cal.)(High Court)

S. 25B : Income from house property - Arrears of rent. (S. 23)Arrears of rent received in subsequent year cannot be spread over previous years, it is taxable in the year of receipt. (A. Ys. 1996-97 - 2000-01).CIT v. R. J. Wood P. Ltd. (2011) 334 ITR 358 (Delhi)(High Court)


S. 26 : Income from house property - Co-owner - Assessment.Quantification of annual value of co-owned property in course of assessment of AOP consisting of co-owners is not a condition precedent for taxability of individual share of such income in hands of co-owners. (A.Y. 2002-03).Sujeer Properties (AOP) v. ITO (2011) 131 ITD 377 / 138 TTJ 684 / 55 DTR 282 (Mum.)(Trib.)

D-. Profits and gains of business or profession

S. 28(1) : Business Loss - Speculative Loss - Sale and purchase of Units of UTI . (S. 43(5), 70, 73)Assessee tea plantation company purchased units of UTI on cum dividend basis shortly before declaration of dividend and sold the same at a lower price. i.e. ex-dividend immediately after receiving the dividend. Transaction of purchase and sale of units when done as a business in a speculative manner, the loss therefrom could be set off only against profit arising in speculation business. Assessee claimed set off of loss from speculation business against income from tea plantation which is not admissible due to the prohibition contained in section 73(1), however, in view of the Supreme Court decision in Appollo Tyres Ltd. v CIT (2002) 255 ITR 273 (SC) assessee’s claim was sustainable.CIT v. Periakaramalai Tea & Produce Co. Ltd. (2011) 51 DTR 186 / 195 Taxman 185 / 238 CTR 449 (Ker.)(High Court)

S. 28(1) : Business income - Gifts from devotees on birth day – Vocation – Profession - Capital receipt.Assessee as religious head was not performing any religious rituals for his devotees for consideration. He was doing charitable work and spiritualisation for benefit of mankind. Gift received by assessee from devotees out of natural love and affection. Receipt cannot be taxed as income from any vocation or profession.CIT v. Gopala Naicker Bangarue (2011) Tax .L.R. 686 (Mad.)(High Court)

S. 28(i) : Business Income - Capital gains - Tests to determine whether shares gains assessable as STCG or business profits.The Supreme Court vide order dated 15.11.2010 dismissed the Department’s Special Leave Petition against the judgment of the Bombay High Court in CIT v Gopal Purohit (2010) 228 CTR 582 / (2011) 336 ITR 287 (Bom.).CIT v. Gopal Purohit (2011) 334 ITR 308 (St.)(SC)

S. 28(i) : Business income - Capital gains – Firm - Development of property. (S. 45)The assessee firm was carrying on business of dealing in grocery items. The object of the firm included development and sale of property. Firm constructed a commercial complex. The portions of said property was sold in relevant years and consideration received was utilized to clear debt which had been incurred for development of property. Assessee claimed the income as capital gain which was rejected by the Assessing officer and assessed as business income. The Court held that notwithstanding that the objects of firm income would be assessed as capital gains. (A. Ys. 1996-97 to 1997-98 and 1999-2000).CIT v. Pai Provision Stores (2011) 203 Taxman 196 (Karn.)(High Court).

S. 28(i) : Business income - Income from other sources - Interest income. (S. 56)


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The Tribunal has given finding that the borrowings, made by the assessee, were very much part and parcel of assessee’s investment in acquiring the ship. Even the RBI‘s permission was obtained for the same and interest earned from the unutilised portion of the said borrowing will constitute business income.CIT v. Varun Shipping Co. Ltd. (2011) 334 ITR 263 / 203 Taxman 92 (Bom.)(High Court)Editorial- The Supreme court has granted special leave to the department to appeal against this judgment. (2010) 325 ITR (ST) 5 (Bom).

S. 28(i) : Business income - Rent from Leave and License of office premises taxable as “business profits”.Applying the test laid down in Universal Plast Ltd. 237 ITR 454 (SC) as to when income from property is assessable as “business profits” and as “income from house property”. It was held that rental income has to be assessed as “business profits” because (i) all assets of the business were not rented out by the assessee and it continued the main business of dealing in scientific apparatus etc, (ii) the property was being used for the Regional Office and was let out by way of exploitation of business assets for making profit, (iii) the assessee had not sold away the properties or abandoned its business activities. The transaction was a “commercial venture” taken in order to exploit business assets and for receiving higher income from commercial assets.The Scientific Instrument Co. Ltd. v. CIT (2011) 202 Taxman 563 (All.)(High Court)

S. 28(i) : Business income - Capital gains - Sale of land and building constructed thereon. (S. 45)The Court held that in the absence of any finding of the authorities as to the date of acquisition of the property in question by the assessee, matter is remanded to the Tribunal to determine the actual date of acquisition of the property and also to decide afresh the question as to whether the profit arising out of the sale was in the nature of business profit or capital gain. (A. Y. 1997-98).Ramachandra Estate Development & Investment Co. (P) Ltd. v. Jt. CIT (2011) 244 CTR 573 (Bom.)(High Court)

S. 28(i) : Business income - Adventure in the nature of trade - Purchasing land under acquisition by Government - Interest on compensation - Income from other sources. (S. 2(13), 2(14), 56)Compensation received on purchasing land notified for Acquisition by the Government, not held as capital asset was liable to be taxed as business income, as such transaction fall under definition of “adventure in the nature of trade” under section 2(13). Interest on compensation on compulsory acquisition of land is taxable as business income and not as income from other sources. (A. Ys. 2000-01 to 2002-03) Dy. CIT v. Gopal Ramnarayan Kasat (2010) 328 ITR 556 / (2011) 240 CTR 266 / 54 DTR 228 (Bom.)(High Court)

S. 28(i) : Business income - Computation - Cost of land contributed by partner to the firm. (S. 4)In computing the profits and gains of the firm on the sale of property in question, the value of the plot brought by one of the partners by way of capital contribution should be taken as per amount declared in revised returns as valuation of land in question which was accepted by the wealth tax authorities and not at value which was earlier shown in the books. (A. Y. 1972-73 to 1979-1980)Hansallaya Properties v. CIT (2011) 49 DTR 231 / 196 Taxman 496 / 336 ITR 83 (Delhi)(High Court)

S. 28(i) : Business income - Capital gains - Shares PMS fee, even if NAV based, is deductible in computing PMS capital gains. (S. 48) In computing capital gains under section 48, payments are deductible in two ways, one by taking full value of consideration net of such payments and the other by deducting the same as “expenditure incurred wholly and exclusively in connection with the transfer”. The expression “full value of consideration” contemplates additions and deductions from the apparent value. It means the “real and effective


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consideration”, which can be arrived at only after allowing the deductible expenditure. The PMS fee, on profit sharing basis, was for the twin purposes of acquisition and sale of the securities. The fact that bifurcation between the two is not possible is not relevant. Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that brokerage, fees and duties have to added to the cost of investments. (A.Ys. 2004 -05 to 2006-07) (CIT v. Shakuntala Kantilal (1991) 190 ITR 56 (Bom.) followed); Devendra Kothari (2011) 50 DTR 369 (Mum.) (Trib.) not followed). (A. Ys. 2002-03, 2004-05 to 2006-07) KRA Holding & Trading P. Ltd. v. Dy. CIT (2011) 46 SOT 19 (Pune)(Trib.)

S. 28(i) : Business Loss - Bad debt - Claim for “Business loss” maintainable - Website Development Expense is not Capital Expenditure. [S. 37(1)]The assessee, engaged in investment activities, advanced Rs. 27.97 lakhs for development of a website. As the advance was not recoverable, the assessee wrote off the amount and claimed it as a “bad debt” even though the conditions of section 36(1)(vii) & 36(2) were not satisfied. The Assessing Officer rejected the claim though the CIT(A) allowed it. On appeal by the department to the Tribunal, HELD:(i) Though the claim as a ‘bad debt’ is not allowable, the assessee is entitled under Rule 27 to support

the CIT(A)’s order on the ground that the amount should be allowed as a ‘business loss’. The subject-matter of an appeal should be understood not in a narrow and unrealistic manner but should be so comprehended as to encompass the entire controversy between the parties which is to be adjudicated upon by the Tribunal. Such a claim can be considered provided no new facts are needed (Edward Keventer 123 ITR 200 (Del.) & Gilbert & Barker 111 ITR 529 (Bom.) followed);

(ii) On merits, the department’s argument that the amounts paid for development of websites cannot be allowed as business loss because if the websites had been successfully put up, the expenditure would have been capital expenditure is not acceptable. because (a) as the expenditure was abortive, no capital asset has in fact been acquired and (b) even if the website had materialized, it does not result in an advantage of an enduring nature or in the capital field as it is only for the day-to-day running of the business and provision of information.

Dy. CIT v. Edelweiss Capital Ltd. (Mum.)(Trib.) Source: www.itatonline.org

S. 28(i) : Business income - Capital gains - Investment in shares - Despite borrowing, shares gain can be STCG & not business profits.The fact that the assessee borrowed for the purpose of buying shares is not conclusive that the assessee intended to do business in shares and not merely invest in them if the interest is capitalized as cost of the shares & not claimed as a revenue expenditure (Shanmugam 120 ITD 469 (Pune) followed). The fact of borrowing cannot be held against the assessee if there are other predominating factors in favour. Also as the assessee has own funds, it can be presumed that the shares were bought out of those funds. (A. Ys. 2005-06 & 2006-07)Mahendra C. Shah v. Addl. CIT (2011) 58 DTR 242 / 140 TTJ 16 (Mum.)(Trib.)Editorial: CIT v. Gopal Purohit (2010) 228 CTR 582 / (2011) 336 ITR 287 (Bom.) S.L.P. rejected (2011) 334 ITR 308 (St.)

S. 28(i) : Business Income - Development rights – Retirement - Value of flats to be allotted latter Assessee, a builder having constituted a partnership firm with four others by contributing his development rights in a plot and retired from the firm within 11 days. The Tribunal held that the firm is not genuine and entire consideration received was taxable as business income. Value of flats to be allotted to be treated as consideration received, though the flats are to be allotted in future. (A. Y. 2004-05)


ACIT v. Dilip S. Hate (2011) 49 DTR 49 / 136 TTJ 40 / 131 ITD 348 (Mum.)(Trib.)

S. 28(i) : Business Income - Capital gains - Investment in shares. (S. 45)Activity of frequent buying and selling of shares over a short span of period has to be treated as adventure in the nature of trade. The assessee had made only 37 transactions in 35 scripts. In the preceding year the Assessing Officer has accepted the short term gains and long term gains as investment. The Tribunal held that the principle of resjudicata cannot be applied to Income Tax proceedings and each assessment year is independent. The Tribunal also held that the treatment in the books of an assessee is not conclusive. (A. Y. 2005-06).Harsha N. Mehta (Smt.) v. Dy. CIT (2011) 43 SOT 332 (Mum.)(Trib.)

S. 28(i) : Business income - Professional income - AIR Information.In the absence of contrary material brought by the Revenue authorities, that the assessee had received professional fees more than what has been declared by him, no addition should be made by the Assessing Officer on account of non furnishing of partywise details of professional fees received during the year and non–reconciliation of professional fees received with AIR information.S. Ganesh v ACIT (2011) TIOL 87 ITAT-Mum. 701 / (2011) 42-B. BCAJ (March P. 33)(Trib.)

S. 28(i) : Business income - Capital gains - Transactions in shares - Volume and frequency of the transactions. (S. 45)Where the assessee had carried out about 800 transactions in shares of more than 200 listed companies with borrowed funds and the purchases and sale of shares was the only activity of the assessee with a very short holdings period, and substantial time was devoted for such activity, in a regular and systematic manner, the profit from such transactions was rightly treated as business profit as against short-term capital gains claimed by the assessee. (A. Y. 2004-05)Jayshree Pradip Shah v. ACIT (2011) 51 DTR 344 / 131 ITD 326 / 137 TTJ 173 (Mum.)(Trib.)

S. 28(i) : Business income - Capital gains – Volume - Despite Large number of transactions in shares, profit assessable as capital gains - (S. 45).Where assessee is a HUF and offers income from sale of shares as short term capital gain, the fact that the assessee has transacted in 158 shares should not be the sole criterion to come to the conclusion that assessee is a trader in shares. Following circumstances to be considered while assessing such income as capital gain. These are whether (a) the assessee was holding the shares in its books as an investor, (b) the assessee have any office or administration set up, (c) the shares were acquired out of own funds and family funds and not through borrowing, (d) there was not a single instance where the assessee had squared-up transactions on the same day without taking delivery of the shares, (e) In the previous and subsequent assessment years, the Assessing Officer had vide scrutiny assessments treated the assessee as an investor. Nagindas P. Sheth (HUF) v. ACIT (Mum.)(Trib.) Source: www.itatonline.org

S. 28(i) : Business income - Capital gains - Investment in shares – Investor – Trader - Large volume in shares not deciding factor to hold assessee trader - (S. 45).The income of an assessee who has invested in shares to be assessed as capital gain if the following conditions are satisfied. If (a) The assessee was a good timer of purchase and sale of shares thereby substantially increasing his gains in the stock market, (b) The large turnover was because of bulk purchases and sales in a scrip. There were very few transactions of purchase and sale, as the assessee was purchasing in block of a particular share in large volume. Accordingly, large volume cannot be a deciding factor to hold


as a trader, (c) the assessee was not a broker or sub-broker and did not have any office establishment, (d) The assessee did not do any speculative activity nor indulge in any sales without delivery, (e) The shares were shown as capital assets in the books of account, (f) The assessee had not pledged any shares with any financial institutions, nor borrowed any funds.Ramesh Babu Rao v. ACIT (Mum.)(Trib.) Source : www.itatonline.org

S. 28(i) : Business income - Capital gains - Transaction in shares - Share broker - Two separate accounts. (S. 45)Assessee is a broker as well as investor. It has maintained the investment portfolio separately income of which was liable to be taxed as capital gains, as intention in respect of this was to hold the investment as investment only and shown as such in the books of accounts. Income thereon was shown and treated as capital gains in successive assessments. Income to be assessed as capital gains. (A. Y. 2005-06)ACIT v. Bulls & Bears Portfolios Ltd. (2011) 137 TTJ 741 587 / 53 DTR 97 / 48 SOT 587 (Delhi)(Trib.)

S. 28(i) : Business income - Capital gains - Investment in shares – Income treated as STCG – Rule of consistency applied. (S. 45).Though in case of transaction of large volumes, magnitude, frequency, continuity, regularity, the ratio between purchase & sale of shares are treated as income from business, but is in certain circumstances, income from such transactions is treated as STCG as a reason of Rule of consistency propounded by Bombay High Court in Gopal Purohit 228 CTR 582 (Bom), which is squarely applicable. (A. Y. 2006-07) Shantilal M. Jain v. ACIT (2011) 132 ITD 466 / 64 DTR 425 (Mum.)(Trib.)

S. 28(i) : Business income - Capital gains - Gains arising from PMS transactions - Not business profits.Transactions carried out via PMS are in nature of transactions meant for Wealth maximization & not encashing profits on appreciation in value of shares. In case where assessee is engaged in systematic activity of holding of portfolio through PMS manager, it cannot be said that main object of holding the portfolio is to make profit by sale of shares. The high number of transactions are misleading as these are computer split transactions and not independent transactions. Hence, gains arising out of PMS transaction has to be assessed as Capital Gain and not business income. (A. Y. 2006-07)ITO v. Radha Birju Patel (2011)(Mum.)(Trib.) Source: www.itatonline.org S. 28(i) : Business income - Income from other sources – Interest from partnership firmWhen a specific provision has been enshrined in the Act and the income is taxable under the head “Profits & Gains of Business or Profession”, then there is no question of treating the same as income from other sources. (A. Y. 2003-04)ACIT v. Delite Enterprises P. Ltd. (2011) 135 TTJ 663 / 128 ITD 146 / 50 DTR 193 (Mum.)(Trib.)

S. 28(i) : Business income - Subsidy - To meet the part of expenditure incurred - Revenue nature.Subsidy received by Government to meet the part of the expenditure to be incurred for rectification and improvement of power line damaged due to cyclone will be revenue in nature. (A. Y. 1987-88).Dy. CIT v. A. P. State Electricity Board (2011) 130 ITD 1 / 138 TTJ 425 / 55 DTR 52 (Hyd.)(TM)(Trib.)

S. 28(i) : Business income - Valuation of closing stock - Firm dissolved - Business taken over by another concern. [S. 45(4)]


Where assessee firm was dissolved and its closing stock was taken over by another concern, same had to be valued in profit and loss account itself on date of dissolution on market price and excess of market price of closing stock over its book value had to be assessed as business profits of assessee firm. (A. Y. 1992-93).ACIT v. Goel Udyog (2011) 45 SOT 444 (Delhi)(Trib.)

S. 28(i) : Business income - Property rental assessable as “business profits” if commercial activities carried out.Merely because income is attached to immovable property, it cannot be the sole factor for assessment of such income as income from property. Primary object of the assessee while exploiting the property has to be considered. If the main intention is to exploit the immovable property by way of complex commercial activities, the income is assessable as business income. (A. Y. 2006-07)ITO v. Shanaya Enterprises (2011) (Mum.)(Trib.) (www.itatonline.org)Editorial: Sultan Brothers (1964) 51 ITR 353 (SC) explained as not being in conflict with Shambhu Investments (2003) 263 ITR 143 (SC).

S. 28(i) : Business income – Capital gains - Income from purchase and sale of shares – Revision. (S.45, 263)Assessee carried on the activity of buying and selling shares and units of mutual funds in a systematic and regular manner with high frequency and volumes and repetitive purchases and sales of the same scrip throughout the year, the Tribunal held it has to be assesses as business income and the revision order under section 263 directing the Assessing Officer to be assess the same as business income was held to be justified. (A. Y. 2006-07)Spectra Shares & Scrips (P) Ltd. v. Dy. CIT (2011) 62 DTR 411 (Hyd.)(Trib.)

S. 28(i) : Business income - Capital gains - Shares PMS transaction gains are STCG and not business profits. (S. 45)(i) Given the definitions of the term “business” and “capital asset” in section 2(13) & 2(14), shares, if held for more than 12 months, will be a long-term capital asset, inspite of continued and systematic dealings;(ii) On facts, as the assessee had engaged a portfolio manager to look after its’ investments and all decisions to buy and sell were taken by the portfolio manager and not by the asessee, the assessee cannot be called a “dealer”;(iii) The object of the PMS was to maximize the value of the portfolio. It was “wealth maximization” and not “profit maximization”;(iv) In the balance sheet, the shares were valued at cost and not at lower of cost or market value. (A. Y. 2004-05)ARA Trading & Investment Pvt. Ltd. v. Dy. CIT (2011) 47 SOT 172 (Pune)(Trib.)

S. 28(i) : Business income - Method of accounting – Enhanced rate - Sale of flat. (S. 4, 145)Assessing Officer having not brought any material on record to prove that the assessee has sold the flats at a price higher than the price recorded in the books of account, addition made by the assessing officer by enhancing the selling rates cannot be sustained. (A. Ys. 1998-99 to 1999-2000)ACIT v. Dharti Estate (2011) 51 DTR 28 / 129 ITD 1 / 136 TTJ 263 (Mum.)(Trib.)(TM) S. 28(i) : Business loss - Valuation of interest rate swap contract. (S. 145)Loss on account of valuation of interest rate swap contract is allowable as deduction and it cannot be disallowed on the ground that it is a notional or imaginary loss. (A. Y. 2003-04).ABN Amro Securities India (P) Ltd. v. ITO (2011) 133 ITD 343 (Mum.)(Trib.)



S. 28(iiia) : Business income – Accrual – Notional export benefits receivable - Advance licence. (S. 5)It is now a settled law that if a particular income shown in the profit and loss is not taxable under the Act, it cannot be taxed on the basis of estoppels or any other equitable doctrine. Equity is outside the purview of tax laws; Under section 28(iiia), only profit on sale of license should be chargeable but not the profit which may come in future on sale of the licence. (A. Y. 1997-98).GKW v. CIT (2011) 64 DTR 79 (Cal.)(High Court)

S. 28(iv) : Business income – Benefit or perquisite - Benefit arising out of business - Bank loan - Waiver of loan by bank. [S.2 (24), 41(1)]The assessee was not trading in money transactions. A grant of loan by a bank cannot be termed a trading transaction nor construed to be in the course of business. Indisputably, the assessee obtained the loan for the purpose of investing in capital assets. A part of this loan with interest was waived under agreement between the parties. The amount referable to the loans obtained by the assessee towards the purchase of its capital asset could not constitute a trading receipt. Therefore, the facts were totally different from the facts in CIT v. T. V. Sundaram Itengar and Sons Ltd. (1996) 222 ITR 344 (SC). (A. Y. 2001-02).Iskaraemeco Regent Ltd. v. CIT (2011) 331 ITR 317 / 196 Taxation 103 / 49 DTR 185 / 237 CTR 239 (Mad.)(High Court)

S. 28(iv) : Business income – Benefit or perquisite - Waiver of loan – Capital or revenue receipt - Depends on whether loan was used for capital or revenue purposesIt was held that income from waiver of loan depends on the purpose for which loan is taken. In case the loan was taken for acquiring a capital asset, the waiver thereof would not amount to any income exigible to tax under section 28(iv) or 41(1). Whereas, if the loan was taken for a trading purpose and was treated as such from the very beginning in the books of account, its waiver would result in income more so when it was transferred to the P&L A/c in view of CIT v. Sundaram Iyengar and Sons Ltd. (1996) 222 ITR 344 (SC). (A. Y. 2004-05)Logitronics Pvt. Ltd. v. CIT (2011) 333 ITR 386 / 197 Taxman 394 / 53 DTR 50 / 240 CTR 20 (Delhi)(High Court)

S. 28(iv) : Business income - Remission of loan liability. [S. 41(1)]The Tribunal held that since loan received was utilized for acquiring capital assets, the amount remitted was not taxable under section 41(1). As it was remission of liability section 28(iv) was also not applicable.Terra Agro Technologies v. ACIT, ITA No.1503/Mds./2010, Dt.09-06-2011, A.Y.2004-05, BCAJ September 2011, pg. 23, Vol. 43-A, Part 6

S. 28(v) : Business income - Income from other sources - Interest from partnership firm. (S. 56)When there is a specific provision for treating interest and salary, etc. earned by a partner of from a firm as taxable under the head “Profits and gains or business or profession” there is no question of categorizing it under the residual head of income. (A. Y. 2003-04).ACIT v. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 / 128 ITD 146 (Mum.)(Trib.)

S. 28(va) : Business income - Capital or revenue - Non–compete compensation - Prior to A. Y. 2002-03. Section 28(va) inserted w.e.f. A.Y. 2002-03, non-compete compensation is a capital receipt. (S. 4) The payment received as a non competition fee under a negative covenant was always treated as a capital receipt till A. Y. 2003-04. There is a dichotomy between receipt of compensation received for loss of agency, which is treated as revenue receipt and receipt of compensation attributable to negative /


restrictive covenant which is treated as capital receipt. It should be noted that it is only by section 28(va) inserted by Finance Act 2002 w.e.f. 1/4/2003, which is amendatory and not clarificatory that the said capital receipt is now made taxable. (A. Y. 1997-98)Guffin Chem P. Ltd. v. CIT (2011) 239 CTR 225 / 52 DTR 289 / 332 ITR 602 / 198 Taxman 78 / 225 Taxation 383 (SC)

S. 28(va) : Business income – Capital or revenue - Share transfer agreement – Non-compete covenant – No transfer of controlling interest. It was held that a Share Transfer Agreement is merely agreement for sale of shares and is a non-compete covenant. It does not in any manner refer to transfer of any controlling interest. Thus, the amount assessable as business income. (A. Y. 2006-07)ACIT v. R.K.B.K. Fiscal Services Ltd. (2011) 52 DTR 29 / 138 TTJ 1 (Kol.)(Trib.)

S. 28(va) : Business income - Non compete fees - Compensation for not carrying on activity in relation to any business for a period of 11 years - Capital gains. (S. 45)The assessee was one of the promoter of “TP Ltd.” and together with other promoters held substantial shares in the company. By an agreement “I Ltd.” (Acquirer) agreed to purchase share holding of the assessee along with other promoters of “TP Ltd”. The Acquirer with a view to ensure that the promoters after sale of the shares did not indulge in competing business entered in to a non compete agreement whereby the assessee was paid Rs. 2 crores for agreeing not to carry or be engaged, concerned or interest in any competing business for a period of 11 years. The assessee treated the said receipts as capital receipt. The Assessing Officer held that the receipt in question was a fee received for not carrying out any activity in relation to any business and therefore, chargeable to tax under section 28(va). The Tribunal held that for proviso (i) to section 28(va)(a) to apply there must be transfer of the right to carry on any business. The assessee in the instant case was not carrying on any business on his own but was the promoter and director of the company whose shares were purchased by the acquirer. The provisions of section 45 would get attracted only when there is a capital gains arising as a result of transfer of a capital asset. The definition of transfer in given is section 2(47). In a agreement by which the assessee refrained form indulging in a business competing with the promoter, there cannot be transfer in any modes set out in section 2(47) therefore the payments on account of non compete fee cannot be brought to tax under section 45 hence in the instant case the proviso (i) to section 28(va)(a) will not apply. Consequently the receipt in question would be chargeable to tax as business income and not capital gains, accordingly the order of Commissioner was up held. (A. Y. 2007-08).Ramesh D. Tainwala v. ITO (2011) 48 SOT 324 (Mum.)(Trib.)

S. 28(vi) : Business income - Keyman Insurance Policy. [S. 10(10D)]Amount received on maturity of keyman insurance policy is liable to be taxed in hands of assessee for the Asst. Year 2005-06 in view of clarificatory amendment, by the Finance (No. 2) Act, 1996, w.e.f. 1st Oct., 1996, though policy was taken earlier.(A. Y. 2005-06)Binjrajka Steel Tubes Ltd. v. ACIT (2011) 50 DTR 89 / 136 TTJ 113 / 130 ITD 46 (Hyd.)(Trib.)

S. 31 : Repairs and insurance of machinery - Plant and furniture. [S. 37(1)]Expenditure consisted of dismantling, cleaning and inspection of various parts, repairs and replacement of worn out parts, geometrical alignments of machines, painting of machines, overhauling and repair of power transmission unit and replacement of electric panel. Expenditure was on account of current repairs for which deduction would be allowable under section 31(1) as well as under section 37. (A. Ys. 1994-95, 2005-06 & 2006-07)


Bharat Gears Ltd. v. CIT (2011) 337 ITR 368 / 62 DTR 219 (Delhi)(High Court)

S. 32 : Depreciation – Plant - Construction industry - Shuttering material.Each item of shuttering material does not form a plant hence not entitled to 100 percent depreciation under first proviso to section 32(1)(ii).CIT v. Vijay Enterprises (2011) 332 ITR 235 / 59 DTR 98 / 243 CTR 488 / 201 Taxman 324 / Tax L.R. 497 (AP)(High Court)

S. 32 : Depreciation - Non user of asset - Block of assets.The assessee claimed depreciation under section 32 in respect of the assets at its Bhopal unit which was closed for six years. The claim was on the basis that (1) despite closure of the unit there was a “passive user” of the asset were part of the “Block of assets”, depreciation could not be disallowed. Assessing Officer and CIT(A) rejected the claim. Tribunal upheld the claim. On appeal to High Court, the Court held that despite non-user of assets, depreciation is allowable, if it is part of “Block of assets”. (A. Y. 1998-99) CIT v. Oswal Agro Mills Ltd. (2011) 50 DTR 305 / 238 CTR 113 / 197 Taxman 25 (Delhi)(High Court)

S. 32 : Depreciation - Asset used by the firm belong to partner - Insurance on building. Assessee is not entitled to depreciation on factory building owned by it but used in business of firm in which assessee was partner. Insurance charges paid on said building also not allowable. (A. Y. 2005-2006). Karan Raghav Export (P) Ltd. v. CIT (2011) 196 Taxman 504 / 49 DTR 327 (Delhi)(High Court)

S. 32 : Depreciation – Approach road – Inside factory – Building.Approach road constructed by the assessee inside its factory premises should be treated as part of building as such, depreciation has to be allowed on the same.CIT v. Sunshine Glass Indus P. Ltd. (2011) 49 DTR 31 (Raj.)(High Court)

S. 32 : Depreciation – Fluctuation in foreign exchange – To be allowed on outstanding liability though no amount was paid during the year.The Assessing Officer partly disallowed the claim for depreciation calculation on the basis of increased value of assets of the assessee on account of fluctuation of foreign exchange rates. The CIT(A) held that the assessee is following mercantile system of accounting and allowed the claim on the balance outstanding liability. The High Court and Tribunal affirmed the same and also referred to the judgments in the case of CIT v Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) and Oil and Natural Gas Corporation Ltd. (ONGC) v. CIT (2009) 322 ITR 180, wherein it was held that increase and decrease in liability in the repayment of foreign loan should be taken into account to modify the figure of actual cost in the year in which the increase or decrease in liability arises on account of fluctuation in rate of exchange. (A. Y. 1998-99).CIT v. National Hydroelectric Power Corpn. Ltd. (2011) 332 ITR 322 (P&H)(High Court)

S. 32 : Depreciation – Assets in the name of managing director.Depreciation under section 32 was allowable to the assessee company on the assets which were purchased in the name of the managing director of the assessee company and his wife but, used exclusively for the assessee’s business. (A. Y. 2004-05).CIT v Metalman Auto P. Ltd. (2011) 52 DTR 385 / 336 ITR 434 (P&H)(High Court)

S. 32 : Depreciation - Leasing of vehicles - Higher rate of depreciation.


Assessee company engaged in business of leasing of motor vehicles etc to its clients is not entitled to higher rate of depreciation. The basic requirement for being entitled to depreciation at higher rate of 50 percentage under Entry No. 111(2)(ii) of Appendix-I to Income Tax Rules is user of vehicles in business of transportation or business of hire. (A. Ys. 1989-90-1992-93). Bhatwati Appliances v. ITO (2011) 337 ITR 286 / 199 Taxman 131 (Guj.)(High Court)

S. 32 : Depreciation - Actual cost. Where the assessee paid custom duty under protest on imported machinery, the assessee would be entitle to add the same to the cost of the plant and machinery for computing depreciation thereon. (A. Y. 2005-06)CIT v. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Delhi)(High Court)

S. 32 : Depreciation - UPS 60%.Depreciation is allowable at the rate of sixty percent (60%) on U.P.S. (A. Y. 2005-06) CIT v. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Delhi)(High Court)

S. 32 : Depreciation - User of asset - Kept ready for production.Where the plant and machinery were kept ready for production, the assessee would be entitle to claim depreciation under the provisions of section 32 of the Act even though such plant and machinery were not actually put to use by the assessee during the year. (A. Y. 1995-96).CIT v. Shahbad Co-operative Sugar Mill Ltd. (2011) 56 DTR 414 (P&H)(High Court)

S. 32 : Depreciation - Poultry shed.Poultry shed is a building and not a ‘plant’, as such not eligible for higher rate depreciation as applicable to plant and machinery. (A. Y. 1991-92 & 92-93). CIT v.Padmavathi Hatcheries (P) Ltd. & Ors. (2011) 335 ITR 325 / 241 CTR 171 / 55 DTR 105 (AP)(High Court)

S. 32 : Depreciation - Intangible asset - Goodwill - Depreciation allowable. The assessee had purchased a hospital with its land, building, equipment, staff, name, trademark and goodwill as a going concern. Under the sale deed the value of the goodwill included the name of the hospital, its logo and trademark was 2 crores. The Assessing Officer disallowed the depreciation on the goodwill on the ground that it was not covered under section 32(1)(ii). The CIT(A) and Tribunal held in favour of the Department. On appeal to the High Court by the assessee, the High Court while allowing the appeal held that though goodwill is not specifically mentioned in section 32(1)(ii) of the Income-Tax Act, depreciation is allowable not only on tangible assets covered by clause (i) of section 32(1), but also on the intangible assets specifically enumerated in clause (ii) and such other business or commercial rights similar to the items specifically covered there in. The High Court held that, by transferring the right to use the name of the hospital itself, the previous owner had transferred the goodwill to the assessee and the benefit derived by the assessee was a retention of continued trust of the patients who were patients of the previous owner. The amount paid for the goodwill for ensuring retention and continued business in the hospital, it was one acquiring a business and commercial rights and the same was comparable with trademark, franchise, copyright etc., the High Court held that goodwill was covered by the provisions of section 32(1)(ii) entitling the assessee for depreciation. (A.Y. 2004-05).B. Raveendran Pillai v. CIT (2011) 332 ITR 531 / 237 CTR 80 / 194 Taxman 477 / 47 DTR 81 (Ker.)(High Court)

S. 32 : Depreciation - Sale and lease back - Despite tax avoidance, 100% Depreciation on Sale & Lease Back Allowable.


The assessee purchased equipment from the Haryana State Electricity Board (“HSEB”) which was already installed at the Board’s Thermal Power Station at Faridabad and immediately leased the equipment back to the HSEB. The assessee claimed 100% depreciation on the said equipment. The Assessing Officer disallowed depreciation on the ground that the transaction was not one of purchase and lease but was a pure financial and loan transaction.The Hon’ble High Court held dismissing the department appeal that: (i) The real intention of the parties in entering into the sale and lease agreement has to be gathered from the words in the agreement in a tangible and in an objective manner and not upon a hypothetical assessment of the supposed motive of the assessee to avoid tax. (Industrial Development Corporation of Orissa Ltd. v. CIT (2004) 268 ITR 130 (Ori.), CIT v. Rajasthan State Electricity Board (2004) 204 CTR 415 (Raj.) and CIT v. Gujarat Gas Company Ltd. (2009) 308 ITR 243 (Guj.) followed); (ii) In order to deny the claim of depreciation, it would have to be held that the transaction was not genuine and that the same was a subterfuge. Merely because an assessee gets a commercial advantage because of the factoring in of a tax benefit, it cannot be said that the transaction is not genuine. There is no finding or evidence to indicate that the transaction was not genuine. The observations of Chinappa Reddy, J in McDowell & Co Ltd. v. CTO ( 1985) 154 ITR 148 is not good law in view of UOI v. Azadi Bachao Andolan (2003) 263 ITR 706 (SC) where it was held that “tax planning may be legitimate provided it is within the framework of law”;(iii) The observations in Asea Brown Boveri Ltd. v. Industrial Finance Corporation of India (2004) 126 Comp. Cas. 332 (SC) with regard to the nature of a financial lease are not of much use to the revenue in view of the factual backdrop that the transaction has been found to be genuine. Once it is established that the ownership of the equipment is that of the assessee, it is clear that the assessee is entitled to claim depreciation. (A. Y. 1996-97) CIT v. Cosmo Films Ltd. (2011) 338 ITR 266 / 59 DTR 153 / 200 Taxman 384 / 245 CTR 23 (Delhi)(High Court)

S. 32 : Depreciation - Gas Cylinder – Rate - Mounted on a chassis of a truck - Appendix-1.Liquefied gas cylinder mounted on the chassis of the truck is for all purposes as a gas cylinder including valves and regulators as defined in Appendix 1 item III (ii) F (4) of the income tax Rules and therefore depreciation at 100 percent was allowable, instead of 40 percent applicable to transport vehicles.CIT v. Anatha Gas Suppliers (2011) 335 ITR 334 / 59 DTR 116 / 242 CTR 488 (AP)(FB)(High Court)

S. 32 : Depreciation – Unabsorbed - Carry forward and set off.Provisions of section 32(2) as amended w.e.f. 1st April,1997 permit set off of brought forward unabsorbed depreciation firstly against the business profits and then against income under any other head in A. Y. 1997-98 and subsequent assessment years for a period of eight years ,therefore unabsorbed depreciation for the period up to assessment year 1996-97 could be brought forward and set off against income chargeable under the head income from other sources. ( A. Ys. 1989 to 2002-03).CIT v. Kirti Resorts (P) Ltd. (2011) 60 DTR 138 / 243 CTR 340 (HP)(High Court)

S. 32 : Depreciation - Brought forward unabsorbed depreciation - Exempt incomes - Export oriented undertaking – Computation. (S.10B)Deduction under section 10B, has to be granted with reference to the profit of the industrial unit computed under the provisions of the Act, which includes set off of unabsorbed depreciation carried forward from earlier years. (A. Y. 2001-02 to 2005-06).CIT v. Patspin India Ltd. (2011) 62 DTR 364 / 245 CTR 97 (Ker.)(High Court)


S. 32 : Depreciation - Genuineness of purchase of assets – Survey – Disclosure - Revised return - Retraction. (S. 133A)During survey assessee admitted that computer software and hardware were not purchased by it, and it filed a revised return withdrawing the claim of depreciation and offered to tax. Thereafter the assessee filed an affidavit retracting the statement during the course of survey. The Tribunal recorded the finding of fact that during the course of survey neither the assets were found nor the assessee could establish names of the parties form whom computer software and computer hardware were purchased. High Court confirmed the order of Tribunal. (A. Y. 2001-02).B.D.P.S. Software Ltd. v. Dy. CIT (2011) 62 DTR 361 / 245 CTR 19 / (2012) 340 ITR 375 (Bom.)(High Court)

S. 32 : Depreciation - Good will – Assignment. Assessee company acquired cement plant from company C for Rs. 105.30 Crores. Assessing Officer noted that 10 percent of purchase price represented goodwill and on that basis he disallowed depreciation on Rs. 10.53 crores. On appeal, Commissioner (Appeals) held that no value could be assigned to good will and entire sale consideration was to be reduced from value of block of assets on ground that transferor company was established five years ago and through this period it was a loss making unit and thus had no goodwill. The Court held that since cement plant purchased was a loss making unit from its commencement of business and no value was assigned in respect of brand name as a well as goodwill. Assessing Officer was not justified in deducing 10 percent towards estimated value of goodwill from total purchase consideration and disallow proportionate depreciation. (A.Y. 1991-92).CIT v. India Cements Ltd. (2011) 203 Taxman 119 / 339 ITR 31 (Mad.)(High Court)

S. 32 : Depreciation - Ownership - Hire purchaseHirer of an asset under hire purchase agreement is entitled to depreciation in view of the CBDT Circular No. 9 dt. 23-3-1943 (C & P Vol. 10. P. 537 -538 4th Edition). (A. Y. 1995-96)CIT v. Kaveri Engineering Industries Ltd. (2011) 53 DTR 102 (Mad.)(High Court)

S. 32 : Depreciation - User for business - New aircraft ready for the use.Assessee obtained delivery of the new aircraft purchased by it in the later half of the relevant previous year and got the same insured, it was held that the aircraft was made ready to use in business, hence, depreciation was allowable. (A. Y. 1998-99)EIH. Ltd v. CIT (2011) 54 DTR 249 / 338 ITR 503 / 244 CTR 353 (Cal.)(High Court)

S. 32 : Depreciation - Discontinuance of business.Assessee company did not do any hotel business after its hotel building was washed away in floods in September, 1995. However, assessee company being a juristic entity incorporated under the Companies Act, did not cease to exist. Since, it has to fulfill its obligations imposed by Companies Act till it is would up some, staff has to be maintained. Therefore, once the assessee company is in existence, it is entitled to depreciation though it has discontinued its business. (A. Ys. 1998-99 to 2002-03).CIT v. Kirti Resorts (P) Ltd. (2011) 60 DTR 138 / 243 CTR 341 (HP) (High Court)

S. 32 : Depreciation - Intangible asset - Abkari licence.Abkari licence is a business rights given to the party to carry on liquor trade, on which the assessee is entitled to depreciation at 25 percent. It falls within the definition of intangible asset as per section 32(1)(ii). (A. Y. 2004-05).Ambika (S) v. Dy. CIT (2011) 245 CTR 103 / 203 Taxman 2 (Mag.)(Ker.)(High Court)


S. 32 : Depreciation - Charitable trust. (S. 11)Assessee charitable trust is entitled claim for depreciation on the assets owned by it. If depreciation is not allowed as a necessary deduction in computing the income of a charitable trust, then there would be no way to preserve the corpus of trust. (A. Ys. 2004-05 to 2006-07).CIT v. Shri Gujarati Samaj (Regd.) (2011) 64 DTR 76 (MP)(High Court)

S. 32 : Depreciation – Rate – Hardware – Computer.Assessee engaged in printing business, used certain hardware for execution of printing process, said hardware could not be categorized as ‘computer’ and would not be eligible for higher depreciation. It is only where machine is being used essentially and predominantly for computing capability and where it is not being harnessed for other specialized industrial uses, be it mechanical, electric or electronic (or a composite thereof) activity that it could be called as a computer. (A.Y. 2005-06).S. T. Reddiar & Sons v. Dy. CIT (2011) 129 ITD 475 / 135 TTJ 480 / 49 DTR 326 / 7 ITR 1 (Cochin)(Trib.)

S. 32 : Depreciation - Actual cost - Registered valuation report - Slump sale. [S. 43(1)]It was held by Hon’ble Mumbai Tribunal that where cost of fixed assets was adopted by assessee on basis of registered valuer’s report and there was no evidence of transaction a collusive one, or to reduce tax liability and there being no clause for payment of goodwill, the assessee was entitled to depreciation on actual cost shown in the books of accounts. (A. Y. 2000-01)Dy. CIT v. Lafarge India Ltd. (2011) 9 ITR 118 / 49 DTR 289 (Mum.)(Trib.)

S. 32 : Depreciation - Toll road - Business of setting up of infrastructural facilities.Assessee was entitled to depreciation on toll road which is constructed on “Build–own-operate-transfer” basis (A. Ys. 2003 & 2004-05).Gujarat Road & Infrastructure Co. Ltd. v. CIT (2011) 56 DTR 73 / 139 TTJ 718 / 7 ITR 730 (Ahd.)(Trib.)

S. 32 : Depreciation - Block of assets - Sale of assets - Closure of one manufacturing activities. (S. 50).Assessee having closed down its manufacturing activities in one of Unit and sold all the assets of that unit except motor vehicles and software, block of assets, viz, building and plant and machinery, ceased to exist and thereafter these assets neither belonged to the assessee nor were used for the purpose its business and therefore, assessee is not entitled to depreciation thereon. (A. Ys. 2005-06 and 2006-07).Sony India (P) Ltd. v. Addl. CIT (2011) 56 DTR 156 / 141 TTJ 432 (Delhi)(Trib.)

S. 32 : Depreciation – Goodwill - Commercial rights - Commercial benefits.Where the assessee has made the excess payment over and above the cost of intangible assets and that excess payment was claimed to have been made against goodwill, only the portion of goodwill representing cost of acquisition of the commercial rights shall be eligible for depreciation and not the portion relating to acquiring commercial benefits. On the facts Tribunal directed the Assessing Officer to divide the entire cost of goodwill in two parts and 50 percent of the cost of the goodwill be treated as a cost of acquisition of the commercial rights and allow the depreciation thereon at a prescribed rate. (A. Ys. 2005-06 & 2006-07).Jeypore Sugar Company Ltd. v. ACIT (2011) 56 DTR 229 / 139 TTJ 475 / 44 SOT 625 (Visakha)(Trib.)

S. 32 : Depreciation - Computer peripherals - Printers – Scanners – servers - UPS.


Computer peripherals such as printers scanners, servers, UPS, etc., form integral part of computer system on which higher depreciation of 60% is allowable. (A. Y. 2005-06).ITO v. Omni Globe Information Technologies India (P) Ltd. (2011) 131 ITD 280 / 141 TTJ 86 / 60 DTR 374 (Delhi)(Trib.)

S. 32 : Depreciation - Trust - Cost of asset allowed as application of income. Claim of depreciation by assessee trust in respect of assets, cost of which had been claimed as an application of income towards its objects, would amount to double deduction which is prohibited by law. (A. Y. 2005-06).Dy. DIT v. Adi Sankara Trust (2011) 46 SOT 230 / 64 DTR 449 (Coch.)(Trib.)

S. 32 : Depreciation – Building - Landscaping expenses – Hotel - Storage tank.Since the assessee is in Hotel business its building is not merely a structure of four walls but includes all such things as are necessary to give the building better look and is a matter of attraction for the customers, therefore, Landscaping done by assessee in its hotel is to be treated as “building” and depreciation is allowable.Payments made by assessee to NDMC for unauthorized occupation, construction of diesel storage tanks and fire fighting tanks and covering sanitary lines without approval in respect of the hotel acquired by it from the Central Government formed part of purchase consideration as these payments were made to perfect the title of the assessee in the property and the amount being capitalized the assessee is entitled for depreciation. (A. Ys. 2003-04 to 2007-08)Dy. CIT v. Hotel Excelsior Ltd. (2011) 60 DTR 450 / 141 TTJ 248 (Delhi)(Trib.)

S. 32 : Depreciation – Rate – Printers - UPS.Printers and UPS fall within the class of computer peripherals and therefore, eligible for depreciation at the rate of 60%. (A. Y. 2006-07)Haworth (India) (P) Ltd. v. Dy. CIT (2011) 140 TTJ 446 / 11 ITR 757 / 131 ITD 215 / 58 DTR 36 (Delhi)(Trib.)

S. 32 : Depreciation - Computer system - Trial period – VSAT - Equipments located in members premises.Computer system which stood installed and used for trial period would also constitute “user” for purpose of depreciation under section 32 .Assessee is entitled to depreciation in respect of VSAT network equipment installed at the premises of members. (A. Ys. 1997-98,1998-99 and 2001-02).ACIT v. National Stock Exchange of India Ltd. (2011) 133 ITD 27 / 62 DTR 329 / 142 TTJ 189 (Mum.)(Trib.)

S. 32 : Depreciation - Block of assets – Ownership - Purchase of shares with right to occupy premises.The assessee made total payment of ` 4.44 crores to WRPL which has been divided in to two parts viz. consideration for shares at ` 2.76 crores and non–refundable construction of ` 1.67 crores. Both these payments are aimed at acquiring, using and occupying the property. But for the purchase of shares it is not permissible to became member. The assessee is entitled to depreciation on the entire consideration.(A. Y. 2000-2001)SRI Adhikari Brothers Television Networks Ltd. v. ACIT (2011) 52 DTR 295 / 130 ITD 439 / 137 TTJ 424 (Mum.)(Trib.)

S. 32 : Depreciation – Website.


In view of the amendment of Appendix I w.e.f. Asst. Year 2003-04 allowing depreciation @ 60 percent on software, depreciation is allowable on expenditure for development of website @ 60 percent. (A. Ys. 2003-04 & 04-05)Dy. CIT v. C. M. Y. K. Printech Ltd. (2011) 53 DTR 59 (Delhi)(Trib.)

S. 32 : Depreciation - Intangible assets – Goodwill. Depreciation is allowable on specified intangible assets like, license or any other business or commercial rights of similar nature and not on Goodwill. (A. Ys. 2002-03 to 2004-05)Osram India (P) Ltd. v. Dy. CIT (2011) 51 DTR 297 / 137 TTJ 749 (Delhi)(Trib.)

S. 32 : Depreciation – Non-compete fee.Non-compete fee is not in the nature of knowhow, patents copy right, trade marks, licenses or franchises within the meaning of section 32(1)(ii), depreciation is not allowable.Sharp Business Systems (India) Ltd. v. Dy. CIT (2011) 59 DTR 385 / 133 ITD 275 (Delhi)(Trib.)

S. 32 : Depreciation - Intangible assets - Leasehold rights over the land - User of brand name, Trade mark, Logo, design - Slump sale.Lease hold rights cannot be considered as an intangible asset as per the provisions of section 32(1)(ii), hence not entitled depreciation. Where the assessee had purchased the user of brand name, trade mark, logo, design, drawings, manufacturing process and technical knowhow in respect of the products manufactured by unit which was acquired by assessee at a slump price, expenditure allocated by approved valuer is capital expenditure, assessee is entitled depreciation on the said amount. (A. Y. 2006-07).Drilbits International (P) Ltd. v. Dy. CIT (2011) 62 DTR 171 / 142 TTJ 86 (Pune)(Trib.)

S. 32 : Depreciation – Unabsorbed - Business discontinued.The business of assessee as carried on in earlier years had been discontinued , in view of provisions of section 32(2) as amended with effect from 1-4-2002, assessee’s claim of set off of unabsorbed depreciation pertaining to those years against income of current year was to be rejected. (A. Ys. 2002-03, 2004-05 and 2006-07).Vidhyavihar Containers Ltd. v. Dy. CIT (2011) 133 ITD 363 (Mum.)(Trib.)

S. 32 : Depreciation – Amalgamation - Second proviso - Quantification.The assets have been acquired and used from 29th August, 2003. In this case therefore proportion adopted by the assessee as fifty–fifty seems to be correct, however this apportionment has to be done out of total depreciation which was allowable at 100 percent in view of second proviso i.e. Amalgamating company has rightly claimed the depreciation for the first six months because only depreciation of six months has been claimed in the case of amalgamated company. The Tribunal set a side the order of Commissioner (Appeals) and directed the Assessing Officer to allow the depreciation for six months. ( A. Y. 2004-05). Bunge Agribusiness (India) (P) Ltd. v. Dy. CIT (2011) 64 DTR 201 / 132 ITD 549 (Mum.)(Trib.)

S. 32 : Depreciation - Additional depreciation - Enhancement of installed capacity - Qua Business or Qua an Undertaking.Assessing Officer held that enhancement of installed capacity had to be considered in respect of whole business and not with reference to one single unit and disallowed additional depreciation. Tribunal held that one should consider increase in capacity of an undertaking in which additional machinery was installed.


Since concerned unit was an independent unit which had increased its capacity by more than 10 percent, said undertaking, satisfied conditions prescribed in section 32, hence additional depreciation was to be allowed there on. (A. Y. 2005-06).NRB Bearings Ltd. v. Dy. CIT (2011) 133 ITD 306 (Mum.)(Trib.)

S. 32 : Depreciation – Quantification – Amalgamation of companies. Assessee amalgamating company having acquired assets on 29th Aug., 2003 and amalgamated with another company on 1st Oct., 2003 had rightly claimed the depreciation at fifty per cent which was allowable at 100 per cent as per second proviso to section 32(1). (A. Y. 2004-05)Bunge Agribusiness (India) (P) Ltd. v. Dy. CIT (2011) 64 DTR 201 / 132 ITD 549 (Mum.)(Trib.)

S. 32(2) : Depreciation – Unabsorbed - Carry forward and set off - Exempted income - Income from other sources. [S.10B(6), 56, 72(2)] Assessee being entitled to deduction under section 10B upto A.Y. 2005-06, provisions of section 10B(6) are not applicable in the relevant A.Y. i.e. 2004-05 and therefore, unabsorbed depreciation brought forward from assessment years prior to A.Y. 2000-01 can be set off against business income or against any other head of income including income from other sources. (A. Y. 2004-05).Dy. CIT v. Akay Falvours & Aromatics (P) Ltd. (2011) 55 DTR 1 / 130 ITD 41 / 138 TTJ 513 (Coch.)(TM )(Trib.)

S. 32A : Investment allowance - X-ray machines ultrasound scanner angiography etc. The assessee is a public limited company engaged in the business of running hospitals. The assessee had claimed investment allowance in respect of the equipments such as x-ray machines, ultrasound scanners, angiography, gamma camera, etc. The Assessing Officer was of the view that hospital is not engaged in manufactured production of any article or thing which is a prerequisite for grant of investment allowances, and therefore disallowed the investment allowance claim by the assessee. The CIT(A) and Tribunal held in favour of the assessee. On appeal to the High Court by the Department, the High Court while dismissing the appeal held that medical instruments provide a basic knowledge to diagnose and treat diseases and enable doctors to study how diseases progress in human bodies and compare how biological processes work in a healthy body. The High Court further held that speed and technology are improving human life and the progress of scientific and technical knowledge cannot be ignored and therefore held that medical equipment used by hospitals are entitled to investment allowance under section 32A of the Income Tax Act 1961. (A. Y. 1989-90)CIT v. Apollo Hospital Enterprises (2011) 338 ITR 68 / 242 CTR 229 / 56 DTR 297 (Mad.)(High Court)

S. 32AB : Investment deposit account- Amount paid as advance for purchase of machinery.Amount given in advance for purchase of plant and machinery amounts to utilization in the year for the purpose of section 32AB(1)(b). Installation of plant and machinery is not a condition precedent for availing the benefit of section 32AAB. (A. Y. 1989-90).CIT v. Vindhya Telelinks Ltd. (2011) 63 DTR 313 (MP)(High Court)

S. 35(1)(iv) : Business expenditure - Expenditure on scientific research - Chapter VI-A deduction. (S. 80B(5), 80HH, 80I)Deduction under section 35(1)(iv) read with section 35(2) has to be first allowed in computing of business income as a whole and thereafter deductions under section 80HH and 80I have to be granted only from net income attributable to the eligible industrial unit.CIT v. Duroflex Coir Industries (P) Ltd. (2011) 55 DTR 133 / 245 CTR 606 (Ker.)(High Court)


S. 35(1)(iv) : Business expenditure - Expenditure on scientific research - Capital expenditure - Development of software.Business of the assessee being development of software for its clients and not solely research and development, any expenditure in doing so cannot itself fall within the parameters of section 35(1)(iv) and cannot be allowed as deduction under that section. (A. Y. 2002-03).3i Infotech Ltd. v. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 / 129 ITD 422 (Mum.)(Trib.)

S. 35A : Business expenditure - Expenditure on acquisition of patent rights or copy rights - Business expenditure - Patent - Copy right. [S. 37(1)]Royalty paid by assessee for use of the brand names and trade marks, and not for acquiring the same, the provisions of section 35A cannot be applied, the expenditure allowable as business expenditure. (A. Ys. 1997-98 to 1999-2000).CIT v. V. R. V. Breweries & Bottling Industries Ltd. (2011) 62 DTR 121 / 244 CTR 576 (Delhi)(High Court)

S. 35AB : Business expenditure - Expenditure on know-how - Purchase of designs and drawings - Consultancy charges. [S. 37(1)]Assessee has paid Rs. 11,39,195 for purchase of designs and drawings. Out of which 10,39,195 was paid for getting designs and drawings for manufacturing of opening roller, while remaining amount of Rs. 1,00,000 was paid as a consultancy charges. Assessee claimed entire deduction under section 37(1). Assessing Officer has allowed only 1/6th of expenditure under section 35AB. On appeal, Commissioner (Appeals) held that entire expenditure was allowable under section 37(1). Tribunal up held the order of Commissioner (Appeals). On further appeal to High Court, the High Court held that the amount spent for acquiring technical knowhow for increasing its product range therefore it attract the provision of section 35AB, hence only 1/6th of the said amount would be deductible in relevant assessment year. In respect of consultancy charges provisions of section 35AB cannot be applied, the said amount will be allowable under section 37(1) of the Income-tax Act. (A. Y. 1990-91).CIT v. Lalkshmi Card Clothing Manufacturing Co. Ltd. (2011) 203 Taxman 647 (Mad.)(High Court)

S. 35D : Business expenditure - Amortisation of certain preliminary expenses - Public issue expenses.Assessee company was incorporated in 1976, hence, public issue expenses relating to assessment year 1995-96 could not be claimed under section 35D. (A. Ys. 1999-2000 and 2001-02). CIT v. Shasun Chemicals & Drugs Ltd. (2011) 199 Taxman 107 (Mad.)(High Court)

S. 35D : Business expenditure - Amortisation of certain preliminary expenses -- Issue of shares capital base.Expenditure incurred on issue of shares so as to increase its capital base did not qualify to be amortised under section 35D. (A. Y. 2006-07).Medreich Ltd. v. Dy. CIT (2011) 48 SOT 579 (Bang.)(Trib.)

S. 35DDA : Business expenditure - Amortisation of expenditure under voluntary retirement scheme-Amalgamation or demerger - -Payment to employees on voluntary retirement – [S. 10(10C), 37 (1)]Section 35DDA would be attracted only when payment has been made to an employee in connection with his voluntary retirement, in accordance with the scheme or schemes of voluntary retirement. Since the payment reduces the burden on the assessee relatable to subsequent years, the legislature inserted this section in order to allow only 1/5 of total sum paid by the assessee to its employees. This amount in the


hands of the employee has been exempted under section 10(10C) to the extent of Rs. 5 Lakhs. Provisions of section 35DD were not attracted in the matter of VRS compensation paid to the retiring employees as the conditions of Rule 2BA were not met and the said expenditure is allowable under section 37(1). (A. Y. 2003-04) Dy. CIT v. Warner Lambert (India) (P) Ltd. (2011) 56 DTR 121 (Mum.)(Trib.)

S. 35DDA : Business expenditure - Amortisation of expenditure under voluntary retirement scheme- Amalgamation or demerger - Business expenditure -Scheme floated by the assessee giving option to the employees of one unit. (S. 10(10C), read with Rule 2BA).The scheme floated by the assessee giving option to the employees of one unit to leave its employment without any qualifying condition regarding age or length of service against payment of compensation is to be treated as VRS though it is not conformity with Rule 2BA and assessee is entitled to deduction of one fifth of the expenditure incurred on the payments under then scheme in accordance with the provisions of section 35DDA. (A. Ys. 2005-06 & 2006-07). Sony India (P) Ltd. v. Addl. CIT (2011) 56 DTR 156 / 141 TTJ 432 (Delhi)(Trib.)

S. 35E : Business expenditure - Deduction for expenditure on prospecting etc, for minerals.Where the assessee incurred a loss, the deduction under section 35E is not available. (A. Ys. 1997-98 & 2000-01 to 2004-05).Singareni Collieries Company Ltd. v. ACIT (2011) 141 TTJ 593 . 133 ITD 213 / 57 DTR 28 (Hyd.)(Trib.)

S. 35E : Business expenditure – Deduction for expenditure on prospecting etc. - Minerals.Assessee which is engaged in prospecting and exploration of minerals, it also provided consultancy services in same field, expenditure incurred towards prospecting and exploring activities were capitalized and amortization of same was claimed under section 35E. Expenditure incurred to earn consultancy service were claimed as business expenditure under section 37(1). Assessing Officer held that all the expenditure were to treated as eligible for amortisation under section 35E. The Tribunal held that only such expenses which are incurred wholly and exclusively on any operations relating to prospecting as envisaged under provisions of section 35E(2) read with section 35(E)(5)(a), and rest of unconnected expenses which may have been incurred by an assessee are eligible deduction in normal course of computation of business income. (A. Y. 2005-06).De Beers India (P) Ltd. v. Dy. CIT (2011) 48 SOT 506 /(2012) 13 ITR 1 (Mum.)(Trib.)

S. 36(1)(ii) : Business Expenditure - Bonus or commission – Section bars tax avoidance scheme of paying commission instead of dividend.(i) The argument that Section 36(1)(ii) is applicable only to employees who are not shareholders is not acceptable because payment of dividend to shareholders is not compulsory. Section 36(1)(ii) applies to all employees including shareholder employees though the disallowability is restricted to partners and shareholders because it is only in those cases that payment can be said to be in lieu of profit or dividend;(ii) The argument that as no dividend was “payable”, section 36(1)(ii) does not apply is not acceptable because the word “payable” does not mean that dividend should be statutorily or legally payable. Since payment of dividend is discretionary and not compulsory, any such construction will lead to absurd results. The word “payable” means that dividend would have been declared by any reasonable management on the facts and circumstances of the case considering the profitability and other relevant factors and become payable to shareholders. If a reasonable conclusion can be drawn that the dividend ought to have been paid and that instead of paying dividend, commission was paid, section 36(1)(ii) would be attracted;


(iii) On facts, there is no evidence to show that the directors had rendered any extra services for payment of huge commission in addition to services rendered as an employee for which salary was paid. Further, though the turnover and the profit was exceptionally high as compared to the earlier years, this was because of the stock market boom. The assessee being a share broker gets commission on sale/purchase of shares by investors/traders and its income is assured irrespective of whether the investor/ trader loses or gains in the transaction. The steady rise in performance was due to improved market conditions and not because of any extra service rendered by the directors. Also, no dividend was declared even though any reasonable management would have declared at least about 20% dividend in the years when there were substantial profits; (iv) The device adopted by the assessee was obviously with the intention to avoid payment of full taxes. There is obvious tax avoidance. Section 36(1)(ii) is intended to prevent escape from taxation by describing the payment as bonus or commission when in fact it should have reached the shareholders as profit or dividend (Loyal Motor 14 ITR 647 (Bom) referred) Dalal Broacha Stock Broking Pvt. Ltd. v. ACIT (2011) 10 ITR 357 / 131 ITD 36 / 59 DTR 41 / 140 TTJ 128 (Mum.)(SB)(Trib.)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - to settle loan liability of sister concern.Interest on loan obtained by assessee to settle liability of its sister concern, to retain business premises of assessee the same is allowable. (A. Y. 1997-98)CIT v. Neelkanth Synthetics and Chemicals P. Ltd. (2011) 330 ITR 463 (Bom.)(High Court)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Interest and Penalty under Sales Tax Act.Interest paid on funds borrowed for interest and penalty under Sales Tax Act for belated payment allowable as business expenditure. Revenue appeal was dismissed as no substantial question of law.CIT v. International Fisheries Ltd. (2011) 220 Taxation 11 (Bom.)(High Court)

S. 36(1)(iii) : Business expenditure – Interest on borrowed capital.Where the assessee was having sufficient non-interest bearing fund by way of share capital and reserves and there was no nexus between the borrowings of the assessee and advances made by it, no disallowance under section 36(1)(iii) of the Act was called for. (A. Y. 2001-02, 2003-04, 2004-05) CIT v. Bharti Televenture Ltd. (2011) 331 ITR 502 / 51 DTR 98 (Delhi)(High Court)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Investment in sister concern - Shares of subsidiary - Control over the company.Investment made by the assessee company out of bank overdraft in the shares of its subsidiary company to have control over that company being an integral part of its business, interest paid by the assessee which is attributable to said borrowings is allowable as deduction under section 36(1)(iii).CIT v. Phil Corporation Ltd. (2011) 61 DTR 15 / 244 CTR 226 / 202 Taxman 368 /(Bom.)(High Court)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Interest payable on loans. The assessee was in the business of trading in shares and had claimed interest on loans obtained for business. The shares had been shown under ‘Investments’ in its’ books and hence the Assessing Officer disallowed interest on borrowings. It was held that treatment in books was not conclusive and given the nature, volume of the assessee’s business, it was clear that the assessee was trading in shares and hence interest could not be disallowed.


CIT v. Aravind Prakash Malpani (2011) 200 Taxman 41 (Karn.)(Mag.)(High Court)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Loans utilized for making advances for acquisition of Machinery -Expansion of the existing business.Interest paid in respect of loans utilized for acquisition of new machinery for expansion of the existing business, interest relating to prior to utilization of the machinery was rightly disallowed by the tribunal by invoking proviso to section 36(1)(ii). (A. Y. 2005-06).Power Drugs Ltd. v. CIT (2011) 62 DTR 276 / 245 CTR 623 (P&H)(High Court)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Year of allowability -Compromise decree.Assessee could not repay the loan due to financial difficulty. Lender filed the suit and demanded the interest. After some time a consent decree was passed on 8-2-2001 on which the assessee has agreed to repay the loan with interest. The assessee claimed the interest as deduction on the ground that same was crystallised when the consent term was passed. Assessing Officer held that the interest cannot be allowed in the relevant year. The Court held that since compromise decree was passed on 8-2-2001, assessee was entitled to claim deduction of that liability in year in question. (A. Y. 2000-01).CIT v. Jain Studio Ltd. (2011) 203 Taxman 522 (Delhi)(High Court)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Investment as capital in partnership firm.Interest paid on borrowed amount invested in as capital of partnership firm, interest expenditure allowable under section 36(1)(iii) and no disallowance can be made under section 14A. (A. Y. 2003-04)ACIT v. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 / 128 ITD 146 (Mum.)(Trib.)

S. 36(1)(iii) : Business expenditure - Interest on borrowed capital - Advance to sister concern - Mutual accommodations - Commercial expediency.When there is mutual accommodation by both parties in terms and lending and borrowing from each other, the assessees claim of commercial expedient has to be accepted. (A. Y. 2004-05).Ramkishin Textiles P. Ltd. v. ITO (2011) 9 ITR 321 (Mum.)(Trib.)

S. 36(1)(vii) : Business expenditure - Bad debts - Non financial company - Bank Guarantee.Assessee being a non banking financial company, its activity of giving guarantee on behalf of another company was part of its money lending business and ,therefore, the security amount adjusted by the bank against the dues of the said company following default on the part of the latter which has became irrecoverable is allowable as bad debt. (A. Ys. 1998-99, 1999-2000 & 2003-04).CIT v. Tulip Star Hotels Ltd. (2011) 57 DTR 210 (Delhi)(High Court)

S. 36(1)(vii) : Business expenditure - Bad debts - Write off in the books. Where the assessee had written off certain debts as bad in its books of accounts, there is no further requirement to prove that the debts was a trade debt or the fact that it is irrecoverable. (A. Y. 1996-97 & 98-99)CIT & Anr. v. Krone Communication Ltd. (2011) 333 ITR 497 / 53 DTR 120 (Karn.)(High Court)

S. 36(1)(vii) : Business expenditure - Bad debts - Proprietorship taken over by a Private limited company. [S. 36(2)]


When assessee succeeded the business of predececessor taking over all asets and liabilities in cluding the debt, when the income represented such debtors was taken in to consideration in assessment of proprietorship concern, bad debt is allowable in the hands of sucessorn private limied company under section 36(2), r.w. 36(1)(vii).The Court followed the judgment of Apex court in CIT v. Veerabhadra Rao, K.Koteswara Rao & Co. (1985) 155 ITR 152 (SC). A-I Acid Private Limited v. Dy. CIT (2011) October ACAJ P. 463( Vol 35 Part 7-8 P. 463) (Guj.)(High Court)

S. 36(1)(vii) : Business expenditure - Bad debts - Alternative claim - If “bad debt” not allowable under section 36(1)(vii), claim for deduction under section 37(1) can be raised for first time even before High Court. [S. 37(1)]If loss of debt does not come within section 36(1)(vii), a claim can be made under section 37(1). Merely because claim was made under one provision of Act and not under another provision, it does not debar the assessee from claiming deduction under section 37(1) even if it was not raised before lower authorities. (A. Y. 1986-87) Mohan Meakin Ltd. v. CIT (2011) 59 DTR 401 (Delhi)(High Court)

S. 36(1)(vii) : Business expenditure - Bad debts - Business loss - If Not ‘Bad Debt’, ‘Business Loss’ claim sans specific ground invalid. (S. 28(i), Income-tax (Appellate Tribunal) Rules, 1963 - Rule 27)Before the Tribunal, the assessee raised a ground only on “bad debt” (and not “business loss”). At the hearing, it conceded the claim for “bad debt” and pressed for the claim for “business loss”. The Tribunal held that the claim regarding “business loss” cannot be entertained because, though the CIT(A) has dealt with the issue, there is no specific ground. The claim is also not maintainable under Rule 27 since that applies only to a Respondent in the appeal. (A. Y. 2003-04).Manori Properties Pvt. Ltd. v. ITO (Mum.)(Trib.) www.itatonline.orgEditorial : A contra view, in the same fact-situation, was taken in Mohan Meakin v Dy. CIT (2011) 59 DTR 401 (Delhi)(High Court). The High Court held that if grant of relief on another ground is justified, the Tribunal would be under a duty to grant that relief.

S. 36(1)(vii) : Business expenditure - Bad debts - Assessee only to write it off as bad debt - Not required to prove that debts had became bad.A mere write-off of bad debt was sufficient under section 36(1)(vii) and that it was not necessary for the assessee to establish that debt had actually become bad. The law settled by the Supreme Court was binding on all including the Assessing Officer, under article 141 of the Constitution of India. [T.R.F. Ltd. v CIT (2010) 323 ITR 397 (SC)]. (A. Y. 2005-06).ACIT v. Safe Enterprises (2011) 9 ITR 553 / 128 ITD 459 / 137 TTJ 573 / 53 DTR 322 (Mum.)(Trib.)

S. 36(2)(i) : Business expenditure - Bad debts - Share broker - entire amount of debt need not be taken into account.In the present case following the Special Bench decision in the case of Shreyas Morakhia (40 SOT 432), it was held that in order to satisfy the conditions stipulated in section 36(2)(i), it is not necessary that the entire amount of debt has to be taken into account in computing the income of the assessee and it will be sufficient even if part of such debt is taken into account in computing the income of the assessee. This principle applies to a share broker. The amount receivable on account of brokerage is a part of debt receivable by the share broker from his client against purchase of shares and once such brokerage is credited to the profit and loss account and taken into account in computing his income, the condition


stipulated in section 36(2)(i) of the Act gets satisfied. The bad debt therefore, claimed by the broker was allowed. (A. Y. 2003-04).Dy. CIT v. IIT Investrust Ltd. (2011) 45 SOT 1 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue expenditure - Study report.Consultancy charges paid for obtaining study reports in Bitumen is revenue expenditure. (A. Y. 2005-06)CIT v. Shell Bitumen India (P) Ltd. (2011) 221 Taxation 44 (Delhi)(High Court)

S. 37(1) : Business expenditure - Capital or revenue expenditure - Expenditure on setting up new sugar units - Expansion of business.Expenses incurred by assessee, a sugar manufacturer, by way of salaries, wages, bonus, provident fund contribution, workmen welfare expenses, power, fuel and water, manufacture expenses rent for office building, etc. on setting up new sugar units were expenses for the purpose of manufacture of sugar in respective factories and therefore, the same are allowable as revenue expenditure. (A. Y. 1992 – 93).CIT v. Sakhti Sugars Ltd. (2010) 194 Taxman 91 / 45 DTR 134 / (2011) 339 ITR 400 / 237 CTR 51 (Mad.)(High Court)

S. 37(1) : Business expenditure - Replacement of moulds - Revenue expenditure.Replacement of moulds did not result in creation of new capital asset or benefit of enduring nature, mere fact that moulds were used in production process could not be conclusive as to the nature of expenditure, hence, expenditure on replacement of moulds was revenue expenditure.CIT v. Malerkotla Steels & Alloys (P) Ltd. (2011) 336 ITR 49 / 237 CTR 201 / 49 DTR 1 (P&H)(High Court)

S. 37(1) : Business expenditure - Share of profit from firm - Exempt income - Interest on capital borrowed. [S. 10(2A)]Interest expenditure incurred on amount borrowed for purpose of contributing funds in form of capital in partnership firm can be allowed against interest income received from partnership firm on credit balance of capital. (A. Y. 2005-06).Karan Raghav Export (P) Ltd. v. CIT (2011) 196 Taxman 504 / 49 DTR 327 (Delhi)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Expenditure on production of film for advertisement.Expenditure incurred by assessee on production of films by way of advertisement for promoting marketing of products manufactured by it being in respect of ongoing business of assessee is allowable as revenue expenditure. (A. Ys.1996-97 & 2001-02)CIT v. Geoffrey Manners & Co. Ltd. (2011) 238 CTR 49 / (2009) 315 ITR 134 / 180 Taxman 87 / 19 DTR 249 (Bom.)(High Court)

S. 37(1) : Business expenditure - Expenditure on foreign education of managing director’s son – Allowable.Amount spent towards educational expenses of a student, in which the assessee is carrying on its business was allowable expenditure under section 37(1) notwithstanding the fact that the student was son of managing director. (A. Ys. 1997-98 & 1998-99). CIT v. Ras Information Technologies (P) Ltd. (2011) 238 CTR 76 / 50 DTR 93 / 200 Taxman 305 (Karn.)(High Court)

S. 37(1) : Business expenditure - Capital or revenue expenditure - Voluntary retirement Scheme. (S. 35DDA)Even for the period prior to the introduction of section 35DDA, w.e.f. 1st April, 2001, the assessee was entitled to claim deduction of expenditure incurred under VRS only in a phased manner; however, in view


of consistent views of various High Courts, the assessee had to be allowed deduction of entire expenditure, as revenue expenditure in respect of Asst. Year 1999-2000CIT v. O.E.N. India Ltd. (2011) 238 CTR 340 / 196 Taxman 131 / 49 DTR 94 (Ker.)(High Court)

S. 37(1) : Business expenditure –Capital or revenue expenditure- Part of larger machines.Where parts of larger machines are purchased by the assessee, expenditure on such parts is allowable as revenue expenditure. (A. Y. 1982-83)CIT v. Modi Industries Ltd. (2011) 197 Taxman 76 / 339 ITR 467 / 46 DTR 241 (Delhi)(High Court)

S. 37(1) : Business expenditure - Warranty.Provision for warranty claim made by the assessee based on a scientific method and worked on the average of earlier year’s warranty settlement claims was held to be allowable business expenditure. (A. Ys. 1999-2000, 2000-01, 2001-02, 2002-03, 2003-04, 2004-05)CIT v. Luk India P. Ltd. (2011) 52 DTR 117 / 239 CTR 440 (Mad.)(High Court)

S. 37(1) : Business expenditure - Ad-hoc expenditure.Ad-hoc expenditure out of cartage, labour and sealing expenses cannot be made by the assessing authority when similar expenses are allowed in totality by Appellate Authority in earlier years. (A. Y. 1992-93)Friends Clearing Agency P. Ltd. v. CIT (2011) 332 ITR 269 / 49 DTR 297 / 58 DTR 109 / 237 CTR 464 (Delhi)(High Court)

S. 37(1) : Business expenditure - Contingent Liability - Suit filed by bank.Interest payable to the bank on the loan with respect to which the bank had filed suit for recovery cannot be disallowed treating the same as contingent liability merely for the reason that the bank had not shown the accrued interest in its books. (A. Y. 1992-93)Friends Clearing Agency P. Ltd. v. CIT (2011) 332 ITR 269 / 49 DTR 297 / 58 DTR 109 / 237 CTR 464 (Delhi)(High Court)

S. 37(1) : Business expenditure – Real estate business – Income from house property – Brokerage – Commission.Where the assessee derived income from real estate business and also income from house property, the assessee is claim for deduction of brokerage and commission cannot be disallowed against the business income on the ground that the assessee is not entitled to any further deduction other than those provided under section 24 of the Act. (A. Y. 2003-04)Mukti Properties P. Ltd. v. CIT (2011) 50 DTR 273 / 238 CTR 174 (Cal.)(High Court)

S. 37(1) : Business expenditure – Convertible debentures – Capital or revenue expenditure.Expenses incurred on the issue of convertible debentures has to be treated as Revenue expenditure. (A. Y. 1993-94)CIT v. ITC Hotels Ltd. (2011) 334 ITR 109 / 238 CTR 447 / (2009) 32 DTR 215 / (2010) 190 Taxman 430 (Karn.)(High Court)

S. 37(1) : Business expenditure – Expenses towards retrenchment of workers on closure of a unit – Allowable.The assessee carried manufacturing from various units and they were interdependent and unity of control between the units established by the existence of common management, a common business


organization, administration and fund. The closure of one unit did not involve the closure of the business. Therefore, the expenses towards retrenchment of workers was therefore an allowable deduction within the meaning of section 37(1) since there was no closure of business. (A. Y. 2001-02).CIT v. Pfizer Ltd. (2010) 42 DTR 32 / (2011) 330 ITR 62 / 233 CTR 521 (Bom.)(High Court)

S. 37(1) : Business expenditure – Closure of one branch – Amortisation of expenses – Claim of unabsorbed expenditure claimed in the year the branch was closed – Allowable in the year the branch is closedThe assessee had incurred expenditure for opening branches, the cost of which were to be amortised by spreading it over 10 years in equal instalments. One branch was closed, the assessee claimed the unabsorbed expenditure of the closed branch. The High Court held that the business of the assessee continue after the closure of the branch, and the deduction of amortised expenditure need not wait after the closure of the branch. (A. Y. 2003-04)Victoria Gold Gallery v. CIT (2011) 330 ITR 330 (Ker.)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Feasibility study - Study abandoned - Revenue expenditureFeasibility studies conducted by the assessee for the existing business with a common administration and common fund and the studies were abandoned without creating any new asset, therefore, expenses were of revenue expenditure.CIT v. Priya Village Roadshows Ltd. (2009) 185 Taxman 44 / 32 DTR 316 / (2010) 228 CTR 271 / (2011) 332 ITR 594 (Delhi)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Expenditure on abandoned expansion plans.The assessee had incurred expenditure on engaging services of consultants for improving operational efficiencies inextricably linked to the existing business. The project was abandoned, with no new asset to be created. The expenditure held to be revenue expenditure. (A. Y. 2000-2001).Indo Rama Synthetics India Ltd. v. CIT (2009) 185 Taxman 227 / 32 DTR 322 / (2010) 228 CTR 278 / (2011) 333 ITR 18 (Delhi)(High Court)Editorial: SLP rejected (2010) 328 ITR (St) 9 (SC).

S. 37(1) : Business expenditure - Professional’s heart surgery expense not deductible - Not allowable as repair expenses. (S. 31)Expenditure incurred on heart operation was not deductible under section 31 as also 37(1) because of following reasons:1) Heart cannot be considered plant as it did not have any mention in assessee’s balance sheet under

assets and its cost of acquisition could not be determined. 2) Deduction under service 37(1) cannot be granted as the expenditure incurred does not have any

immediate or direct nexus between the expenses incurred on surgery and his efficiency in the professional field per se.

3) Before expenses on repair of plant are admitted as a deduction, plant would necessarily have to be reflected as an asset in books of account. (A. Y. 1983-84).

Shanti Bhushan v. CIT (2011) 199 Taxman 280 / 57 DTR 233 / 242 CTR 375 / 336 ITR 26 (Delhi)(High Court)

S. 37(1) : Business expenditure - Payment to bank as guarantor - Loan of subsidiary company - Surety.As per the development agreement the assessee was obliged to convey marketable title to the purchasers of the flats to be built on a property. Assessee paid money to the bank as surety to discharge the loan


obtained by its sister concern so as to secure release of the aforesaid property which was mortgaged with the bank. The payment was to avoid breach of terms of the development agreement. The said payment is allowable as business expenditure. (A. Y. 1993-94).CIT v. Rudra Industrail Commercial Corporation (2011) 55 DTR 5 / 244 CTR 304 (Karn.)(High Court)

S. 37(1) : Business expenditure - Tractor charges – Assessee requesting the Assessing Officer to issue summons - Addition without issuing summons - Not valid. (S. 131)Assessee made payments of tractor charges to parties partly in cheque and partly in cash. Assessee requested the Assessing Officer to summon person to whom cash payments were made. Assessing Officer made addition without summoning person. The Court held that addition was not proper.CIT v. Brij Pal Sharma (2009) 20 DTR 146 / 178 Taxman 467 / (2011) 333 ITR 229 (P&H)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Expenditure on glow sign board.Expenditure on glow sign boards is allowable as revenue expenditure.CIT v. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Delhi)(High Court)

S. 37(1) : Business expenditure - Key man insurance premium. [S. 10(10D)]Assessee is a Chartered Accountant had debited an amount of Rs 50 Lakhs towards Keyman Insurance Premium, which was taken in one of the his employee who was the head of the financial consultancy division and looking after the financial consultancy for corporate finance. The appeal of the assessee was allowed by the Tribunal. On appeal by the revenue the Court held that it is the prerogative of the businessman to consider and decide as to which of the employees is important for the business and it is for him to take life insurance policy for such an employee keeping in mind various factors and circumstances. The High Court confirmed the order of Tribunal.CIT v. Kamlesh M. Solanki – Tax appeal No. 2421 of 2009 dt. 26-4-2011 (ACAJ Vol. 35 Part 03 June 2011 P. 165) (Guj.)(High Court)

S. 37(1) : Business expenditure – Foreign studies of person appointed as trainee in company - Son of president.Fact that trainee happens to be son of President does not make the expenditure personal in nature. Since son of President was appointed by resolution and an agreement as been entered into, that the trainee after completion of the education from abroad will be obliged to resume service in the company as a technical executive at least for ten years. Expenses incurred on foreign studies of person appointed as trainee in company are business expenditure.Gournitye Tea & Industries Ltd. v. CIT (2011) Tax L.R. 315 (Cal.)(High Court)

S. 37(1) : Business expenditure - Foreign travelling expenditure of managing director and his wife - Authorised by resolution.When the board of directors of the assessee had thought it fit to spend on foreign tour of the accompanying wife of the managing director for commercial expediency for reasons reflected in its resolution, it was not with in the province of the income tax authority to disallow such expenditure. There was resolution of company authorizing foreign travel of managing director and his wife for business purposes. The Court applied the ratio of CIT v Walchand and Co. P. Ltd. (1967) 65 ITR 381 (SC). However, as there was no resolution authorizing the wife of the deputy managing director, the expenditure on such travel were rightly disallowed. (A. Y. 2000-01).J. K. Industries Ltd. v. CIT (2011) 335 ITR 170 / 241 CTR 166 / 54 DTR 179 (Cal.)(High Court)


S. 37(1) : Business expenditure - Parties found non-existence after three years - Expenditure cannot be disallowed - Income from undisclosed source. (S. 69)Where the assessee took care to purchase materials for his business by way of account payee cheque from third party and subsequently the parties do not appear before the assessing authorities as they had discontinued their business, the assessee’s claim of genuine business expenditure cannot be disallowed for their non existence after three years of transactions. (A. Y. 1998-99)Diagnostics v. CIT (2011) 334 ITR 111 / 56 DTR 317 (Cal.)(High Court)

S. 37(1) : Business expenditure – Capital or revenue – Glow sign board.Expenditure incurred by the assessee on glow signboard was held to be an allowable business expenditure. (A. Y. 2005-06)CIT v. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Delhi)(High Court)

S. 37(1) : Business expenditure – Company - Personal use. In case of Company there cannot be disallowance of car expense for personal use of car. (A. Y. 1988-89)CIT v. Nuchem Ltd. (2011) 55 DTR 14 (P&H)(High Court)

S: 37(1) : Business Loss - Abandoned project - Capital asset.Amount paid as advance for acquisition of a capital asset for a project which was abandoned, did not qualify for deduction as a business loss since the amount spent was in relation to acquisition of a capital asset.CIT v. Southern Gas Ltd. (2011) 198 Taxman 165 (Ker.)(Mag.)(High Court)

S. 37(1) : Business expenditure - Expenses prohibited on account of being illegal. Where the assessee paid sums to local goons and the police for maintenance of law & order, it was held that such expenditure being prohibited by law, did not qualify for deduction. (A. Y. 1992-93).CIT v. Swaminathan (2011) 198 Taxman 140 (Karn.)(Mag.)(High Court)

S. 37(1) : Business expenditure - assessee requesting Assessing Officer to summon person – addition without summoning – Not proper.In the instant case the assessee had a paid a sum in cash and cheque, being tractor charges to D. During the assessment proceeding the assessee had made a mention of his inability to produce D for verification of the transaction, but had also requested the Assessing Officer to issue summons to the D, so as to enable the Assessing Officer to determine for himself the veracity of the assessee claim. The Assessing Officer, however, made the additions without issuing summons to D. The CIT(A) and ITAT both ruled in favour of the assessee. On appeal to the High Court, the High Court while deciding the issue in favour of the assessee held that the CIT(A) and ITAT had given a finding that the Assessing Officer had made additions without any material whatsoever, and the AO could have enforced the presence of D especially since a substantial part of the payments were made by the assessee by banking channels.CIT v. Grij Pal Sharma (2009) 20 DTR 146 / 178 Taxman 467 / (2011) 333 ITR 229 (P&H)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - ERP Software Package Allowable As Revenue Expenditure.The assessee, engaged in manufacturing of telecommunication and power cable accessories and trading in oil retracing system and other products, incurred expenditure of Rs. 23 lakhs on purchase of “Enterprises


Resources Planning (ERP) package”. The AO treated the expenditure as capital in nature. The Tribunal applied the functional test laid down by the Special Bench ( Amway India Enterprise v. Dy. CIT (2008) 111 ITD 112 (Delhi)(SB)(Trib.) and held that the expenditure was allowable as a deduction on the basis that the software facilitated the assessee’s trading operations or enabling the management to conduct the assessee’s business more efficiently or more profitably but it is not in the nature of profit making apparatus. The department filed an appeal before the High Court. HELD dismissing the appeal:“In our view, no fault can be found in the aforesaid order of ITAT holding that software expenditure was allowable as revenue expenditure.”CIT v. Raychem RPG Ltd. (2011) 64 DTR 57 / 245 CTR 515 (Bom.)(High Court)

S. 37(1) : Business expenditure - Education expenses of son of managing director for higher education.Where assessee being a consulting agency in manufacturing and engineering industry entered into an agreement with son of Managing Director, agreeing to spend money on higher education in USA on terms that the son of Managing Director would work with assessee company after completion of the course. Such Money spent by an assessee either in sponsoring a student or towards educational expenses of a student in a discipline, in which assessee is carrying on its business, is a valid expenditure and is entitled to deduction. (A. Ys. 1997-98 and 1998-99).CIT v. Ras Information Technologies (P) Ltd. (2011) 200 Taxman 305 / 238 CTR 76 / 50 DTR 93 (Karn.)(High Court)

S. 37(1) : Business expenditure - Royalty.Payment of royalty by assessee company to its US based holding company which has been incurred wholly and exclusively for the purpose of business of the assessee is allowable as business expenditure. (A. Ys. 1999-2000 to 2001-02).CIT v. Oracle India (P) Ltd. (2011) 59 DTR 222 / 243 CTR 103 / (2011) Tax L.R. 905 (Delhi)(High Court)

S. 37(1) : Business expenditure - Demolition of structure - Capital or revenue.Amount spent by assessee on demolition of structure which had caught fire and major repair of premises during the period when the business was in existence are admissible as revenue expenditure. (A. Y. 1995-96).CIT v. Bhupindera Flour Mills (P) Ltd. (2011) 59 DTR 307 (P&H)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Reconditioning of machineryAssessee incurred huge expenditure on total reconditioning and overhauling of machinery. Since reconditioning had resulted in imparting useful life to hitherto old and unfit machinery and thus, resulting in a benefit of enduring nature expenditure was capital in nature. (A. Ys.1994-95, 2005-06, 2006-07).Bharat Geras Ltd. v. CIT (2011) 337 ITR 368 / 62 DTR 219 (Delhi)(High Court)

S. 37(1) : Business expenditure - Ransom money - While kidnapping is an offense, paying ransom is not; Bar in Explanation 1 to section 37(1) not attracted.Where payment is made by assessee as a ransom to secure the release of a kidnapped director, it was held that such a payment is not prohibited. The Explanation of section 37(1) provides that expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law shall not be deemed to have been incurred for the purpose of business. It has to be seen whether the expenditure is incurred for any purpose which is an offence or prohibited by law. Accordingly, the Explanation of to section 37(1) is not applicable and the ransom is deductible as business expenditure.


CIT v. Khemchand Motilal Jain Tobacco Products (P) Ltd. (2011) 243 CTR 270 / 60 DTR 113 / 201 Taxman 292 / (2012) 340 ITR 99 (MP)(High Court)

S. 37(1) : Business expenditure – Capital or revenue expenditure - Expenditure on ‘Application Software’ - Revenue in nature.The expenditure incurred for the purpose of installation of “Oracle” software for financial accounting, inventory and purchase held to be revenue in nature as it did not resulted in creation of new asset or a new source of income. The test of enduring benefit is not a certain or a conclusive test. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. Expenditure incurred which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched is expense in the nature of revenue expenditure. Test of enduring benefit or advantage collapses in such like cases especially in cases which deal with technology and software application which do not in any manner supplant the source of income or added to the fixed capital of the assessee. Followed : Alembic Chemical Works Co. Ltd. v CIT (1989) 177 ITR 377 (SC). CIT v. Asahi India Safety Class Ltd. (2011) 64 DTR 63 / 203 Taxman 277 (Delhi)(High Court)

S. 37(1) : Business expenditure - Benefit to other person - No written agreement.If the expenditure is incurred for the purpose of assessee’s business then no part of the same can be disallowed merely because some other person has benefited out of the same, and there is no written agreement with the payee/recipient.CIT v. Agra Beverages Corporation Pvt. Ltd. (2011) 200 Taxman 43 (Delhi)(Mag.)(HIgh Court)

S. 37(1) : Business expenditure - Glow sign boards.Expenditure incurred on glow sign boards for purpose of advertisement by the assessee is revenue expenditure.CIT v. Orient Ceramics & Industries Ltd. (2011) 200 Taxman 64 (Delhi)(Mag.)(High Court)

S. 37(1) : Business expenditure - Foreign tours - Expansion of existing project.Expenditure incurred by the assessee on foreign tours of its personnel, in connection with expansion of existing project is eligible for deduction as revenue expenditure.CIT v. J. K. Synthetics Ltd. (2011) 200 Taxman 101 (Delhi)(Mag.)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Lease rent of 99 years.Lease rent of Rs. 48,02,616/- paid to G.I.D.C for period of 99 years held to be revenue in nature. Registration of lease deed is not relevant for deciding the issue of capital or revenue. High Court confirmed the order of Tribunal.Dy. CIT v. Sun Pharmaceuticals Ind. Ltd. (2011) 224 Taxation 456 (Guj.)(High Court)

S. 37(1) : Business expenditure – Penalty - SEBI regulations - Fine for violation of procedural law not hit by Explanation to section 37(1).The assessee paid penalty/fine to BSE/NSE for infringement of procedural rules such as failure to maintain margins, trading beyond exposure limits, late submission of margin certificates, delay in making payment & deliveries etc. The Assessing Officer disallowed the claim for deduction on the ground that there was an infringement of statutory law laid down by SEBI and the Explanation to section 37(1) was attracted. The High Court held that, as the payments made by the assessee to the Stock Exchange for violation of their


regulation was not an account of an offence or which is prohibited by law, the invocation of the Explanation to section 37 of the Act was not justified. CIT v. The Stock and Bond Trading Company (Bom.)(High Court) www.itatonline.org

S. 37(1) : Business expenditure - Penalty – Fine-Settlement of dispute - Infringement of patent - Explanation.Paramount and governing consideration behind settlement in question was to avoid the expenses and uncertainty of further litigation and there was no violation of patent laws. Expenditure incurred towards settlement of dispute for infringement of patent was not hit by Explanation to sub-section (1) of section 37 and the same is allowable as business expenditure. (A.Y. 2005-06).CIT v. Desiccant Rotors International (P) Ltd. (2011) 63 DTR 214 / 245 CTR 572 / 201 Taxman 144 (Delhi)(High Court)

S. 37(1) : Business expenditure - Recovery of lesser amount than incurred - fees.If an Asset Management Company of Mutual Funds due to business exigencies claims and recovers from Mutual Funds lesser amount than the amount of expenditure, fees, etc., actually incurred during course of its business as allowed under SEBI Regulation, then unless it is established that there was no business exigencies or claim was not genuine, expenditure the same cannot be disallowed. (A. Y. 2003-04).CIT v. Templeton Asset Management (India) (P) Ltd. (2011) 202 Taxman 496 / 63 DTR 59 / (2012) 340 ITR 279 (Bom.)(High Court)

S. 37(1) : Business expenditure - Ad films - Advertisements.Assessee who was engaged in business of stock broking and share transactions expenditure incurred on ad films by way of advertisements for promotion and marketing of its products would be allowable as revenue expenditure.CIT v. Bonaza Portfolio Ltd. (2011) 202 Taxman 545 (Delhi)(High Court)

S. 37(1) : Business expenditure - Patent – Copyright. (S. 35A)Royalty paid by assessee for use of the brand names and trade marks, and not for acquiring the same, the provisions of section 35A cannot be applied, the expenditure allowable as business expenditure. (A.Ys. 1997-98 to 1999-2000).CIT v.V. R. V. Breweries & Bottling Industries Ltd. (2011) 244 CTR 576 (Delhi)(High Court)

S. 37(1) : Business expenditure - Capital or revenue - Payment of royalty on yearly basis for know how not becoming exclusive property of assessee.The assessee had claimed a deduction being an amount paid by way of Royalty for technical know-how and use of trademark. The assessing officer held that such payment of Royalty in lieu of technical know-how in the nature of enduring advantage for exclusive use and therefore held that 25% of such payments have to be construed as capital expenditure. The CIT(A) and Tribunal held that the entire expenditure is deductible. On appeal to the High Court by the Department, the High Court well dismissing the appeal held that the ownership rights of the trademark and know-how always vested with a foreign company and on the expiration or termination of the agreement thus as he was to return all the know-how obtained by it under that agreement, and also the payment of Royalty was also to be on year to year basis on the net sales of the assessee and at no point of time the assessee was entitled to become the exclusive owner of the know-how and trademark and therefore held that the expenditure incurred by the assessee on Royalty was deductible in whole. (A. Ys. 2002-03, 2003-04, 2005-06)


CIT v. G4S Securities Systems (India) P. Ltd. (2011) 338 ITR 46 / 62 DTR 84 (Delhi)(High Court)

S. 37(1) : Business expenditure - Ad hoc disallowance.Ad Hoc disallowances-Disallowance of telephone expenses, maintenance expenses not justified when audited books & vouchers produced by assessee. CIT v. S.S.P. (P.) Ltd. (2011) 202 Taxman 386 (P&H) (High Court)

S. 37(1) : Business expenditure - Corporate Guarantee - Subsidiary - One time settlement with Bank.Giving corporate guarantee was not only one of the objects of the assessee company but the same was given for its subsidiary company and it was in the interest of the assessee company and hence, the commercially expedient decision, hence, one time settlement with bank was allowable as business loss. (A. Y. 2004-05).ACIT v. W. S. Industries (India) Ltd. (2011) 128 ITD 98 / 40 DTR 106 / 9 ITR 596 (Chennai)(Trib.)

S. 37(1) : Business expenditure - Keyman Insurance – Hospital - Consultancy fees - Software Maintenance.Keyman Insurance premium paid by the Company on the lives of Chief cardiac surgeon, chairman, and managing director of company was qualified as deduction under section 37(1). Consultancy fees paid for maintenance of software were to be allowed as revenue expenditure. (A. Y. 2005-06).Escorts Heart Institute & Research Centre Ltd. v. ACIT (2011) 128 ITD 108 (Delhi)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Rectification and improvement of power line - Revenue expenditure.Expenditure incurred by assessee on rectification and improvement of power line was a revenue expenditure, even if it was spent out of subsidy amount received from Government. (A. Y. 1987-88).Dy. CIT v. A. P. State Electricity Board (2011) 130 ITD 1 / 138 TTJ 425 / 55 DTR 52 (Hyd.)(TM)(Trib.)

S. 37(1) : Business expenditure – Company – Disallowance - Vehicles and telephone expenses of Directors.There is no personal usage by the company, hence, no disallowance can be made on account of personal use of the vehicles /telephone by the directors / officials of the company. (A. Y. 2004-05).Ramkishin Textiles P. Ltd. v. ITO (2011) 9 ITR 321 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Royalty for use of logo.Payment made by the assessee for non exclusive user of logo based on turnover and not lump sum payment is allowable as revenue expenditure. (A. Y. 2006-07).ACIT v. Shriram Transport Finance Co. Ltd. (2011) 9 ITR 543 (Chennai)(Trib.)

S. 37(1) : Business expenditure - Service charges to GovernmentService charges paid to Government as per directives of State Government allowable as deduction. (A. Y. 1998-99).Dy. CIT v. Travancore Titanium Products Ltd. (2011) 130 ITD 161 / 138 TTJ 276 / 54 DTR 308 (Cochin)(TM)(Trib.)

S. 37(1) : Business expenditure – Repair of lease building – Foreign travelling expenses of Chief editor and staff – Allowable.The assessee company was engaged in the business of printing and publication of various periodicals. The assessee company took on lease a building and got repaired an empty derelict hall, which was converted into a recreation room and was used by the assessee’s staff. The assessee company claimed a deduction of


the same and the same was allowed under section 37(1) of the Act on the ground that the assessee had not acquired a capital asset but put up a construction of building only for the purpose of business. The foreign travel expenses claimed by the assessee also for the travelling of the Chief Editor, Assistant Editor and other staff was also allowed as a business expenditure as the same was necessitated to grow business of the assessee’s magazines, periodicals, etc. (A. Y. 2005-06).ACIT v. M. M. Publications Ltd. (2011) 43 SOT 59 (Cochin)(Trib.)

S. 37(1) - Business expenditure - Licence fee - Parent companyLicence fee paid by the assessee–company to its parent company under technical assistance agreement is allowable business expenditure.( A. Y. 2005-06)Dy. CIT v. Nestle India Ltd. (2011) 7 ITR 758 (Delhi)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Expenses on development – Upgradation of computer software – Depreciation. (S. 32)Assessee engaged in the business of development of computer software having followed the method of accounting whereby it is treating the expenditure on development of computer software as part of work in progress during the period of development and capitalization the same when the software attains technically feasibility and is ready for sale, the expenditure incurred on development, upgradation of software products has to be treated as capital expenditure, however, depreciation would be allowable thereon in the year of capitalization. (A. Y. 2002-03).3i Infotech Ltd. v. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 / 129 ITD 422 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Litigation Expenses - Criminal Proceedings against an actor in his individual capacity.The assessee an actor incurred expenditure in defending himself against criminal proceedings which arose out of the film shooting. The Tribunal held that the criminal proceedings were filed against the individual, this has nothing to do with the assessee’s profession. The expenditure was purely of a personnel nature and not allowable.(A. Ys. 2003-04 and 2004-05)Dy. CIT v. Salman Khan (2011) 8 ITR 150 / 52 DTR 137 / 137 TTJ 15 / 130 ITD 81 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Entrance fees to a club - Corporate membership.Entrance fees paid towards corporate membership of the club is an expenditure incurred wholly and exclusively for the purpose of business and not towards capital account as it only facilitates smooth and efficient running of a business enterprise and does not add to the profit earning apparatus of a business enterprises and accordingly CIT(A) was justified in deleting the disallowances of entrances fee made by the Assessing Officer. (A. Y. 2004-2005)Dy. CIT v. Banc of America Securities (India) (P) Ltd. (2011) 136 TTJ 441 / 128 ITD 386 / 50 DTR 521 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Secret commission for providing contract.Secret commission paid by the assessee to directors of the company giving construction contract to the assessee cannot be allowed as expenditure in view of Explanation 1 to section 37(1). (A. Ys. 1983-84 & 1984-85).J. K. Panthaki & Co. v. ITO (2011) 57 DTR 233 / 139 TTJ 337 (Bang.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue expenditure - Entrance fee to a club, for membership of its director.


The company had taken membership in the name of the director of the assessee company and none of the executives of the company appeared to have been made members of the club. The expenditure incurred for club membership was disallowed on the ground that the assessee failed to produce any evidence and prove that the benefit of membership was utilized wholly or exclusively for the purpose of business. (A. Y. 2004-05). New India Extrusions (P) Ltd. v. ACIT (2011) 46 SOT 14 (Mum)(URO)

S. 37(1) : Business expenditure – Payment of compensation.Payment made by the assessee to close family members for getting vacant and peaceful possession of premises was held capital expenditure as there was no dispute going on between the parties to show that the payment was necessary for taking peaceful possession. (A. Y. 2003-04).ITO v. Pritam Juice (2010) 124 ITD 237 / 37 DTR 398 / 5 ITR 664 / (2011) 138 TTJ 294 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Convertible debentures.Expenditure in connection with issue of 4 percent fully convertible debentures which were later converted into equity shares of the assessee company was of revenue nature. ( A.Y. 2005-06).Havells India Ltd. v. Addl. CIT (2011) 59 DTR 118 / 140 TTJ 283 / 47 SOT 61 (Delhi)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue expenditure - Pre operative expenses - Expansion of existing business.Where there is complete interlacing and intermixing of the funds of the assessee, in all its units, besides there being a common management assessee is justified in claiming pre-operative expenses incurred for new project as deductible as revenue expenditure. (A.Y. 2005-06). Havells India Ltd. v. Addl. CIT (2011) 59 DTR 118 / 140 TTJ 283 / 47 SOT 61 (Delhi)(Trib.)

S. 37(1) : Business expenditure - Royalty paid to foreign associated enterprise.Royalty paid to foreign associated enterprise under foreign technology collaboration agreement is allowable as revenue expenditure. (A. Y. 2005-06).Cabot India Ltd. v. Dy. CIT (2011) 46 SOT 402 / 61 DTR 408 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue – Non-compete fees - Deferred revenue expenditure.Expenditure incurred by the assessee to ward off the competition for a period of seven years during which any company could have set up its products and reputation in the market, expenditure cannot be allowed as revenue expenditure. As non-compete fee is held to be capital expenditure, claim for treating it as revenue expenditure entitled to deduction for seven years is also not allowable. (A. Y. 2001-02).Sharp Business Systems (India) Ltd. v. Dy. CIT (2011) 59 DTR 385 / 133 ITD 275 / 140 TTJ 607 (Delhi)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Expenditure on software.Expenses incurred by the assessee for obtaining license to use software are to be treated as revenue expenditure. (A.Ys. 2003-04, 2004-05 & 2006-07)ST Microelectronics (P) Ltd. v. CIT (2011) 61 DTR 1 (Delhi)(Trib.)

S. 37(1) : Business expenditure - Expenditure to procure raw Material.Expenditure incurred for the purpose of procuring the raw material in thermal power station is allowable expenditure. (A. Ys. 1999-2000, 2004-05)ACIT v. Chettinad Cement Corporation Ltd. (2011) 140 TTJ 100 / 133 ITD 317 / 58 DTR 225 (Chennai)(Trib.)


S. 37(1) : Business expenditure - Broken period interest.Broken period interest has to be allowed if the securities were held as current assets. (A. Y. 1996-97)Jt. CIT v. Dena Bank (2011) 139 TTJ 81 / 9 ITR 327 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Software usage.Software usage and product development expenses incurred by the assessee company engaged in internet related services are allowable as revenue expenditure to the extent the same are routine and periodic expenses not resulting in creation of new assets. (A.Y.2005-06).Dy. CIT v. Rediff Com India Ltd. (2011) 61 DTR 426 / 47 SOT 310 / 141 TTJ 679 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Foreign tour expenses.Foreign travel expenses of doctor partner for obtaining the latest information on the technological advancements, concerning dental implants are allowable as business expenditure. (A.Y 2004-05)Dy. CIT v. B2C Implants (2011) 141 TTJ 638 / 130 ITD 184 / 52 DTR 192 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Expenditure on foreign education of director being son of the major shareholder.Where the assessee company was not able to substantiate that sending of the director for training abroad was for the benefit of the business of the assessee, the expenses incurred for foreign training were not allowable in the hands of assessee company. (A. Y. 2004-05)Vishesh Entertainment Ltd. v. ACIT (2011) 60 DTR 284 / 12 ITR 337 / 131 ITD 187 / 141 TTJ 340 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Loss on account of irrecoverable amount that were advanced to farmers.Assessee advanced the amount to framers as a measure to ensure continuous supply of raw materials, which was essential in nature of business of assessee, when raw materials were not received on such advances, it would be a loss in revenue field. Following the ratio of Apex court in CIT v Wood ward Governor India (P) Ltd. (2009) 312 ITR 254 (SC), wherein the court held that the expression ‘any expenditure’ used in section 37 cover both ‘expression incurred’ as well as even if ‘loss’ amount had gone out of pocket of assessee , therefore the advances written off was allowable as business expenditure. (A. Ys. 2005-06 to 2007-08)Sterling Agro Processing (P) Ltd. v. ACIT (2011) 48 SOT 80 (Chennai)(Trib.)

S. 37(1) : Business expenditure - Alleged bogus purchases. Assessee contended that cash received by it against the cheque payments of Rs 30,80,730/- from two parties was utilized to purchase cloth from the grey market which was found recorded in the inventory of closing stock, the Tribunal has accepted that the assessee did make cash purchases of Rs. 30,80,730/- and the said purchases cannot be treated as bogus purchases. (A.Ys. 2001- 02 to 2004-05).Free India Assurance Services Ltd. v. Dy. CIT (2011) 62 DTR 349 / 132 ITD 60 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Renovation of office premises - Lease hold premises - Depreciation. [S. 32(1)]The assessee has incurred huge expenditure on purchase of ply wood, furniture, etc. for making wooden partitions, cabins, cubicles, desks, etc. in its lease hold office premises, the Tribunal held that the expenditure was capital in nature, however, the assessee will be entitled depreciation in terms of explanation 1 to section 32. (A.Ys. 2001-02 to 2004-05).


Free India Assurance Services Ltd. v. Dy. CIT (2011) 62 DTR 349 / 132 ITD 60 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Compensation - Drivers – Labour Court.As per the settlement arrived in the labour Court giving an undertaking to provide employment to drivers whose employment was terminated by the hire operators which were rendering services to the assessee, compensation paid by assessee to said drivers for giving up their rights in full and settlement of their claims is allowable as deduction, as the assessee got apparent advantage in the form of reduced car hire charges as a result of impugned payment. (A. Y. 2003-04). ITO v. Taj Services (P) Ltd. (2011) 64 DTR 105 / (2012) 143 TTJ 70 (Mum.)(Trib.)

S. 37(1) : Business expenditure – Interest - Loans from its holding company.Assessee obtained loan from its holding company in year for its business of manufacturing, it was discontinued in year 1998-99 and there was no activity relating to said business in year under consideration. Since loan borrowed by assessee from its holding company was not utilized for business carried on by it in year under consideration, Interest on same could not be allowed as deduction. (A. Y. 2002-03, 2004-05 and 2006-07).Vidhyavihar Containers Ltd. v. Dy. CIT (2011) 133 ITD 363 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue - Lease premises - Renovation expenses – Depreciation. (S. 32) Expenditure incurred towards renovation of premises taken on lease will be capital in nature and assessee would be entitled depreciation on it. (A. Y. 2006-07).ACIT v. Efftronics Systems (P) Ltd. (2011) 133 ITD 460 / (2012) 143 TTJ 484 / 65 DTR 322 (Visakhapatanam)(Trib.)

S. 37(1) : Business expenditure - Provision for doubtful debts - Notional loss on valuation of shares - Provision for premium on debenture - Business loss. [S. 28(1)]Provision for doubtful debt was not allowable as bad debt, however the same can not be allowed as business loss as the said amount was not crystallised during the year. Notional loss on revaluation of shares and there was no transfer of any share such loss can not be allowable. Option was given to redeem debentures in to equity shares after six months on payment of premium. Assessee company made ‘provision for premium debenture’ and claimed loss. Since an event had not yet occurred, there was no crystallization of liability and loss could not be allowed. (A .Y. 2000-01).Mahindra Intertrade Ltd. v. Dy. CIT (2011) 133 ITD 597 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Promotion of new products – Brands - Year of allowability.During relevant assessment year assessee incurred expenses on promotion of new products and brands which had been treated as deferred revenue expenditure in books and amortized for a period of six years, however, while computing the taxable income entire expenditure was claimed as revenue expenditure. Tribunal held that revenue expenditure is allowable in year in which liability had crystallized and accounting treatment given by assessee is not relevant for purpose of determining whether or not expenditure was allowable as deduction. (A. Ys. 2003-04 and 2004-05).ACIT v. Kopran Ltd. (2011) 48 SOT 225 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Bank services - Issue of shares to increase capital.Amount paid by assessee company for bank services rendered in connection with issue to increase capital base of company, could not be allowed as revenue expenditure under section 37(1). (A. Y. 2006-07).


Medreich Ltd. v. Dy. CIT (2011) 48 SOT 579 / 57 DTR 456 / 8 ITR 639 (Bang.)(Trib.)

S. 37(1) : Business expenditure – Deduction - Prospecting, etc. - Minerals.Assessee which is engaged in prospecting and exploration of minerals, it also provided consultancy services in same field, expenditure incurred towards prospecting and exploring activities were capitalized and amortization of same was claimed under section 35E. Expenditure incurred to earn consultancy service were claimed as business expenditure under section 37(1). Assessing Officer held that all the expenditure were to treated as eligible for amortisation under section 35E. The Tribunal held that only such expenses which are incurred wholly and exclusively on any operations relating to prospecting as envisaged under provisions of section 35E(2) read with section 35(E)(5)(a), and rest of unconnected expenses which may have been incurred by an assessee are eligible deduction in normal course of computation of business income. (A. Y. 2005-06).De Beers India (P) Ltd. v. Dy. CIT (2011) 48 SOT 506/(2012)13 ITR 1 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Notional loss on revaluation of shares.Notional loss on revaluation of shares was held to be not allowable as there was, prima-facie, no transfer of shares. (A. Y. 2001-02)Mahindra Intertrade Ltd. v. Dy. CIT (2011) 133 ITD 597 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Capital or revenue expenditure - Construction on land belonging to Government.Expenditure on construction of approach road to a plant which was not operational during the year constituted capital expenditure. (A.Y. 1995-96)Aditya Birla Nuvo Ltd. v. ACIT (2011) 141 TTJ 702 / 131 ITD 511 / 61 DTR 343 (Mum.)(Trib.)

S. 37(1) : Business expenditure - Foreign tour expenses - Latest information.Foreign tour expenses for obtaining latest information concerning dental implants are allowable as business expenditure. (A. Y. 2004-05)Dy. CIT v. B2C Implants (2011) 141 TTJ 638 / 130 ITD 184 / 52 DTR 192 (Mum.)(Trib.)

S. 38 : Building - Partly used for the purpose of business - Depreciation.Assessee installed hub in its own premises of assessee and VSAT antenna and monitors were installed at premises of member brokers. Assessee was collecting only usage charges from members. Assessee claimed depreciation on said equipment. Assessing Officer held that VSAT network was being used by members for purpose of conducting their business, therefore by invoking provisions of section 38(2) he estimated that 40% of such net work could be said to have been used for the assessee’s business and he disallowed 60% of depreciation. The Tribunal held that installation of system was expedient for carrying on business of assessee and full depreciation was to be allowed. (A. Ys. 1997-98,1998-99 and 2001-02).ACIT v. National Stock Exchange of India Ltd. (2011) 133 ITD 27 / 142 TTJ 189 / 62 DTR 329 (Mum.)(Trib.)

S. 40(a)(i) : Amounts not deductible – Non-resident - Deduction at source - Technician outside India - (S. 195)Payment made outside India for services rendered by non-residence technicians outside India no disallowance can be made as provisions of section 195 is not applicable. (A. Y. 2003-04) CIT v. International Creative Foods (P) Ltd. (2011) 49 DTR 150 / 337 ITR 440 / 240 CTR 90 (Ker.)(High Court)


S. 40(a)(i) : Amounts not deductible - – Non-resident – Deduction at source - Software.The assessee had purchased a software from M and sold in the Indian market. The assessee acted as a dealer. This could not be termed as royalty, therefore, section 40(a)(i) had no application.CIT v. Dynamic Vertical Software India P. Ltd. (2011) 332 ITR 222 (Delhi)(High Court)

S. 40(a)(i) : Amounts not deductible – Non-resident - Interest - Branch of foreign Bank - Head office - Deduction at source - Permanent establishment. (S. 195)It was held that as regards taxability in the hands of the Head Office & obligation for TDS under section 195, the same was not chargeable to tax in the hands of the Head Office. The PE being assessable as separate legal entity pursuant to provisions of DTAA there is no obligation to deduct tax under section 195 and consequently no disallowance under section 40(a)(i) can be made in the hands of the branch. Interest paid by a branch. Thus, interest paid by a branch of a Foreign entity to its Head office is deductible in the hands of the branch. Such interest is not taxable in the Head Office’s hands.ABN AMRO Bank, N.,V. v. CIT (2011) 57 DTR 85 / 241 CTR 552 / 198 Taxman 376 (Cal.)(High Court) Editorial: Betts Hartley Huett (1979) 116 ITR 425 (Cal.) distinguished Hyundai Heavy Industries (2007) 291 ITR 482 (SC) & Morgan Stanley (2007) 292 ITR 416 (SC) followed

S. 40(a)(i) : Amounts not deductible - Discounting charges - Export sales bill - Deduction at source - Interest. (S. 2(28A), 195)Discounting charges paid by assessee to a foreign company for discounting export sale bills is not “interest” as defined in section 2(28A), since foreign company has no permanent establishment in India, it was not liable to tax in respect of discounting charges and therefore, assessee was under no obligation to deduct tax at source under section 195 and the discounting charges could not be disallowed under section 40(a)(i). (A. Ys. 2004-05 & 2005-06). CIT v. Cargill Global Trading (I) (P) Ltd. (2011) 335 ITR 94 / 241 CTR 443 / 56 DTR 188 / 199 Taxman 320 (Delhi)(High Court)

S. 40(a)(i) : Amounts not deductible - Deduction at source – Royalty - Paid or deducted.As per the proviso to section 40(a)(i), deduction for royalty could be allowed in the year in which TDS was either paid or deducted under Chapter XVII –B; where as tax was deducted in A. Y. 1995-96 but payment was made in the next A. Y. i.e. 1996-97, assessee was not entitled to claim the same as deduction in A. Y. 1996-97 but could be claimed in A. Y. 1995-96, only. (A. Y. 1996-97). CIT v. Whirlpool of India Ltd. (2011) 56 DTR 65 / 242 CTR 245 (Delhi)(High Court)

S. 40(a)(i) : Amounts not deductible – Payment of commission – Non-resident - Deduction at source. (S. 195)Tax is not deductible under section 195 with regard to payment of commission to foreign agent in view of Circular No. 23 of 1969 and Circular No. 786 of 2000. The payment cannot be disallowed under section 40(a)(i) as Circular No. 7 of 2009 had no retrospective effect. (A. Y. 2007-08)Dy. CIT v. Sanjiv Gupta (2011) 135 TTJ 641 / 50 DTR 225 (Luck.)(Trib.)

S. 40(a)(i) : Amounts not deductible - Fees for technical services - Deduction at source – Non-resident. (S. 9 (1)(vii)(b), 195)In order to fall with in the exception of section 9(1)(vii)(b), the technical services for which, the fees have been paid, ought to have been utilized by resident in a business outside India or for the purpose of making or earning any income from any source outside India. Assessee having established that the testing and


certification services provided by it by CSA were utilized only for export activity, section 9(1)(vii)(b) being not attracted, section 40(a)(i) could not be invoked. (A. Y. 2005-06).Havells India Ltd. v. Addl. CIT (2011) 59 DTR 118 / 140 TTJ 283 / 47 SOT 61 (Delhi)(Trib.)

S. 40(a)(i) : Amounts not deductible - Deduction at source – Non-resident - A Fee for “user of name” and “accreditation” not taxable as “royalty”. (S. 195)The assessee, engaged in manufacture of tooth paste etc paid Rs. 11,71,826 as “accreditation panel fees” to British Dental Health Foundation UK without deduction of tax at source. The Assessing Officer disallowed the sum under section 40(a)(i) on the ground that the sum was taxable as “royalty” and tax had not been deducted at source under section 195(1). The CIT(A) deleted the disallowance. Before the Tribunal, the department argued that since the assessee derived valuable advantage from the accreditation by BDHF and use the same as a marketing tool, the amount constituted “royalty”. The Tribunal dismissing the appeal held that, (i) The obligation to deduct tax under section 195(1) arises only if the payment is chargeable to tax in the hands of non-resident recipient. If the recipient of the income is not chargeable to tax, the vicarious liability on the payer is ineffectual. As the Assessing Officer had not established how the recipient was liable to pay tax, he was in error in disallowing under section 40(a)(i) (GE India Technology Center P. Ltd. v. CIT (2010) 327 ITR 456 (SC) followed;(ii) On merits, though the accreditation fees permitted the assessee the use of name of British Dental Health Foundation, it did not constitute “royalty” under Article 13 of the India-UK DTAA because it did not allow the accredited product to use, or have a right to use, a trademark, nor any information concerning industrial, commercial or scientific experience so as to fall within the definition of the term. (A. Y. 2004-05) ACIT v. Anchor Health and Beauty Care Pvt. Ltd. (2011) 47 SOT 284 (Mum.)(Trib.)

S. 40(a)(i) : Amounts not deductible – Non-resident - Certificate by a Chartered Accountant - Deduction at source. (S.195)A certificate issued by a chartered accountant cannot be a conclusive determination of taxability of income in the hands of the recipient. Question of taxability in the hands of the recipient remains open and the assessee continues to have obligation to file all the relevant details, enabling determination of such liability, before the revenue authorities. Matter was remitted to the Assessing Officer to examine the taxability of the payments in the hands of recipients, on merits. (A.Y.2005-06).Dy. CIT v. Rediff Com India Ltd. (2011) 61 DTR 426 / 47 SOT 310 / 141 TTJ 679 (Mum.)(Trib.)

S. 40(a)(iii) : Amounts not Deductible - Salary payable outside India – Non-resident - Dedcution at source - DTAA - India-Netherlands. (S. 5, 9)Employees were non-residents who rendered services outside India and also received salaries outside India, salaries paid to them were not liable to tax in India hence provisions of section 40(a)(iii) were not applicable. (A. Y. 2002-03)Mother Dairy Fruit, Vegetable (P) Ltd. v. CIT (2011) 198 Taxman 33 / 240 CTR 40 / 53 DTR 70 (Delhi)(High Court)

S. 40(a)(iii) : Amounts not deductible - Deduction at source - Income deemed to accrue or arise in India - Salary to staff at Netherland. (S. 9, 192)Assessee did not deduct tax at source on salary payments made to staff at Netherlands. Assessing officer invoked the provisions of 40(a)(iii), and disallowed the payments made on the ground that the tax was not deducted under section 192.The Tribunal held that since salaries had been paid to non-residents for services rendered abroad, provisions of Explanation to section 9(1)(ii) were not applicable to assessee. Since salary


http://itatonline.org/archives/index.php/ge-india-technology-centre-vs-cit-supreme-court-tds-obligation-us-1951-arises-only-if-the-payment-is-chargeable-to-tax-in-the-hands-of-non-resident-recipient

paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India , provisions of section 192 can not be applied hence disallowance made by applying the provisions of section 40(a)(iii) were liable to be deleted. (A. Y. 2003-04).Dy. CIT v. Mother Dairy Fruits & Veg (P) Ltd. (2011) 45 SOT 186 / 60 DTR 220 / 141 TTJ 97 (Delhi)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Payments by firm to partners – Sub-contract - Deduction at Source. (S. 194C)Partners of the assessee firm having executed the transportation, contracts undertaken by the firm by using their own trucks and the assessee having acted as an agent in routing the payments to partners, it cannot be held that there was a separate contract between the firm and the partners and, therefore, such payments could not be disallowed under section 40(a)(ia) on the ground that tax was not deducted at source under section 194C. (A. Y. 2006-07)CIT v. Grewal Brothers (2011) 54 DTR 99 / 240 CTR 325 (P&H)(High Court)

S. 40(a)(ia) : Amounts not deductible - Deduction at source - “Transaction charges” paid to BSE - “fees for technical services”. (S. 9(1)(vii), 194J) In the instant case, there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the BSE is a complete platform for trading in securities. A stock exchange manages the entire trading activity carried on by its members and accordingly renders “managerial services”. Consequently, the transaction charges constituted “fees for technical services” under section 194-J and the assessee ought to have deducted TDS. However, on facts, because from 1995 to 2005 no tax was deducted and no objection was raised by the Assessing Officer and because from A.Y. 2006-07 onwards the assessee had deducted TDS, there was a bonafide belief that no TDS had to be deducted, hence no disallowance under section 40(a)(i) can be made for A.Y. 2005-06.CIT v. Kotak Securities Limited (2011) 62 DTR 339 / 203 Taxman 86 / 245 CTR 3 / (2012) 340 ITR 333 (Bom.)(High Court)

S. 40(a)(ia) : Amounts not deductible - Deduction at source – Contractor – Sub-contractor - Labour Charges - Payments for goods. (S. 194C)It was noted from records that a small friction of total expenditure was in form of labour charges, and as such, it was difficult to say that contract was for supply of labour or work and would rather be categorized as one for purchase of goods, though some labour work stood performed. As it was not a case of contract for service or labour, provision of section 194C cannot be applicable consequently disallowance was deleted. Disallowance cannot be made under section 40(a)(ia) on account of non-deduction of tax at source in respect of estimated labour charges which is a small fraction of the total expenditure in respect of goods purchased. (A. Y. 2005-06) S. T. Reddiar & Sons v. Dy. CIT (2011) 129 ITD 475 / 135 TTJ 480 / 49 DTR 326 / 7 ITR 1 (Coch.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source – Contractor – Amendment – Clarificatory - Tax deducted deposited before due date of filing of return.Provisions of section 40(a)(ia), as amended by the Finance Act, 2010, w.e.f. 1-4-2010, which was been inserted by the Finance (No. 2) Act, 2004, w.e.f 1-4-2005 to section 40 of the Act is remedial in nature, designed to eliminate unintened hardship to the tax payers and which made the provision unworkable or unjust in a specific situation and is clarificatory in nature and, therefore, has to be treated as retrospective


with effect from 1st April 2005, the date on which section 40(a)(ia) has been inserted by the Finance Act (No. 2) Act, 2004 .(A. Y. 2005-06)Kanubhai Ramji Makwana v. ITO (2011) 49 DTR 70 / 135 TTJ 364 / 44 SOT 264 (Ahd.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source - Interest Commission – Sub-contractor - Freight Charges.Assessee deducted the tax at source and paid to Government beyond date stipulated in section 200 but before the due date of filing of his return of income for the year under consideration. Finance Act 2010 had made amendments to provisions of section 40(a)(ia) as per which if tax has been deducted in relevant previous year and same has been paid on or before due date of filing of return of income for said previous year as specified in section 139(1), corresponding amount from which tax has been deducted shall be allowed as deduction. Said amendment was remedial / curative in nature, it would apply respectively with effect from 1-4-2005. (A. Y. 2006-07)Bansal Parivahan (India) (P) Ltd. v. ITO (2011) 43 SOT 619 / 53 DTR 40 / 137 TTJ 319 / 9 ITR 565 (Mum.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - - Payment to truck operators without deduction TDS - Deduction at source. (S. 194C)Assessee operating trailer lorries disbursing freight charges amounting to Rs. 46,70,365 to 16 parties without deducting TDS as specified in section 194C. Assessee was liable to deduct tax at source. Amendment to sub-section (3) of section 194C made through Finance Act 2005, where by second and third provisions were added to it w.e.f. 1st June, 2005 has no retrospective effect. The Tribunal held that the Assessing Officer was justified in making disallowance under section 40(a)(ia). (A. Y. 2005-06).ITO v. M.Sankar (2010) 127 ITD 316 / (2011) 138 TTJ 690 / 55 DTR 289 (Chennai)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source - Franchisee agreement - Sharing of profits. (S. 194C)Franchisee agreement did not stipulate payment to be made to the licence for any work done on behalf of the assessee and it was merely a case of running a study centre and to apportion profits thereof between the assessee and the licence and therefore provisions of section 194C were not applicable and no disallowance under section 40(a)(ia) can be made. (A. Ys. 2005-06, 2006-07).Career Launcher (India) Ltd. v. ACIT (2011) 139 TTJ 48 / 56 DTR 10 / 131 ITD 414 (Delhi)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Payment of contractors - Deduction at source - Form No. 15-I. (S. 194C)Once assessee has obtained Form No. 15-I from the sub-contractors, he is not liable to deduct tax from the payments made to sub-contractors and no disallowance can be made under section 40(a)(ia). Belated furnishing of form No 15J to the CIT is an act posterior in time to payments made under to sub-contractor and therefore, this cannot itself undo the eligibility of exemption created by second proviso to section 194C(3)(i) by virtue of submission of Form No. 15 -I by the sub-contractors.(A. Y. 2006-07).Valibhai Khanbhai Mankad v. Dy. CIT (2011) 56 DTR 89 / 46 SOT 469 / 139 TTJ 70 (Ahd.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Payment to contractor - Dedcution at source. (S. 194C)Section 40(a)(ia) applies even in respect of amount paid and not merely payable to the contractors and therefore CIT (A) was justified in confirming disallowances under section 40(a)(ia) as the assessee had failed to deduct tax under section 194C. (A. Y. 2007-08).Dy. CIT v. Ashika Stock Broking Ltd. (2011) 56 DTR 417 / 139 TTJ 192 / 44 SOT 556 (Kol.)(Trib.)


S. 40(a)(ia) : Amounts not deductible - Payments to Indian Agents of foreign shipping lines -Deduction at source. (S.194C)Transportation of goods by railways does not fall with in the ambit of “work” with in the meaning of section 194C and therefore, there was no obligation on the assessee to deduct tax at source under section 194C from the payments made to Indian agents of foreign shipping lines for inland haulage of goods by railways and accordingly, no disallowance can be made under section 40(a)(ia). (A. Y. 2006-07).Airtech (P) Ltd. v. Dy. CIT (2011) 57 DTR 169 / 139 TTJ 318 / 45 SOT 100 (Delhi)(Trib.)

S. 40(a)(ia) : Amounts not deductible – Payment to contractors - Section is applicable in respect of amount paid and payable – Deduction at source. (S. 194C)Assessee contended that the section 40(a)(ia) is not applicable in case where sum has been paid as the section refers the “sums payable”. The Tribunal held that section is applicable in respect of amount paid also hence, the assessee failed to deduct the tax under section 194C, disallowance was justified. (A. Y. 2007-08).Dy. CIT v. Ashika Stock Broking Ltd. (2011) 139 TTJ 192 / 44 SOT 556 / 56 DTR 417 (Kol.)(Trib.)Editorial – Contrary View was taken by Jaipur Bench in Jaipur Vidyut Vitran Nigam Ltd v. Dy CIT (2009) 123 TTJ 888 (JP)(Trib.).

S. 40(a)(ia) : Amounts not deductible - Payable to a contractor or sub-contractor - Adjustment of refund - Deduction at source. (S. 194C)Irrespective of fact that an assessee is entitled to claim refund of excess tax paid or get adjusted against tax liability under provisions of Act, assessee can not with hold TDS deducted from payment made to a contractor so as to adjust same against excess taxes paid earlier and if an assessee does so then provisions of section 40(a)(ia) are attracted in respect of payment so made. (A. Y. 2005-06).HCC Pati Joint Venture v. ACIT (2011) 46 SOT 263 (Mum.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Interest payment additional cost - Deduction at source. (S. 194A)When the amount of interest paid has been considered to be part of the purchase price and not interest under section 194A, such payment cannot be disallowed under section 40a(ia). (A. Y. 2005-06).Parag Manshuklal Shah v. ITO (2011) 46 SOT 302 / (2012) 65 DTR 342 (Ahd.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Fees for technical services - Deduction at source – Non-resident – DTAA - India-UK. (S. 9(1)(vii)(b), 195, Arts. 13 &15)By amendment in the Finance Act, 2007, the legislature inserted the Explanation with retrospective effect from 1st June,1976 to section 9(2) and it was impossible for the assessee to deduct tax in the financial year 2003-04 1st April, 2003 to 31st March, 2004, when the obligation to deduct TDS was not on the assessee during that period disallowance was not sustainable. Assessee acted bonafide in conformity with the provisions of Act. (A. Y. 2004-05).Sterling Abraive Ltd. v. ACIT (2011) 140 TTJ 68 / 57 DTR 361 / 44 SOT 652 (Ahd.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source - Deposited before due date of filing of return - Amendment by FA 2010 is not retrospective.The Finance Act, 2010 amended s. 40(a)(ia) w.r.e.f 1.4.2010 to provide that no disallowance would be made if the TDS was deposited on or before the due date for filing the return. The assessee claimed that the said amendment was “remedial and curative in nature” and applicable from A. Y. 2005-06. The Special Bench,


held that, the amendment to section 40(a)(ia) by the FA 2010 was made retrospectively applicable only from A. Y. 2010-11 and not earlier. It is nowhere stated that the amendment is curative or declaratory in nature nor is such an intention discernible. A provision giving relief cannot be regarded as retrospective only because the original provision caused hardship to the assessee. Section 40(a)(i) caused “intended difficulty” with the object of discouraging non-compliance with the TDS provisions. A partial relaxation in its rigor, inserted with prospective effect, cannot be treated as “retrospective“. (A. Y. 2005-06)Bharati Shipyard Ltd. v. Dy. CIT (2011) 132 ITD 53 / 61 DTR 41 / 11 ITR 599 / 141 TTJ 129 (Mum.)(SB)(Trib.)

S. 40(a)(ia) : Amounts not deductible – Interest –Deduction at source- Form No. 15G.Depositors having submitted form No. 15G to the assessee well in time, interest paid to them without deduction of tax at source cannot be disallowed under section 40(a)(ia) simply because the said forms could not be submitted to the Assessing Officer the with in the time stipulated in the Act, once the same were available to the Assessing Officer while framing the assessment. (A. Y. 2006-07).Shyam Sunder Kailash Chand v. ITO (2011) 60 DTR 270 / 141 TTJ 126 (Jaipur)(Trib.)

S. 40(a)(ia) : Amounts not deductible – Commission - Non-resident – Agent - Service rendered outside India – Deduction at source. (S. 9(1)(i), 195).Commission paid to non resident agent for services rendered out side India not being chargeable to tax in India could not be disallowed under section 40(a)(ia). (A. Ys. 2001-02 to 2004-05).Dy. CIT v. Devi’ s Laboratories Ltd. (2011) 60 DTR 210 / 140 TTJ 746 / 131 ITD 271 / 10 ITR 501 (Hyd.)(Trib.)

S. 40(a)(ia) : Amounts not deductible – Short deduction at source – No disallowance for short-deduction TDS default. (S. 194C)Where it is a case of short deduction of payment as against non-deduction of TDS, disallowance under section 40(a)(ia) could not be made. Though section 40(a)(ia) provides for a disallowance if amounts towards rent, etc have been paid without deducting tax at source. It does not apply to a case of short-deduction of tax at source. As the assessee had deducted under section 194C, it was not a case of “non-deduction” of TDS. If there is a shortfall due to difference of opinion as to which TDS provision would apply, the assessee may be treated as a defaulter under section 201 but no disallowance can be made under section 40(a)(ia). [Chandabhoy & Jassobhoy (ITAT Mumbai) followed]. (A. Y. 2007-08)Dy. CIT v. S. K. Tekriwal (2011) 48 SOT 515 (Kol.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source - Retrospective amendment.Where the assessee acted bona fide in conformity with the provision of Act and the legal position in not deducting tax at source, retrospective amendment could not make him liable and therefore no disallowance under section 40(a)(ia) was called for. (A. Y. 2004-05)Sterling Abraive Ltd. v. ACIT (2011) 57 DTR 361 / 140 TTJ 68 / 44 SOT 652 (Ahd.)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Professional fees - Brokerage and commission - Deduction at source - Payments made before due date of filing of return. [S. 139(1)]Tax deducted from the payments of professional fees in the month of March, 2005 having been deposited on 22nd June, 2005, within due date as per section 139(1), the payments can not be disallowed. As regards the brokerage and Commission payment on which tax was deducted in February, 2005, but deposited on 6th April 2005, i.e. after the end of relevant previous year, is to be disallowed under section 40(a)(ia). (A. Ys. 2002-03 to 2005-06). ACIT v. Bombay Real Estate Development Company (P) Ltd. (2011) 64 DTR 137 (Mum.)(Trib.)


S. 40(a)(ia) : Amounts not deductible - lease rent for cranes – Works contract - Deduction at source. (S. 194C)Payment made by the assessee for hiring of cranes to crane owners was with reference to the period of lease and not at all related to the work/ out derived from the cranes and therefore such payment cannot be said to be payment made for “works contract” covered by section 194C and therefore was not required to deduct tax at source under section 194C and consequently the payments could not be disallowed under section 40(a)(ia). (A. Y. 2006-07).ACIT v. Sanjay Kumar (2011) 48 SOT 615 / (2012) 143 TTJ 415 (Delhi)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source – Contractor - Sub contractor - Labour charges. (S. 194C)Assessee paid labour charges to various labourers which included cash payments exceeding Rs. 50,000 to some labourers throughout year. Assessing Officer disallowed such payments by invoking provisions of section 40(a)(ia) for non-deduction of tax at source under section 194C. According to assessee the number of persons from one family worked as casual labourers at site on daily wage basis and due to practical difficulties for preparing individual vouchers for each labour payment, only one voucher was prepared in name of head of family who received the money and if individual labourers were taken into consideration, payment does not exceed Rs. 50,000 in a year to each person. Assessee also filed the confirmation from persons who received the sums on behalf of a number of members and same had not been repudiated by revenue. Tribunal held that the disallowance was not justified. (A. Y. 2006-07).Nalawade C. Maruti v. Jt. CIT (2011) 48 SOT 566 (Pune)(Trib.)

S. 40(a)(ia) : Amounts not deductible - Deduction at source – Contractor – Sub-contractor - Hiring of tractors and trolleys - Transport and Octroi charges. (S. 194C, 194I)Assessee hired Tractors and trolleys from nearby villages for purpose of business and debited payments on day basis under head “transportation and octori charges”. Assessing Officer disallowed the same on ground that said payments were transport charges and hence required deduction at source under section 194C. The Tribunal held that the nature of expenditure cannot be deduced merely on the basis treatment accorded in account books, but to be decided on basis of substantive character of transaction. As hiring of tractors / trolleys for purpose of using them in business could not be equated to a contract for transportation for carriage as contemplated under section 194C, therefore disallowance of expenses by invoking provisions of section 40(a)(ia) was unjustified. Even if such an arrangement is considered to be falling with in the purview of section 194I of the Act, however for the period under consideration the requirement of deduction at source on machinery rentals are not applicable. (A. Y. 2006-07).Nalawade C. Maruti v. Jt. CIT (2011) 48 SOT 566 (Pune)(Trib.)

S. 40(b) : Amounts not deductible – Firm – Partner – Interest - Salary. (S. 28(i), 29, 32, 145)Assessee partnership firm paid interest to partners on their capital account and claimed the deduction. Assessing officer held that as the assessee has not claimed depreciation in books of account however claimed depreciation in the computation, he reworked the capital balances of partners by reducing the cumulative amount of depreciation therefrom and allowed the interest computed on such reduced capital balances. The Tribunal held that in terms of section 40(b), read with section 28(i) and 29, Assessing Officer is not entitled to disallow payment of interest to partners by re working capital account balances of partners. (A.Ys 1999-2000 & 2003-04).Swaraj Enterprises v. ITO (2011) 132 ITD 488/ 140 TTJ 360 / 11 ITR 70 / 57 DTR 299 (Visakhapatanam)(Trib.)


S. 40(b) : Amounts not deductible - Interest and salary to partner - Partnership deed - CBDT- Circular. (S. 119)Assessee had not filed certified copy of the partnership deed signed by all the partners specifying the individual share of partners. There was no agreement in respect of quantification of the salary or the rate of interest on the capital contribution of the partners and such payment was left to the discretion of the partners at the end of financial year. Circular No. 739 dt. 25th March, 1996 does not run counter to any of the provisions of the Act, therefore the Circular being clarificatory in nature cannot be said to be beyond the powers of the Board. When there was no agreement in respect of quantification of the salary or rate of interest on the capital contribution of the partners and such payment was left to the discretion of the partners at the end of the financial year deduction for interest and salary under section 40(b) could not be allowed. (A. Y. 1993-94).Sood Bhandari & Co. v. Central Board of Direct Taxes (2011) 64 DTR 338 / (2012) 246 CTR 89 (P&H)(High Court)

S. 40(b) : Amounts not deductible - Salary to working partner – HUF - Karta.Salary paid to working partner even though as Karta of HUF, is received as individual and as working partner, hence allowable as deduction while computing income of firm. (A. Y. 2005-06)CIT v. Jugal Kishor & Sons (2011) Tax. L.R. 550 (All.)(High Court)

S. 40(b) : Amounts not deductible - Firm – Remuneration - Not working partnerWhere remuneration is paid to a partner who is not a working partner, remuneration payable to him even in accordance with the deed of partnership is not allowable under the provisions of section 40(b) of the Act. (A. Ys. 1999-2000 to 2004-2005)Reliable Surface Coatings v. ACIT (2011) 7 ITR 183 (Ahd.)(Trib.)

S. 40(b) : Amounts not deductible – Partnership - Remuneration to Partners - CBDT Circular, which specifies that for section 40(b)(v), the partnership deed should specify the remuneration, is invalid.Section 40(b)(v) allows a deduction of payment of remuneration to a working partner if it authorized by the partnership deed and not in excess of the limits. Section 40(b)(v) does not lay-down any condition that the partnership deed should fix the remuneration or the method of quantifying remuneration. Accordingly, CBDT Circular No. 739 dated 25.3.1996 which requires that either the amount of remuneration payable to each individual should be fixed in the agreement or the partnership agreement deed should lay down the manner of quantifying such remuneration goes beyond section 40(b)(v). The CBDT cannot issue a circular which goes against the provisions of the Act. The CBDT can only clarify issues but cannot insert terms and conditions which are not part of the main statute. A partnership deed which provides that the remuneration would be as per the provisions of the Act meaning thereby that the remuneration would not exceed the maximum remuneration provided in the Act is valid and deduction is admissible. ( A.Y. 1996-97)Durga Dass Devki Nandan v. ITO (2011) 241 CTR 180/ 200 Taxman 318 / 55 DTR 101 (HP)(High Court)

S. 40(b): Amounts not deductible - Partnership deed must quantify or lay down the manner of quantifying remuneration to partners.Section 40(b)(i) to (v) which prescribe the conditions for deduction of remuneration paid to a partner require that the payment should be authorized by, and be “in accordance with the terms of the partnership deed”. This mandates that the quantum of remuneration or the manner of computing the quantum of remuneration should be stipulated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date.


Sood Brij & Associates v. CIT (Delhi)(High Court) (www.itatonline.org)

S. 40(b) : Amounts not deductible - Interest, Salary, etc. paid by firm to partner.Section 40(b)(v) does not lay down that remuneration payable to partner should be fixed or method of remuneration should be provided for in the partnership deed. All that the said section provides is that if the remuneration paid to partner is in accordance with the partnership deed and does not exceed the aggregate amount laid down in the said section, then the same shall be eligible for deduction. Circular No. 739 which states that amount of remuneration should be provided for in the deed, cannot override the statutory provisions and must yield to the substantive provisions. Durga Dass Devki Nandan v. ITO (2011) 200 Taxman 318 / 241 CTR 180 (HP)(High Court)

S. 40A(2) : Expenses or payments not deductible – Excessive or unreasonable – Same rate of tax – Disallowance not justified.Where assessee purchased from its subsidiary material at prices higher than the market rate for assured supply, there was no question of diversion of funds since both the assessee and the subsidiary were subjected to the same rate of tax, hence, there was no warrant for addition by invoking section 40A(2). (A. Y. 1985-86)CIT v. V. S. Dempo & Co. P. Ltd. (2011) 196 Taxman 193 / 61 DTR 74 / 244 CTR 102 / 336 ITR 209 (Bom.)(High Court)

S. 40A(2) : Expenses or payments not deductible – Royalty - Trade mark and Brands.Royalty paid by the assessee to SWCL for use of latter’s trade mark and brands could not be disallowed by invoking the provisions of section 40A(2), as SWCL is not holding substantial interest i.e. 20 percent or more of the share capital with attendant voting rights, whether directly or beneficially in the assessee company. (A. Ys. 1997-98 to 1999-2000).CIT v. V. R. V. Breweries & Bottling Industries Ltd. (2011) 62 DTR 121 / 244 CTR 576 (Delhi)(High Court)

S. 40A(2) : Expenses or payments not deductible - Purchase transaction from associate concerns.Assessing Officer did not call upon the assessee to furnish any evidence regarding purchase transaction from associate concern, no disallowance could be made applying provisions of section 40A(2)(b), when there were no comments upon the material placed before him during the course of remand proceedings. (A. Y. 2004-05).Dy. CIT v. B2C Implants (2011) 141 TTJ 638 / 130 ITD 184 / 52 DTR 192 (Mum.)(Trib.)

S. 40A(2) : Expenses or payments not deductible - Payment of interest to associated concern. Obtaining the unsecured loan @ 11% from associated concern was commercially expedient as assessee could earn more income from such borrowed funds and secured loans were neither available easily nor they were enough to cater the business needs of the assessee as it did not have enough security and/or provision of guarantee for obtaining such loan and therefore no disallowance under section 40A(2) was called for. (A. Y. 2006-07) Addl. CIT v. Religare Finvest Ltd. (2011) 62 DTR 46 / 141 TTJ 649 (Delhi)(Trib.)

S. 40A(2) : Expenses or payments not deductible – Managing director - Remuneration.M is a Chartered Accountant from London and had quality experience as employee of AAF for ten years before joining the assessee Company. He is also stated to be running the entire business and other two directors are not so qualified and also did not take part in the business. Assessing Officer has not brought any evidence to show that the payment made to the Managing Director was is excessive or unreasonable


having regard to the fair value of the services for which the payment was made or the benefits derived from such services, the conditions of section 40A(2) are not satisfied and, therefore, no part of such payments made to other directors. (A. Ys. 2002-03 to 2005-06). ACIT v. Bombay Real Estate Development Company (P) Ltd. (2011) 64 DTR 137 (Mum.)(Trib.)

S. 40A(2)(b) : Expenses or payments not deductible - Technical know - how - Parent Company. (S. 92)Once it is found that having n regard to the nature, quantum and quality assurance aspects of technical know how and other services provided to the assessee by the parent / foreign company, compensation paid in the form of royalty / consideration cannot be treated as excessive or unreasonable. Tribunal was justified in deleting the addition made by Assessing Officer by relying upon section 40A(2)(b) and section 92. (A. Ys. 1997-98 & 1998-99).CIT v. Nestle India Ltd. (2011) 57 DTR 65 / 337 ITR 103 (Delhi)(High Court)

S. 40A(3) : Expenses or payments not deductible - Block Assessment - GP – Estimated. (S. 158BC)Section 40A(3) applies to block proceedings. It is not accepted that the provisions of block assessment are special, and that they are a complete Code and the other provisions cannot apply. CIT v. Suresh N. Gupta (2008) 297 ITR 322 (SC) & M. G. Pictures (Madras) Ltd. v. ACIT (2003) 185 CTR 185 (Mad.) followed; Cargo Clearing Agency (Gujarat) v. Jt. CIT (2008) 218 CTR 541 (Guj.) not followed. The argument that if income is assessed by estimation on GP rate, no other disallowance can be made is not of universal application. If expenditure which is legally not permissible has been taken into account that can certainly be disallowed even where income is estimated. CIT v. Sai Metal Works (2011) 241 CTR 377 / 54 DTR 327 (P&H)(High Court).

S. 40A(3) : Expenses or payments not deductible - Payment to government. (Rule 6DD)Cash payments made by the assessee to the State Government who granted the contract to collect royalty on behalf of the Government cannot be disallowed under section 40A(3) in view of Rule 6DD(b). (A. Y. 2005-06)CIT v. Kalyan Prasad Gupta (2011) 51 DTR 191 / 239 CTR 447 (Raj.)(High Court)

S. 40A(3) : Expenses or payments not deductible – Cash payments for telephone cards, recharge coupons, etc. by distributor to cellular service provider.Assessee distributor does not make any 'purchasers’ either of goods or services on the acceptance of delivery of telephone cards, recharge coupons or other service products of the cellular service provider and, therefore, no disallowance can be made by applying section 40A(3) irrespective of the mode of payment. (A. Y. 2006-07)S. Rahumathulla v. ACIT (2011) 49 DTR 115 / 135 TTJ 720 / 127 ITD 440 / 7 ITR 41 (Coch.)(Trib.)

S. 40A(3) : Expenses or payments not deductible - Rejection of books of account. (S. 145)Assessing Officer having rejected the books of account and applied the net profit rate for the purpose of computing income, no disallowance could be made under section 40A(3). (A. Y. 2002-03).ITO v. Sadhwani Brothers (2011) 58 DTR 368 / 142 TTJ 26 (JP.)(Trib.)

S. 40A(3) : Expenses or payments not deductible - Block assessment - Profit estimated. (S.158BB)Provisions of section 40A(3) cannot be invoked in block assessment with respect to the purchases found as per seized material and unrecorded in the regular books of account, especially, when the profit from the unrecorded transactions has been estimated and declared.


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Kirti Foods Ltd. v. ACIT (2011) 60 DTR 96 (Pune)(Trib.)

S. 40A(3) : Expenses or payments not deductible - Cash payments - Presumption.The Tribunal held that in the absence of any material to show that the assessee had cash payments in violation of provisions of section 40A(3), disallowance could not be made on presumptions. (A. Ys. 2001- 02 to 2004-05).Free India Assurance Services Ltd. v. Dy. CIT (2011) 62 DTR 349 / 132 ITD 60 (Mum.)(Trib.)

S. 40A(3) : Expenses or payments not deductible - Cash payments exceeding prescribed limit – Principal - Agent.The assessee was distributor of “R” communication products. During relevant assessment year, the assessee made payments to principal by directly depositing cash in his bank account aggregating to Rs. 46.39 lakhs. Assessing Officer invoked the provisions of section 40A(3) and disallowed the payments. The Tribunal held that since the relation ship between “R” communication and assessee was one of principal and agent, the payment cannot disallowed under section 40A(3), accordingly deleted the disallowance. (A. Y. 2007-08).Koottummal Groups v. ITO (2011) 133 ITD 335 (Coch.)(Trib.)

S. 40A(9) : Expenses or payments not deductible - No disallowance for statutory corps as their service regulations have “force of law”The assessee, a corporation setup under a State Act, made a contribution of Rs.16.77 lakhs, in its capacity as employer and as per the service regulations, to the “MSW Karmachari Welfare Fund”. The Assessing Officer & CIT (A) took the view that the payment to a “fund“, was hit by section 40A (9) and not allowable as a deduction. The Tribunal allowing the appeal held that, section 40A(9) provides that no deduction shall be allowed in respect of “any sum paid by the assessee as an employer … as contribution to any fund … except where such sum is so paid … as required by or under any other law for the time being in force“. In the case of statutory corporations, the regulations providing for the terms and conditions of employment and conditions of service have the force of law. Consequently, the service regulations framed by the assessee by which it agreed to make payment to the Fund carried statutory force and fell within the expression “as required by or under any other law” for purposes of section 40A(9). (U. P. Warehousing Corporation 1980 3 SCC 459 followed)Maharashtra State Warehousing Corporation v. ACIT (Pune)(Trib.) www.itatonline.org

S. 40A(9) : Expenses or payments not deductible - Bonus to employees - Actual payment. (S. 43B)Section 40A(9), is an overriding section to 43B, therefore, payment of bonus payable to employees to an employee’s bonus trust would be hit by section 40A(9), even if such payment was made to comply with the provisions of section 43B. (A. Y. 1999-2000 and 2001-02).CIT v. Shasun Chemicals & Drugs Ltd. (2011) 199 Taxman 107 (Mad.)(High Court) S. 41(1) : Profits chargeable to tax – Income - Business income- Remission of liabilityInvestment company has taken loan and invested in long term shares. As there was no communication and claim for many years by lenders and unsecured loan written back. No deduction was claimed in respect of loan. Amount written back cannot be assessed as business income under section 41(1). (A. Y. 2004-05).Logitronics P. Ltd. v CIT (2011) 333 ITR 386 / 240 CTR 20 / 197 Taxman 394 / 53 DTR 50 (Delhi)(High Court)CIT v. Jubilant Securities P. Ltd (2011) 333 ITR 386 / 59 DTR 172 (Delhi)(High Court)


S. 41(1) : Profits chargeable to tax – Income - Business income – Unclaimed insurance premium.Unclaimed insurance premium credited to profit and loss account which was the amount collected by the assessee from the hirers as insurance premium as unclaimed balance becomes income of the assessee and liable to be tax as business income. (A. Y. 1997-98 to 2003-04)Motor General Finance Ltd. v. CIT (2011) 53 DTR 273 / 199 Taxman 51 (Delhi)(High Court)

S. 41(1) : Profits chargeable to tax –Income- Business income - Remission of liability - Unclaimed balances.The assessee was a shipping agent providing services to ships and acted as off shore representative. During the course of its business, the assessee was required to make deposits on behalf of its customers on various accounts with the Mumbai Port Trust. After recovering the charges, Mumbai Port Trust used to refund the amounts which in turn, were admittedly returned by the assessee to its principal as and when demanded. The refund of amount lying with the assessee for more than three years were considered by the assessee as income and offered to tax. The Assessing Officer rejected the method of accounting followed by the assessee and brought to tax entire refund amount lying with the assessee to tax under section 41(1). The Tribunal deleted the addition. On appeal the High Court up held the view of Tribunal.CIT v. Modest Maritime Services P Ltd. (2011) 338 ITR 64 (Bom.)(High Court)

S. 41(1) : Profits chargeable to tax – Income - Unilateral writing off the liability - Cessation of liability.Creditors did not encash the cheques within the validity period does not imply that those debts have been either extinguished or became barred. There may be circumstances which may enable the creditor to come with a proceeding for enforcement of the debt even after expiry of the normal period of limitation as provided in the Limitation Act, therefore there was no cessation of liability which could be charged as income under section 41(1). (A. Y. 1995-96).Goodricke Group Ltd. v. CIT (2011) 63 DTR 360 / 199 Taxman 402 / 338 ITR 116 (Cal.)(High Court)

S. 41(1) : Profits chargeable to tax - Depreciation - Balancing Charge - Benefit or Perquisite. [S. 28(iv), 41(2)]Where the cost of assets purchased by the assessee in earlier year was reduced by the seller on settlement of dispute, benefit of depreciation obtained by the assessee in the earlier years cannot be termed as an allowance or expenditure claimed by the assessee in the earlier years to warrant invocation of provisions of section 41(1), or 41(2). However, Assessing Officer is directed to bring back to tax, the amount of depreciation granted to the assessee in the earlier years on the alleged excess amount of Rs. 2 crores under section 28(iv) and redetermine the closing WDV of the block assets in the year under consideration. (A. Y. 2005-06)Binjarjka Steel Tubes Ltd. v. ACIT (2011) 50 DTR 89 / 136 TTJ 113 / 130 ITD 46 (Hyd.)(Trib.)

S. 41(1) : Profits chargeable to tax – Income-Business income - Liability outstanding more than three years.There is no rule that liability outstanding for more than three years need not be paid and the same becomes income of the assessee. In the absence of any specific information in the possession of the Assessing Officer that the amounts outstanding for more than three years were no longer payable by the assessee, same could not be treated as deemed income under section 41(1). (A. Y. 2003-04 & 2004-05)Dy. CIT v C. M. Y. K. Printech Ltd. (2011) 53 DTR 59 (Delhi)(Trib.)

S. 41(1) : Profits chargeable to tax –Income- Business income - Remission or cessation of liability.Where the amount ceased to be payable in the books by showing nil balance and the assessee had claimed the deduction of same amount in earlier year, the provisions of section 41(1) were rightly attracted. (A. Y.


2004-05 to 2006-07)ITO v. E. A. Infrastructure Operations P. Ltd. (2010) 41 SOT 269 / (2011) 135 TTJ 239 / 41 SOT 269 / 48 DTR 200 (Mum.)(Trib.)

S. 41(1) : Profits chargeable to tax – Income - Capital or revenue receipt - Waiver loan. [S. 2 (24), 28(iv)]Principal amount of loan, which is taken for the purpose of business or trading activity, on its waiver by the creditor, would constitute income chargeable to tax; however, if the loan is utilized for the purpose of acquiring any capital asset, the same, on its waiver, would not constitute income chargeable to tax either under section 41(1) or section 28(iv) or section 2(24). (A. Y. 2006-07)Dy. CIT v. Logitronics (P) Ltd. (2010) 127 ITD 16 / (2011) 53 DTR 73 / 137 TTJ 287 (Delhi)(Trib.)

S. 41(1) : Profits chargeable to tax – Income - Remission or cessation of trading liability -Outstanding credit.For treating amount of outstanding credit as taxable under section 41(1), there has to be a positive act on part of creditor in current year which would provide benefit to assessee by way of remission; merely because certain amount is outstanding for number of years will not be a case for holding that there is a cessation or remission. The Tribunal dismissed the appeal of revenue. (A. Y. 2007-08).ITO v. Bhavesh Prints (P) Ltd. (2011) 46 SOT 268 / 142 TTJ 128 / 64 DTR 401 (Ahd.)(Trib.)

S. 41(1) : Profits chargeable to tax – Income - Liabilities outstanding more than three years.Out standing liabilities of the assessee can not be said to have ceased to exist merely because the relevant accounts have become non operational or period of three years have expired and, therefore, such liabilities can not be charged to tax by invoking the provisions of section 41(1), more so when the assessee has not written back such liabilities in its profit and loss account. (A. Ys. 2003-05 to 2007-08).Dy. CIT v. Hotel Excelsior Ltd. (2011) 60 DTR 450 / 141 TTJ 248 (Delhi)(Trib.)

S. 41(2) : Profits chargeable to tax - Balancing charge - Transfer - Exchange - Transfer of assets at written down value to share holders in exchange for shares. [S. 2(47)]The assessee transferred certain assets in its textile unit to its share holders at written down value in exchange for shares surrendered to it. The Assessing Officer invoked section 41(2) in respect of the transferred assets in lieu of excess value of the shares over the written down value of the assets and made the addition. The CIT(A) deleted the addition. The Tribunal upheld the deletion. On reference the court held that the assets given at written down value in exchange of shares would amount to “Transfer” within the meaning of section 2(47). It attracted tax under section 41(2). (A. Y. 1983-84).CIT v. Oswal Spinning and Weaving Mills Ltd. (2011) 338 ITR 648 (P&H) (High Court)

S. 43(I) : Actual cost – Definitions - Depreciation - Assets acquired from franchisees - Valuation on the basis of valuation report - [S. 32, 43(6)]Assessee company engaged in the business of manufacture of soft drinks acquired manufacturing assets and other assets, land and building of its franchisees on the basis of valuation done by the approved valuer. Assessing Officer increased the value of land by 50% on estimated basis and value of bottles and crates was reduced by 50% and plant and machinery by 25%. The Court held that Tribunal was justified in direction the Assessing Officer to accept the valuation of assets acquired by the assessee from five vendor companies on the basis of report of the registered valuer when there was no basis to discard the valuation report. (A. Y. 1996-97).CIT v. Pepsico India Holdings (P) Ltd. (2011) 334 ITR 404 / 56 DTR 137 (Delhi)(High Court)


S. 43(1) : Actual cost – Definitions - Depreciation - Custom duty paid under protest. (S. 32)Assessee is entitled to add the disputed customs duty paid by it under protest on the imported machinery to the cost of plant and machinery and depreciation thereon. (A. Y. 2005-06)CIT v. Orient Ceramics & Industries Ltd. (2011) 56 DTR 397 (Delhi)(High Court)

S. 43(5) : Speculative transaction – Definitions - Derivative - Future contracts for purchase / sale of securities. Losses incurred from the Exchange traded derivative transactions carried on by the assessee during relevant assessment year are speculative transactions covered under section 43(5) of the Act and the loss incurred in those transactions are liable to be treated as speculative loss. Section 43(5) is not restricted to contracts which are capable of performance by actual delivery, and therefore, fact that futures contracts settled otherwise than by actual delivery cannot be a ground to hold that futures contracts are not speculative transactions under section 43(5). Clause (d) inserted in proviso to section 43(5) with effect from 1-4-2006 is prospective in nature and, therefore, transactions covered under clause (d) are deemed not be speculative transactions only with effect from 1-4-2006. (A. Y. 2003-04).CIT v. Bharat R. Ruia (HUF)(2011) 337 ITR 452 / 199 Taxman 87 / 241 CTR 1 / 54 DTR 153 / (2011) Vol. 113 (3) Bom. L.R. 1499. (Bom.)(High Court)

S. 43(5) : Speculative transaction – Definitions - Loss - Set off of loss - Property income. (S. 73)Loss from speculative transaction cannot be set off against income from property. (A. Y. 1997-98).Aravali Engineers P. Ltd. v. CIT (2011) 335 ITR 508 / 237 CTR 312 / 49 DTR 68 (P&H)(High Court)

S. 43(5) : Speculative transaction – Definitions - Post section 43(5) amendment, pre-A.Y. 2006-07 derivatives “speculation” losses have to be treated as “non-speculation” business losses for purposes of set-off.(i) When an assessee suffers a loss in business, speculative or non-speculative, he has a statutory right to carry forward the unabsorbed loss and set it off against profits and gains from the same business for the next year. The true nature of the loss has to be determined in the year of set-off. A finding as to the character of the loss reached in the year of incurring the loss is not binding in the year of set-off of the loss, even though the assessment may have reached finality. As such dual characterization is permissible (Manmohan Das 59 ITR 699 (SC) & Western India Oil Distributing Ltd 126 ITR 497 (Bom) followed);(ii) Though, as held in CIT v Bharat Ruia, derivatives transactions, prior to the amendment to section 43(5) w.e.f. A.Y. 2006-07, are “speculative transactions” and the losses suffered therefrom are “speculative losses”, the question whether they are eligible for set-off has to be determined as per the law prevailing in the year of set-off. As in the year of set-off, derivatives transactions are not, pursuant to the amendment to section 43(5), treated as “speculative transactions”, the losses incurred prior to the amendment have to be treated as normal business losses and are eligible for set-off against all business income in accordance with section 72 (Shreegopal Purohit 33 SOT 1 distinguished);(iii) Also, the question whether the assessment order is erroneous or not has to be determined as per the then prevailing law and as it was then held that the amendment to section 43(5) was clarificatory and that derivative transactions were not speculative transactions, the order was not erroneous. (G. M. Stainless Steel 263 ITR 255 (SC) followed). (A. Y. 2006-07).Gajendra Kumar T Agarwal v. ITO (2011) 63 DTR 345 / 11 ITR 640 (Mum.)(Trib.)

S. 43(5) : Speculative transaction – Definitions - Derivatives - Foreign institutional investors. (S. 115AD)


Transactions in derivatives, both index based and individual share based, are to be considered as speculative transactions with in the meaning of section 43(5) and they cannot be treated as normal business or non speculative transactions. Section 43(5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities to be considered as short term or long term gains. (A. Y. 2004-05).L.G. Asian Plus Ltd. v. ACIT (2011) 46 SOT 159 / 140 TTJ 668 / 60 DTR 159 (Mum.)(Trib.)

S. 43(5) : Speculative transaction – Definitions - Derivative – loss. Notification issued on 25th Jan., 2006 cannot curtail the applicability of cl.(d) of proviso to section 43(5) so as to make investments in derivatives done prior to 25th Jan., 2006 as speculative; transactions carried out through stock exchanges from 1st April, 2005 to 25th Jan., 2006 which are recognized by notification issued by CBDT on 25th Jan., 2006 would be eligible for being treated as non-speculative within the meaning of cl(d) of proviso to section 43(5).( 2006-07)ACIT v. Hiren Jaswantrai Shah (2011) 62 DTR 95 / 46 SOT 276 / 141 TTJ 851 (Ahd.)(Trib.)

S. 43(6)(c)(i)(B) : Block of assets – Definition - Depreciation – Computation - Apparent consideration - Not Fair market value. (S. 2 (14), 32)The expression “moneys payable” according to Explanation 4 to section 43(6) shall have the meaning as is in the Explanation below sub section 4 of section 41. Therefore, the written down value of all the assets falling with in the block of assets at the beginning of the previous year has to be adjusted by the amount at which the assets is actually sold and not the fair value of the asset that is sold.CIT v. Cable corporation of India Ltd. (2011) 336 ITR 56 / 201 Taxman 339 (Bom.)(High Court)

S. 43B : Deductions on actual payment - Business expenditure - Sales Tax - Extended filing of Return. (S. 139)Where time for filing of return is extended in terms of proviso to section 139(1), it automatically means extension of due date for purpose of section 43B, thus, Sales Tax paid within extended time for filing return cannot be disallowed under section 43B. (A. Y. 1988-89)CIT v. Narender Anand (2011) 332 ITR 483 / 198 Taxman 51 / 55 DTR 193 / 242 CTR 32 (Delhi)(High Court)

S. 43B : Deductions on actual payment – Business expenditure - Contribution to Employees’ State Insurance.Omission of the second proviso and the amendment of the first proviso to section 43B by the Finance Act, 2003, where by payment made by the employer towards contribution to provident fund, employees’ State insurance, gratuity, superannuation and other welfare funds would operate retrospectively from April 1, 1998 onwards. The payment made for ESI contributions could not be disallowed. (A. Y. 1998-99)CIT v. Rai Agro Industries Ltd. (2011) 334 ITR 122 (P&H)(High Court)

S. 43B : Deductions on actual payment – Business expenditure - Excise duty paid in advance.Assessing officer holding that deduction can be claimed only on removal of goods from factories. High Court held that the assessee is entitled to deduction in respect of excise duty paid in advance. (A. Y. 1989-90).CIT v. Modipon Ltd. (No. 2) (2011) 334 ITR 106 (Delhi)(High Court)

S. 43B : Dedcutions on actual payment – Business expenditure - Licence fee.


License fees payable under the Abkari Act for grant of right / privilege to sell liquor if not paid within the period specified in section 43B of the Act cannot be disallowed, as the same is consideration payable to the Government only for grant of right / privilege to sell liquor and not in the nature of any tax, duty, cess or fees as provided in section 43B(a) of the Act. (A. Y. 1999-2000)CIT v. G. Soman (2011) 53 DTR 220 / 241 CTR 82 / 196 Taxman 251 (Ker.)(High Court)

S. 43B : Deductions on actual payment – Business expenditure - Provident fund.Provident payment made late cannot be disallowed under section 43B. (A. Y. 2001-02).B.D.P.S. Software Ltd. v. Dy. CIT (2011) 62 DTR 361 / 245 CTR 19 / (2012) 340 ITR 375 (Bom.)(High Court)

S. 43B : Deductions on actual payment - Business expenditure - Provision for interest financial institutions.Assessee had made the claim only by way of a provision in Profit and loss Account and no actual payment was made by the assessee in respect of the interest payable to the financial institutions, deduction cannot be allowed. (A. Y. 1995-96).CIT v. Lotus Roofings (P) Ltd. (2011) 63 DTR 254 (Mad.)(High Court)

S. 43B : Dedcutions on actual pauyment - Business expenditure - Provision for labour welfare expenses.Provision made for labour welfare expenses was not for payment of bonus or any other payment in guise of bonus but it was to be paid as a part of wages being incentive for performance of workers, disallowance cannot be made. (A. Y. 1990-91).Dy. CIT v. Sri Shanmugavel Mills Ltd. (2011) 202 Taxman 640 (Mad.)(High Court)

S. 43B : Dedcutions on actual payment - Business expenditure-- Bonus to employees - Before due date of filing of return.Bonus payment made before due date of filing of return no disallowance can be made. (A. Y. 2005-06).G. D. Metsteel (P) Ltd. v. ACIT (2011) 47 SOT 62 / 64 DTR 161 / 142 TTJ 641 (Mum.)(Trib.)

S. 43B : Dedcutions on actual payment - Business expenditure - Interest on FCNR loans from Schedule banks.Assessee had taken loans from HSBC and ICICI banks. Auditors in their audit report mentioned that since assessee had not paid interest on FCNR loans from schedule banks before due date of filing of return of income, same was liable for disallowance under section 43B(d). Assessing Officer did not made the disallowance. Subsequently, Assessing Officer reopened assessment and made disallowance under section 43B(d). The Tribunal held that since HSBC and ICICI banks did not fall under categories of State Financial Institutions, provisions of section 43B(d) were not applicable to case of assessee, hence, the disallowance made by the Assessing Officer was deleted. (A. Y. 2001-02).Rabo India Finance Ltd. v. ACIT (2011) 48 SOT 52 (Mum.)(Trib.)

S. 44 : Insurance business - Insurance Act - Rule 5 First Schedule - Adjustment by the Assessing Officer.Section 44 read with Rule 5 of First Schedule makes figure of profit disclosed by Profit and loss account drawn as per Insurance Act as absolute and binding both on assessee Insurance company as well as revenue and it is amenable only for adjustments expressly sanctioned by mandate of clauses (a) and (c) of Rule 5, for computing total income. Insurance company is required to be strictly made as per Rule 5 of First Schedule and it is not open to authorities under the Act to examine items separately debited or credited to profit and loss account with a view to determine their deductibility or inclusion in total income of assessee as per provisions of Act. (A. Y. 2004-05).


New India Assurance Co. Ltd. v. Addl. CIT (2011) 133 ITD 131 (Mum.)(Trib.)

S. 44BB : Business of exploration, of mineral oils – Computation of profits of foreign companies. Applicant has entered into a contract with ONGC and Cairn Energy to conduct seismic survey and data acquisition activities. It has specialization for identifying the surface of the ocean for tapping gas and oil reserves - AAR observed that unless a seismic survey is taken, it is difficult to locate the ocean surface with oil and gas reserves. Drilling and other examinations are ancillary for this purpose and hence activities of the applicant fit into description of said section demanding computation of its income in accordance with this provisionGlobal Geophysical Services Ltd., Cayman Islands (2011) 332 ITR 418 / 239CTR 337 / 198 Taxman 342 / 52 DTR 322 (AAR)

S. 44BB : Business of exploration of mineral oil - Non-resident. (S. 9(1)(vii), S. 44DA) Revenues earned by the applicant, a UK company, under seismic data acquisition and processing contracts in India are taxable under section 44BB.OHAM Ltd.(2011) 241 CTR 327 / 55 DTR 413 / 335 ITR 423 / 241 CTR 171 (AAR)

S. 44BB : Business of exploration of mineral oil – Non-resident - Deduction at source. (S. 40(a)(ia), 195)Since payment to non-resident is covered under the special regime of section 44BB, withholding of appropriate tax by payer without approaching the Assessing Officer does not lead to any violation of withholding tax provisions, expenses cannot be disallowed under section 40(a)(ia) on the ground of short deduction of tax. (A. Y. 2004-05).Frontier Offshore Exploration (India) Ltd. v. Dy. CIT (2012) 13 ITR 168 (Chennai) (Trib)

S. 44BB : Business of exploration, of mineral oils - Non-resident - Income deemed to accrue or arise in India. [S. 9(1)(vii)]Applicant, incorporated in Norway provides geophysical services to oil and gas exploration industry and is awarded contract by Cairn Energy Pvt. Limited (Cairn), India to conduct seismic surveys and provide onshore seismic data acquisition and other associated services. Revenue contends that services extended by the applicant fall under Explanation 2 of section 9(1)(vii) and not under section 44BB as the applicant is not undertaking a mining or like project but is undertaken by someone else and certain technical services are rendered by the applicant to the business enterprise that takes up the project. AAR held that section 44BB will apply relying on its ruling in Geofizyka Torun Sp.zo.o, in AAR/813 of 2009 where it was held that if all the services that are in the nature of technical services within the meaning of Explanation 2 to section 9(1)(vii) are to be computed in accordance with 44DA, very little purpose will be served by incorporating special provision in section 44BB for computing the profits in relation to the services connected with the exploration and extraction of mineral oils.V. Bergen Oilfield Services AS, Norway - AAR No 857/2009 dt.16.05.2011(AAR).

S. 44BB : Business of exploration of mineral oils – Non-resident. (S. 9(1)(vii), 44DA)Applicant, incorporated in Singapore has entered into a time charter vessels hiring agreement for provision of its offshore service vessels to Transocean Offshore International Ventures Ltd. (TOIVL) in India who in turn is providing various offshore drilling and support services to ONGC. Being a time charter agreement, the entire operation, navigation and management of the vessel provided on hire is under the exclusive command and control of the applicant though the vessel is operated and services are rendered as requested by TOIVL. AAR observed that for the purposes of section 44BB of the Act, the vessels provided


are covered under the definition of “plant”. The consideration received for supply of “plant” i.e. the vessels on hire when used in the prospecting for or extraction or production of oil and gas is covered under the special provision for computing profits and gains under said section. AAR further held that said section will apply relying on its ruling in Geofizyka Torun Sp.zo.o, in AAR/813 of 2009 where it had held that if all the services that are in the nature of technical services within the meaning of Explanation 2 to section 9(1)(vii) are to be computed in accordance with 44DA, very little purpose will be served by incorporating special provision in 44BB for computing the profits in relation to the services connected with the exploration and extraction of mineral oils. Bourbon Offshore Asia Pte. Ltd, Singapore (2011) 242 CTR 225 / 58 DTR 155 / 200 Taxman 408 / 337 ITR 122 (AAR)

S. 44BB : Business of exploration of mineral oil - Technical services – Royalties – Non-resident -Mobilization and demobilization revenues. [S. 9(1)(vii), 44DA]Applicant, a foreign company, having entered in to a contract with another foreign company whereby it is providing seismic vessels and seismic crew at the area of operations to carry out 2D geophysical survey offshore India, it is engaged in the business of providing services or facilities in connection with extraction or production of oil and therefore, revenues earned by the applicant under the said contract are taxable in accordance with section 44BB, neither section 9(1)(vii) nor section 44DA was applicable. Entire mobilization and demobilization revenues received by the applicant in respect of seismic data acquisition and or processing activities is taxable in India under section 44BB at an effective rate of 4.223 percent. Western International Ltd. (2011) 242 CTR 634 / 338 ITR 161 / 59 DTR 89 (AAR)

S. 44BB : Business of exploration of mineral oil - Technical services – Royalties – Non-resident – DTAA - India-Norway - Service tax - Finance Act,1994 - S.68. (S. 90, Art. 23, 24)Activities of providing sea logistics services viz-transportation of cargo, material and personnel required at the rig, by the applicant, to ONGC are not technical services and thus, the income derived by the applicant from the said activities is out of the purview of section 9(1)(vii) and is liable to be taxed under section 44BB. Applicant company having shifted its managerial control to Norway in January, 2010, it is liable to be taxed in India in terms of article 23 of the DTAA between India and Norway w.e.f. 1st Jan., 2010. Service tax said to be included in the consideration received by the applicant from ONGC has to go into computation while calculating the consideration for the services or facilities under section 44BB or Article 23(4) of the DTAA.Siem Offshore (2011) 242 CTR 625 / 337 ITR 207 / 59 DTR 141 (AAR)

S. 44BB : Business of exploration of mineral oil - Royalties - Fees for technical services – DTAA – India-Norway.Service of conducting seismic surveys and providing onshore seismic data acquisition and other associated services are taxable under special provision. Entire receipts are subjects to deeming provision under section 44BB, income can not be split.Bergen Oilfield Services AS, Norway (2011) 337 ITR 167 / 241 CTR 322 / 199 Taxman 274 / 55 DTR 409 (AAR)

S. 44BBB : Business of exploration of mineral oil - Foreign companies - Civil construction - Turnkey projects.Contract awarded to the applicant, a Japanese company, for erection of steam turbines, turbo generators and auxiliary equipments / heaters to execute a power project in India by an Indian Company being separate and machineries for the same project to the holding company of the applicant, the contract awarded to the applicant fits in to the description given in section 44BBB and therefore, it is eligible for presumptive taxation under section 44BBB.


Toshiba Plant Systems & Services Corporation, In Re (2011) 332 ITR 456 / 52 DTR 155 / 198 Taxman 26 / 225 Taxation 350 / 239 CTR 163 (AAR)

S. 44C : Non-residents – Head office expenditure - Deduction.Any expenditure to fall in consideration Zone of deductibility under the Act, whether under section 44C or under general, must have been incurred for purpose of business of Indian branch. If expenses are shared / allocated / apportioned / non-exclusive head office expenses, then they will find their residence in overall limit under section 44C, on the other hand exclusive expenses incurred by head office for Indian branch shall be distinctly considered under general provisions of Act. (A. Y. 2002-03).Addl. DIT v. Bank of Bahrain & Kuwait (2011) 44 SOT 693 (Mum.)(Trib.) E.- Capital GainsS. 45 : Capital gains - Slump sale - Firm - Share of Profit from firm pending dissolution. Assessee was a partnership firm. There was specific clause in the partnership deed, stating that on resolution, business should vest in partner or partners, who offered higest price. The partnership firm was dissolved, the sale of the assets was conducted on the direction of the Court among the partners, therefore, the sale consideration cannot be said to be a slump sale. The assessee as erstwhile partners were liable to pay capital gains tax. (A. Y. 1995-96)B. Rachurama Prabhu Estate, Executrix, Smt. Kaveri Bai & Ors. v. Jt..CIT (2011) 52 DTR 122 / 239 CTR 274 / 335 ITR 394 (Karn.)(High Court)

S. 45 : Capital gains - Sale of lease hold land with incomplete building – Short term. [S. 2(29B), 2(42B)]Capital Gain arising to the assessee on the sale of lease hold land with incomplete building is to be bifurcated into gain arising out of sale of leasehold interest in land and sale of building. In the absence of perversity in the finding of the Tribunal estimating the value of the building at Rs. 2.15 crores as against the construction cost of Rs. 1.85 crore, the gain arising on the sale of land is to be treated as a long term capital gain where as the gain of Rs. 30 lakhs arising on the sale of incomplete building is to be treated as short term capital gain. (A. Y. 1996-97).CIT v. Hindustan Hotels Ltd. (2011) 237 CTR 32 / 49 DTR 17 / 199 Taxman 127 / 335 ITR 60 (Bom).(High Court)

S. 45 : Capital gains - Transfer of goodwill - Sale of entire business.Sale of entire business, including all assets and liabilities, as a going concern, not possible to bifurcate consideration received on account of transfer. Transfer does not give rise to capital gains. (A. Y. 1985-86)ACIT v. Patel Specific Family Trust (2011) 330 ITR 397 (Guj.)(High Court)

S. 45 : Capital gains - Business income - Sale of shares - Loan borrowed - Interest paid - Capital gains. [S. 28(iv)] It was held that a capital investment and resale does not lose its capital nature merely because the resale was foreseen and contemplated when the investment was made and the possibility of enhanced values motivated the investment [CIT v. Sutlej Cotton Mills Supply Agency Ltd. (1975) 100 ITR 706 (SC)] followed.Merely because shares are purchased by taking loan at high interest does not mean gains are taxable as business profits.CIT v. Niraj Amidhar Surti (2011) 238 CTR 294 / 48 DTR 33 (Guj.)(High Court)

S. 45 : Capital gains - Compensation for giving up the right to specific performance. (S. 48)


Compensation received for giving up the right to specific performance of an agreement to sell, constitutes capital gain chargeable to tax, however, deduction is allowable as per section 48. (A. Y. 1998-99).CIT v. H. Anil Kumar (2011) 56 DTR 384 / 242 CTR 537 (Karn.)(High Court)

S. 45 : Capital gains - Capital asset - Deduction at source – Non-resident - Corporate veil can be lifted to tax sale. (S. 2(14), 195)The assessee, a company based in Cyprus, bought shares (100% together with another company) of a UK company called Finsider International, from another UK company. Finsider, UK, held 51% shares of Sesa Goa Ltd, India. The Assessing Officer took the view that the 51% shares in Sesa Goa held by Finsider, UK, constituted a capital asset under section 2(14) and that the transfer of the shares of Finsider amounted to a transfer of the said 51% shares of Sesa Goa and that the assessee was liable to deduct tax at source under section 195 when it bought the shares of Finsider, UK. He accordingly issued a show-cause notice under section 201 seeking to treat the assessee as a defaulter. The assessee filed a Writ Petition to challenge the notice on the ground that as one non-resident had sold shares of a foreign company to another non-resident, there was no liability under Indian law. HELD not accepting the assessee’s contention:What is under challenge is only the show-cause notice issued under section 195. t may be necessary for the fact finding authority to lift the corporate veil to look into the real nature of transaction to ascertain virtual facts. It is also to be ascertained whether the assessee, as a majority shareholder, enjoys the power by way of interest and capital gains in the assets of Sesa Goa and whether transfer of shares in the case on hand includes indirect transfer of assets and interest in Sesa Goa.Ricter Holding Ltd. v. ADIT (2011) 339 ITR 199 (Kar.)(High Court)

S. 45 : Capital gains - Trade marks, brands, copyright and goodwill - Business income. (S. 28(va), 55)Trade marks brands, copyright and goodwill constitute of business and are profit earning apparatus. Assessee was owner of brand name of journals which were also registered /indexed with Indian National Scientific Documentation Centre (INSDOC). Assessee company entered in to a “specified Assets Transfer Agreement” with one CMP for sale of all its rights titles and interest in specified assets of its health care journals and communication business. In consideration the assessee received certain amount from CMP which it showed as income from long term capital gains in its return. Assessing Officer, however held that amount received by assessee taxable as income from business under section 28(va). High Court held that the consideration received would be computed as capital gains. (A. Y. 2006-07).CIT v. Mediworld Publications (P) Ltd. (2011) 200 Taxman 1 / 337 ITR 178 / 244 CTR 387 / 61 DTR 391 (Delhi)(High Court)

S. 45 : Capital gains – Compensation - Specific performance. Compensation received by the assessee for giving up the right to specific performance of an agreement to sell was held to be a capital asset chargeable to capital gain tax. (A. Y. 1998-99).CIT & Anr. v. H. Anil Kumar (2011) 56 DTR 384 / 242 CTR 537 (Karn.)(High Court)

S. 45 : Capital gains – Shares - High volume and short holding period - Gains to be considered as short term capital gains - Business income. [S. 28(i)]In the instant case the Tribunal recorded the finding that in a number of cases the assessee had held the LTCG shares for more than 10 years and that the purchase and sale of shares within a period of one year had been offered as STCG. The same was accepted in the preceding assessment year. It was held that it is open to an assessee to trade in the shares and also to invest in shares. When shares are held as investment, the income arising on sale of those shares is assessable as LTCG/STCG. Accordingly, the decision of the


Tribunal in holding that the income arising on sale of shares held as investment were liable to be assessed as LTCG/STCG cannot be faulted.CIT v. Naishadh V. Vachharajani (Bom.)(High Court) (www.itatonline.org)

S. 45 : Capital gains – Shares - Purchase and sale - Short time - Business income. [S. 28(i)]Mere fact that the shares were sold in a short span of time of acquisition due to steep and unanticipated rise in stock market does not mean that the intention was not to hold them for long period of time or deal in them. Profit on sale of shares with in short span of 7 to 10 months held to be capital gains and not as business income. (A. Y. 2005-06).CIT v. Consolidated Finvest and Holding Ltd. (2011) 337 ITR 264 (Delhi)(High Court)

S. 45 : Capital gains - Business income - Sale of land and building constructed thereon. [S. 28(i)]In the absence of any finding of the authorities as to the date of acquisition of the property in question by the assessee, the matter remanded to the Tribunal to determine the actual date of acquisition of the property and also to decide afresh the question as to whether the profit arising out of the sale was in the nature of business profit or capital gain. (A. Y. 1997-98).Ramachandra Estate Development & Investment Co. (P) Ltd. v. Jt. CIT (2011) 244 CTR 573 (Bom.)(High Court)

S. 45 : Capital gains – Possession -Transfer - Development agreement - Consideration. [S. 2(47)]Assessee entered in to a joint venture agreement with developers. Agreement provided that certain sum would be paid to the assessee as a non refundable advance and in addition to same he was entitled for a build up area of to be constructed by developer a free cost. Assessee contended that capital gain will be liable to be taxed in assessment year 2003-04 when construction was completed. The Court held that, after introduction of deemed transfer under section 2(47)(v) of the Act, if the contract, read as a whole, passing of or transferring of complete control over the property in favour of developer, then the contract would be relevant to decide the year of chargeability. On the facts the actual possession of property was handed over on 30-5-1996, hence, the capital gain will be chargeable in assessment year 1997-98. (A. Y.1997-98).CIT v T. K. Dayalu (Dr) (2011) 202 Taxman 531 / 60 DTR 403 (Karn.)(High Court) S. 45 : Capital gains - Security of shares for loan - Pledge.Assessee had taken loans from two parties and pledged certain number of shares as security of the loans but since the value of such shares had fallen, assessee pledged further shares, the addition made by the Assessing Officer treating the value of further shares as long term capital gains was deleted by CIT(A) on the basis of additional evidence in the form of correspondence between assessee and lender requiring further security. (A. Y. 2001-02).CIT v. Betterways Finance & Leasing (P) Ltd. ( 2011) 62 DTR 282 (Delhi)(High Court)

S. 45 : Capital gains - Business income – Firm - Development of property. [S. 28(i)]The assessee firm was carrying on business of dealing in grocery items. The object of the firm included development and sale of property. Firm constructed a commercial complex. The portions of said property was sold in relevant years and consideration received was utilized to clear debt which had been incurred for development of property. Assessee claimed the income as capital gain which was rejected by the Assessing Officer and assessed as business income. The Court held that notwithstanding the objects of firm, income would be assessed as capital gains. (A. Ys. 1996-97 to 1997-98 and 1999-2000).CIT v. Pai Provision Stores (2011) 203 Taxman 196 (Karn.)(High Court)


S. 45 : Capital gains - Business income - Shares - Despite high volume & short holding period - Shares gain is STCG. [S. 28(i)]The assessee offered income by way of Long Term Capital Gain, Short Term Capital Gain, speculative profit and profit from future trading. In such a case, where shares are held for several years and so assessee had acted as investor and not trader, the said the gain shall be assessable as long term capital gain. In similar manner where there is no intra-day trading, shares are held for period of 2 to 5 months and there are no borrowings, the same shall be assessed as Long Term Capital Gain. ACIT v. Naishadh V. Vachharajani (Mum.)(Trib.) (www.itatonline.org)

S. 45 : Capital gains - Agricultural land - Beyond municipal limits. [S. 2(14)(iii)]Sale of agricultural land situated beyond 8 Km from municipal limits of the village having a population of less than 10,000 persons is not liable to capital gains tax.ACIT v. Ashok Kumar Agarwal (2011) Tax World Feb. P. No. 112 (Jaipur)(Trib.)

S. 45 : Capital gains - Conversion of units of UTI in to tax free bonds – Transfer. [S. 2(47)]Assessee claimed capital loss on account of conversion of units of UTI into tax free bonds.The Tribunal held that in the instant case was a simple case of conversion of one asset into another and there was no transfer of asset within the meaning of section 2(47) hence the Assessing officer rightly rejected the claim. (A. Y. 2004-05).ACIT v. ABC Bearings Ltd. (2011) 44 SOT 338 (Mum.)(Trib.)

S. 45 : Capital gains - Consent by landowner - Tranfer of development right (TDR) - Compensation paid to members. [S. 2(24)]Mere grant of consent by the land owner to the developer to construct by consuming TDR purchased by the developer from the third party does not amount to transfer of land or any rights therein. Amount of compensation paid by the developer to the members of the society cannot be taxed in the hands of the society. (A. Y. 1997-98)Raj Ratan Palace Co-Operative Hsg. Ltd. v. Dy. CIT ITA No. 674/Mum/2004 Bench “B” dated 25-2-2011 / (2011) 43A-BCAJ–April 33 (Mum.)(Trib.)

S. 45 : Capital gains - Transfer of Development Right (TDR) - TDR has no cost of acquisition, amount received not taxable. (S. 48)Transferable Development Rights (TDR) granted by the Development Control Regulations for Greater Mumbai, 1991, qualifying for equivalent Floor Space Index (FSI) have no cost of acquisition and so sale thereof does not give rise to taxable capital gains (Jethalal D. Mehta v Dy. CIT 2 SOT 422 (Mum) followed). (A. Y. 1997-98).ITO v. Hemandas J. Pariyani (Mum.)(Trib.) Source: www.itatonline.org

S. 45 : Capital gains – License - No cost of acquisition - Not liable to capital gain tax.In the absence of any cost of acquisition for acquiring the license, consideration received for transferring such license not liable to capital gain. (A. Y. 1996-97)Shree Changdeo Sugar Mills Ltd. v. Jt. CIT (2011) 44 SOT 479 / 139 TTJ 640 / 58 DTR 340 (Mum.)(Trib.)

S. 45 : Capital Gains – Deduction - Shares PMS fee, even if NAV based, is deductible in computing PMS capital gains.


(i) In computing capital gains u/s 48, payments are deductible in two ways, one by taking full value of consideration net of such payments and the other by deducting the same as “expenditure incurred wholly and exclusively in connection with the transfer”. The expression “full value of consideration” contemplates additions and deductions from the apparent value. It means the “real and effective consideration“, which can be arrived at only after allowing the deductible expenditure (CIT v Shakuntala Kantilal 190 ITR 56 (Bom) followed);(ii) The PMS fee, on profit sharing basis, was for the twin purposes of acquisition and sale of the securities. The fact that bifurcation between the two is not possible is not relevant. The department’s argument that fee should be share-specific is absurd because fees for shares transactions is never share specific but is volume based; (iii) Accounting Standard 13 (Accounting for Investments) issued by ICAI provides that brokerage, fees and duties have to added to the cost of investments. The assessee’s method of accounting is to proportionately load the PMS fees on the opening portfolio and investments made during the year which means that no deduction is claimed for the fees on the unsold investments;(iv) Devendra Kothari 50 DTR 369 (Mum) cannot be followed because (i) it unfortunately did not refer to the ‘read down’ interpretation of s. 48 as laid down in Shakuntala Kantilal and (ii) on facts, the claim there was on the entire turnover on global basis and not restricted to only investments. (A. Ys. 2002-03, 2004-05 to 2006-07) KRA Holding & Trading Pvt. Ltd. v. Dy. CIT (2011) 46 SOT 19 (Pune)(Trib.)

S. 45 : Capital gains – Transfer - Assignment or release of interest by retiring partner in favour of continuing partner - Revaluation of assets. [S. 2(47), 47(ii)]The continuing partners agreed to pay to the retiring partner for assigning or release of interest by retiring partner in favour continuing partners, transaction would amount to a transfer within the meaning of section 2(47). If the retiring partner is paid something over and above sum standing to credit of his capital account, there would be a capital gain chargeable to tax. In view of amendment carried out by Finance Act, 1987 by omitting section 47(ii), profits or gains arising from transfer of a capital asset by a firm to a partner on dissolution or otherwise would be chargeable as firm’s income in previous year in which transfer took place and for purposes of computation of capital gains, fair market value of consideration received or accruing as a result of transfer. (A. Y. 2007-08).Sudhkar M. Shetty v. ACIT ( 2011) 130 ITD 197 / 139 TTJ 663 / 58 DTR 289 (Mum.)(Trib.)

S. 45 : Capital gains - Short term capital gains - Market value.Assessee acquired 10 percent of share holding in company at par value in exchange for shares in two companies also at par. Mauritius Company acquired 45 percent of share holdings in same company at premium. There was no proof that transactions were linked in same chain. There was no proof that market value of shares at time of purchase by assessee was higher than price paid by him. Additions made by the Assessing Officer by taking price paid by Mauritius company as market value was deleted. (A. Y. 2004-05).Athappan Nandakumar v. ITO (2011) 9 ITR 436 (Chennai)(Trib.)

S. 45 : Capital gains – Transfer - Part performance of contract.Assessee company purchased a piece of agricultural land on 20-11-1999. It entered into an agreement for sale of said land with “K “ on 5-9-2002 and similarly executed a power of attorney in favour of “M” a, representative of “K” authorising him to cultivate said land and to sell agricultural produce grown on it. The said power of attorney was registered before sub-registrar on 21-11-2002. Sale consideration had been paid to assessee through cheque prior to 5-9-2002. Assessee claimed that transfer of land got completed on 21-


11-2002 and therefore, capital gains arising on sale of land was to be assessed as long term capital gains. However, the Assessing Officer took date of execution of power of attorney and agreement to sell. i.e. 5-9-2002, to be date of transfer and assessed capital gains as short term capital gains. The Tribunal held that, once a document is registered, its effective from date, when it was executed, therefore, power of attorney, event though registered on 21-11-2002, could be effective with the effect from 5-9-2002 and as such, it could be held that possession of land had been given on 5-9-2002 when the power of attorney was executed, therefore, all ingredients as are required to be complied with for applicability of section 53A of 1882 Act were satisfied in instant case on 5-9-2002 and accordingly it was to be held that transfer of land had duly taken place on 5-9-2002, itself and therefore, order of Assessing Officer assessing the same as short term capital gain was up held. (A. Y. 2003-04).V. Ram Chandra Construction (P) Ltd. v. ACIT (2011) 131 ITD 71 / 59 DTR 249 / 140 TTJ 521 (Agra)(TM)(Trib.)

S. 45 : Capital gains - Business income – Shares - Even gains on shares held for 30 days & less is STCG & not business profits. [S. 28(i)]To decide whether a capital gain is short term or long term, it was held that holding period is one of the criteria. The principles that have to be applied are (a) the intention of the assessee at the time of purchase, (b) whether borrowed funds were used, (c) the frequency of purchase and sales, (d) the treatment in the books etc. No single criteria is conclusive and an overall view has to be taken (Associated Industrial Development 82 ITR 586 (SC) & Holck Larsen 160 ITR 67 (SC) followed). (A. Ys. 2003-04, 2004-05 & 2006-07)Hitesh Satishcandra Doshi v. Jt. CIT (2011) 58 DTR 258 / 140 TTJ 32 / 46 SOT 336 (Mum.)(Trib.)

S. 45 : Capital loss - Loss on pro-rata reduction of share capital is “Notional” - In absence of consideration, capital gains provisions do not apply.The assessee invested Rs. 24.84 crores in equity shares of Times Guarantee Ltd. Pursuant to a scheme of reduction under section 100 of the Companies Act, the face value of Times Guarantee shares was first reduced to Rs. 5 from Rs. 10 and thereafter two equity shares of Rs. 5 each were consolidated into one equity share of Rs.10. The result was that the assessee’s investment was reduced to Rs. 12.42 crores. The assessee, claimed that the reduction in face value was a “transfer” and that it had suffered a long-term capital loss of Rs. 22.21 crores after indexation. The Assessing Officer disallowed the claim on the ground that (i) there was no “transfer” and (ii) there was no “consideration” and the machinery provisions of section 48 cannot apply. The issue was referred to the Special Bench. Held by the majority: (i) First the face value of each share was reduced from Rs. 10 to Rs. 5 and then two shares of Rs. 5 each were consolidated into one share of Rs. 10 each. If the argument is that earlier shares were replaced or substituted by new shares, then there is no “transfer” but it is merely a case of substitution of one kind of share with another kind of share(ii) Assuming that a reduction of shares in the manner done by the assessee amounts to a “transfer”, section 45 is not attracted because there is no “consideration” received by the assessee for the transfer. Unless and until a particular transaction leads to “computation” of capital gains or loss as contemplated by section 45 & 48, it cannot attract capital gain tax. On facts, the assessee had not received any consideration for reduction of share capital. While the number of shares held by the assessee has reduced to 50%, nothing had moved from the side of the company to the assessee. (iii) Further, by the reduction, the assessee’s rights had not been extinguished because it continued to hold the same percentage in the holding of Times Guarentee as it did before the reduction. There was no change in the intrinsic value of his shares and even his rights vis-à-vis other shareholders as well as vis-à-vis company remained the same. The concept of capital gains has to be understood as in the commercial world and there was no loss that can be said to have actually accrued to the shareholder as a result of reduction


in the share capital. Also, there would be no change even in the cost of acquisition of shares by virtue of section 55(v). Minority view is that, (i) On the point of “transfer”, a reduction of share capital under section 100 of the Companies Act can take place either by paying excess capital to the shareholders or by cancelling lost capital. While the first method amounts to a “transfer” the other method (adopted by the assessee) results in an “extinguishment of rights” in the shares which is also a “transfer”. Consequently, a reduction of capital by cancellation of shares results in a “transfer”;(ii) On the point that a capital loss cannot be computed if there is no consideration, while it is true that the failure of the computation provisions results in a failure of the charging provisions . there is a distinction between a case where the computation provision is incapable of ascertainment and a case where it is ascertained as zero or Nil. In the present case, the consideration received by the assessee was Nil. It was not a case where the consideration was incapable of ascertainment; (iii) On the point that there is no “loss”, the argument that as with the reduction of capital, there is a corresponding increase in the net worth per share and the assessee’s interest in TGL remains unaffected on an overall basis is not acceptable because after the reduction, the assessee is left with lesser number of shares. The fact that the book value has increased has no effect. An increase or decrease in the market value of shares is of no consequence if the shares are held as investment;(iv) the apprehension that the assessee would derive a double advantage by claiming the loss now and the entire cost at the time of sale is unfounded because (a) the assessee’s books shows the investments at the reduced amount and (b) under section 55(2)(iv)(v), the cost of acquisition of the remaining consolidated shares will be the reduced amount. (A. Y. 2002-03)Bennett Coleman & Co. Ltd. v. ACIT (2011) 12 ITR 97 / 62 DTR 106 / 141 TTJ 777 / 133 ITD 1 (Mum.)(SB)(Trib.)

S. 45 : Capital gains – Shares - PMS fees not deductible against capital gains - Despite dissenting orders, reference to Special Bench not necessaryWhether an earlier order should be followed or a reference to the Special Bench be made depends on whether the Bench is satisfied or not about the correctness of the earlier order and not on the view point of the aggrieved party. It is only when a subsequent Bench finds itself unable to endorse the earlier view that it may make reference for the constitution of the Special Bench. The aggrieved party cannot compel the later Bench to either take a contrary view or make a reference for the constitution of the Special Bench. Homi K. Bhabha v. ITO (Mum.)(Trib.)(www.itatonline.org)

S. 45 :Capital gains – Amount paid to bank by purchaser on behalf of assessee. Where the assessee had transferred plant and machinery, stores, spares, licenses, etc. alongwith certain specified liabilities under an agreement for a consideration and the purchaser had undertaken to pay a sum due by the assessee to a bank, such payment to the bank is only application of income and not charge on income and hence not deductible from total consideration. (A. Y. 1996-97) Shree Changdeo Sugar Mills Ltd. v. JT. CIT (2011) 58 DTR 340 / 139 TTJ 646 / 44 SOT 479 (Mum.)(Trib.)

S. 45 : Capital gains - Business income - Investment in shares - Shares held less than 30 days business income - More than 30 days capital gains. [S. 28(i)]The Tribunal held that shares held more than 30 days then profit and loss arising from sale of such shares was to be considered as short term capital gains. Shares held less than 30 days was to be taxed as business


income. Shares held more than a year were to be assesses as long term capital gains. (A. Y. 2003-04 to 2005-06). ACIT v. Kavita Devi Agarwal (2011) 48 SOT 191 (Jaipur)(Trib.)

S. 45 : Capital gains - Business income - Investment in shares. [S. 28(i)]During relevant assessment year assessee company sold shares of company “ICL” which were held by it since 1996 and had been shown in its balance sheets as investment. It treated income there from as long term capital gain and claimed exemption under section 10(38). The Assessing Officer treated the same as business income and denied the exemption. Commissioner (Appeals) up held the view of assessee. The Tribunal upheld the view of Commissioner (Appeals). (A. Y. 2006-07).ACIT v. Stargate Investments (P) Ltd. (2011) 48 SOT 379 / 10 ITR 211 (Chennai)(Trib.)

S. 45 : Capital gains - Business income - Investment in Land. [S. 28(i)]Object of assessee company were to manufacture, produce, process, purchase, sell or deal in ice–cream etc. It made investment in land and same was shown as fixed assets. Assessee sold lands when it got good price, income from same was shown as capital gain. Assessing Officer treated the said income as business income being adventure in nature of trade. The Tribunal held that there was only transfer of capital assets and not any income from adventure in nature of trade, claim of assessee was justified. (A. Y. 2007-08). High Range Foods (P) Ltd. v. Dy. CIT (2011) 48 SOT 453 (Coch.)(Trib.) S. 45 : Capital gains – Transfer - Development agreement. [S. 2(47)(v)]On the facts of the case the assessee neither received full consideration nor handed over possession of the property, capital gains cannot be assessed in the year of execution of development agreement. (A. Y. 2004-05).B. V. Kodre (HUF) v. ITO, ITA No. 834/PN/2008 dated 4-10-2011.174 (2011) 43-BCAJ (November-46) Bench – “B”

S. 45 : Capital gains – Conversion of investment in to stock-in-trade – Development agreement. Assessee converted its factory land in to stock-in-trade with an intention to develop and accordingly permission to develop land was obtained. Immediately, thereafter, the assessee entered in to a development agreement with a third party with no interest in the project except consideration in the form of constructed flats. The Tribunal held it as an adventure in the nature of trade and therefore, entitled to the benefit of the provisions of section 45(2). (A. Y. 2006-07)Vidyvihar Containers Ltd. v. Dy. CIT (2011) 133 ITD 363 (Mum.)(Trib.)

S. 45 : Capital gains tax – Non-resident - India-Mauritius – DTAA. [Article 13(4)]Applicant is a company incorporated in Mauritius and was issued a Tax Residence Certificate by the Mauritius Tax Authorities. It realized capital gains from sale of shares in Indian company - AAR observed that in the case of Azadi Bachao Andolan 263 ITR 706, the Honorable Supreme Court has held that the certificate of residence issued by Mauritius Revenue Authority constitutes a valid and sufficient evidence of residential status under DTAA. Also, CBDT in Circular No. 682 dated 30.03.1994 has further clarified that under the DTAA, a resident of Mauritius having income from alienation of shares of Indian company shall be liable to tax only in Mauritius. In the case of E*Trade Mauritius, AAR No. 862 of 2009, and, the Delhi ITAT in the case of Saraswati Holding Corporation, 2009-TIOL-529-ITAT-DEL, held the view that the gains arising out of alienation of shares of an Indian Company to a company who is a resident of Mauritius is liable to tax only in Mauritius in terms of Article 13(4) of the DTAA. Hence ruled that on the facts presented by the applicant and in the light of legal position discussed, the applicant is not liable to pay capital gains tax in


India in respect of the transfer of shares.D. B. Zwirn Mauritius Trading No. 3 Ltd., Mauritius (2011) 333 ITR 32 / 240 CTR 1 / 198 Taxman 295 / 53 DTR 178 (AAR)

S. 45 : Capital gains - Transfer of shares - Wholly owned subsidiary - Without consideration. (S. 48, 92, 92C, 195)Transfer of shares to subsidiary company without consideration , would not attract liability to tax under section 45 read with section 48, as the consideration is inapplicable on the date of transfer, as no income is chargeable to tax ,provisions of section 195 or provisions of sections 92 to 92F would not apply. Good Year Tire & Rubber Co, In Re. (2011) 240 CTR 209 / 54 DTR 281 / 334 ITR 69 / 199 Taxman 121 (AAR)

S. 45 : Capital gains - Transfer of shares to wholly owned subsidiary - Transaction not regarded as transfer. (S. 47(iii), 92 to 92F, 139)Transfer of shares of wholly owned Indian subsidiary by the applicant a US company to another group company based in Singapore without consideration being a gift is not taxable under the provisions of section 45, in the absence any income accruing from the transfer of shares, provisions of section 92 to 92F relating to transfer pricing are not applicable, however, applicant is under obligation to file return under section 139. Deere & Company, In re (2011) 56 DTR 242 / 337 ITR 277 / 241 CTR 497 (AAR)

S. 45 : Capital gains – Sale of shares – DTAA – India-France. (S. 90, Article 14)Applicant MA, a French company, pursuant to an understanding with the other applicant GIMD, also a French a company having floated a 100 percent subsidiary and acquired majority shares of an Indian Company in the name of said subsidiary and later both the applicants having sold their shares in the subsidiary to another French company, it was a preordained scheme to deal with the assets and control of the Indian Company without actually dealing with its shares thereby avoiding payment of tax on the capital gains in India, in substance, it involved alienation of the assets and controlling interest of the Indian company having assets, business and income in India in terms of Para. 5 of Article 14 of DTAA between India and France.Groupe Industrial Marcel Dassault In Re (2011) 64 DTR 1 / (2012) 340 ITR 272 / 245 CTR 353 (AAR)

S. 45(2) : Capital gains – Computation - Cost of inflation index - Conversion of immovable property into stock in trade. (S. 48)Assessee firm converted its immoveable property in 1987-88 into stock in trade and developed by entering into an agreement with developer. Revenue did not treat the said arrangement as a transfer at that stage. Capital gains arising on sale of flats and registration of deeds in 1992-93 is to be computed by applying the cost of inflation index as applicable to Asst year 1992-93 and not that applicable in 1987-88. (A. Y. 1993-94).CIT v. Rudra Industrial Commercial Corporation (2011) 55 DTR 5 / 244 CTR 304 (Karn.)(High Court)

S. 45(2) : Capital gains - Capital asset – Stock-in-trade – Valuation. [S. 2(14)]When a partnership firm is dissolved and the erstwhile partner receives stock, it is a capital asset in his hands. When that asset is introduced into a business as stock, it gets converted into stock-in-trade. The value of this stock will have to be the market value on the date of introduction. The same principle would apply if the assessee used her share of the stock obtained from the dissolved firm in the new business.Madu Rani Mehra v. CIT (Delhi High Court) Source: www.itatonline.org


S. 45(2) : Capital gains - Land converted in to stock-in-trade - Cost of improvement - Payment made to State Government to change of user of land. (S. 48)Assessee company which was engaged in the business of manufacturing of containers in the year 1999 and thereupon converted the factory land in to stock-in-trade. The land was converted in to stock-in-trade by passing a special resolution, in extraordinary general meeting of share holders approving the commencement of business of real estate. Assessing officer rejected the claim of the assessee and held that it was a simple transfer of said land as capital asset by assessee company for a stipulated consideration in terms of development agreement and rejected the claim of benefit under section 45(2) of the Income-tax Act. The Tribunal held that since the business of real estate development was duly carried on by assessee, it was entitled to benefit of provisions of section 45(2) in respect of conversion of factory land in to stock in trade. Payment made by the assessee prior date of conversion of land in to stock in trade, would constitute cost of improvement of land since land as a result of said expenditure had became fit for development / redevelopment. (A. Y. 2002-03, 2004-05 and 2006-07).Vidhyavihar Containers Ltd. v. Dy. CIT (2011) 133 ITD 363 (Mum.)(Trib.)

S. 45(4) : Capital gains - Assets taken over by partners on dissolution of firm by court order. [S. 2(14), 2(47), 45(1)]Outgoing partners of the firm having received amount towards their respective shares in the net assets of the firm from a group of three partners who took over the business in an auction following dissolution of the firm, as per order of Court, the capital gains arising on transfer of the assets of the erstwhile firm were taxable in the hands of such outgoing partners. (A. Y. 1995-96)B. Raghurama Prabhu Estate, Executraix Smt. M. Kaveri Bai & Ors. v. Jt. CIT (2011) 335 ITR 394 / 52 DTR 122 / 239 CTR 274 (Karn.)(High Court)

S. 45(4) : Capital gains – Transfer – Dissolution – Otherwise. [S. 2(47)]Land was transferred in the name of the partners by book entries, the assessee contended that as no registration is done, the immoveable property was not legally transferred and also contended that as there was no dissolution, section 45(4) cannot be applied. The Tribunal held that the provision of section 45(4) were applicable. The word “otherwise” covers the transfer other than the dissolution also. (A. Y. 2001-2002) New Gujarat Tin Printing Works v. ITO (2011) 128 ITD 182 / 136 TTJ 64 / 50 DTR 289 (Ahd.)(Trib.)

S. 45(4) : Capital gains – Transfer – Retirement of partner.The assessee which was a partnership firm consisted of two partners. The business of the partnership firm was that of builders, developers, contractors and real estate consultants. The assessee firm commenced the business and development of the project and all the costs incurred in connection with the same were shown as work-in-progress. One of the partners of the firm died and his legal heirs decided to continue the business with the other partner. The legal heirs also retired from the firm and the existing partner took over the assets and liabilities of the firm. This transfer was held as a transfer under the provisions of section 45(4) of the Act and the matter was remanded back to the Assessing Officer for computation of capital gains in hands of the assessee. (A. Y. 2005-06)ITO v. Om Namah Shivay Builders & Developers (2011) 43 SOT 397 / 138 TTJ 49 (Mum.)(Trib.)

S. 45(4) : Capital gains – Transfer of asset to partner by book entry – Registration. [S. 2(47)]If a transaction falls within the ambit of the definition of transfer under the section 2(47) then irrespective of the fact as to whether the transaction is a transfer within the Transfer of Property Act, 1881 or not, the


resultant income accrued is chargeable to tax under the provisions of section 45(4). (A. Y. 2001-02)New Gujarat Tin Printing Works v. ITO (2011) 128 ITD 182 / 136 TTJ 64 / 50 DTR 289 (Ahd.)(Trib.)

S. 45(5) : Capital gains – Enhanced compensation.Enhanced compensation along with interest thereon is assessable entirely in the year in which it is received. (A. Ys. 1999-2000 to 2002-03)Dy. CIT v. Ajay Sharma (2011) 135 TTJ 222 / 49 DTR 65/ 140 TTJ 388 (Delhi)(Trib.)

S. 45(6) : Capital gains - Investment made under Equity Linked Savings Scheme – Transfer -Switchover. [S. 2(47), 80CCB(1)]Units of mutual funds by way of switchover not being units in respect of which assessee had claimed deduction under section 80CCB(1) nor those units were originally issued under a plan formulated under any equity linked savings scheme, they were not of the type of units mentioned in sub section (2) of section 80CCB and therefore, surplus arising to the assessee on account of switch over of the units cannot be assessed as capital gains under section 45(6). (A. Y. 2000-01).A. Vadivel & Ors. v. Dy. CIT (2011) 142 TTJ 875 (Chennai)(Trib.)

S. 47(iv) : Capital gains - Capital loss – Transfer of business and work in progress – 100 percent subsidiary.Assessee transferred business and work in progress to hundred percent subsidiary, which is Indian Company. In view of provisions of section 47(iv), capital gains on such transfer of capital asset was not chargeable to tax. At the same time loss arising on transfer of business assets would also not be allowed as deduction. (A. Y. 2003-04).Dy. CIT v. Mother Dairy Fruits & Veg (P) Ltd. (2011) 45 SOT 186 / 141 TTJ 97 / 60 DTR 220 (Delhi)(Trib.)

S. 47(xiii) : Capital gains - Conversion of firm in to company - Partners capital balance – Loan - Withdrawal of credit balance.Partners converted the firm into company and partners credit balance lying as their capital was converted in to loan and was repaid to them. Assessing Officer held that there was violation of proviso (c) to section 47(xiii). The Tribunal held that merely because the partners’ credit balance lying as their capital converted in to loan and which was repaid to them, it cannot be said that there was any undue benefit directly or indirectly to the partners. As there was no violation, addition was deleted. (A. Y. 2005-06).Vishal Containers P Ltd. v. ACIT ((2011) ACAJ Sept P. 399 (Ahd.)(Trib.)

S. 48 : Capital gains - Cost of acquisition - Land Acquired by succession from ex-Ruler - Cost of acquisition of previous owner not ascertainable - Cost of acquisition to be taken market value. [S. 49, 55(2), 55(3)]For the assessment years 1997-78 and 1979-80, the assessee sold plots of land for consideration. The assessee contended that the previous owner was an ex ruler of Pepsu State and since the asset was acquired under the instrument of annexation its cost of acquisition could not be ascertained and that capital gains tax was not attracted. The Assessing Officer assessed the capital gains taking the market value as on January 1, 1954 or January 1, 1964 as the cost of acquisition depending on the dates specified under section 55(2) of the as applicable to the assessment year. On appeal the Tribunal following the judgment of B.C. Srinivasa Setty (1981) 128 ITR 294 (SC), accepted the contention of assessee. On reference the High Court held that the contention that the value was inapplicable being ascertained, was not tenable. It was not the case of the assessee that the land had no market value at all on the date of acquisition . Even where the cost of acquisition of capital asset cannot be ascertained but the asset has a market value, capital gains tax will be attracted by taking the cost of acquisition to be fair market value as on January 1,


1954 or on a date statutorily specified or at the option by assessee, market value on the date of acquisition. (A. Ys. 1977-78, 1979-80).CIT v. Raja Malwinder Singh (2011) 334 ITR 48 / 56 DTR 366 / 241 CTR 520 (P&H)(FB)(High Court)

S. 48 : Capital gains - Cost of acquisition – Shares - Sale of original and bonus share. [S. 55(2)(b)]Capital gains on sale of original and bonus shares have to be computed by spreading the cost of acquisition of original shares over the original shares and the bonus shares. (A. Y. 1990-91).M. B. & Co. Ltd. v. ACIT (2011) 55 DTR 76 / 337 ITR 29 (Mad.)(High Court)

S. 48 : Capital gains – Rectifying the defect in title.Amount incurred by the assessee for rectifying the defect in title to the property and removing encumbrance on the property were held to be amount spent in connection with the transfer of the property and allowable as deduction while computing capital gain.V. Lakshmi Reddy v. ITO (2011) 333 ITR 359 / 55 DTR 241 / 196 Taxman 78 / 241 CTR 364 (Mad.)(High Court)

S. 48 : Capital gains - Gift - Indexed cost - Previous owner - Indexed cost of gifted assets has to be determined with reference to previous owner.The assessee’s daughter purchased a flat on 29.1.1993 at a cost of Rs.50.48 lakhs. She gifted the flat to the assessee on 1.2.2003. The assessee sold the flat on 30.6.2003 for Rs. 1.10 crores. In computing LTCG, the assessee took the indexed cost of acquisition under Explanation (iii) to sectuib 48 on the basis that she “held” the flat since 29.1.1993. The Assessing Officer held that as the assessee had “held” the flat from 1.2.2003, the cost inflation index for 2002-03 would be applicable. The CIT(A) and the Special Bench of the Tribunal upheld the claim of the assessee. On appeal by the department, HELD dismissing the appeal:Under Explanation 1(i)(b) to section 2(42A), in determining the period for which any asset is held by an assessee under a gift, the period for which the said asset was held by the previous owner has to be included. Accordingly, though the assessee acquired the capital asset on 30.6.2003, she was deemed to have “held” the asset from 29.1.1993 onwards. This fiction will apply to clause (iii) of the Explanation to section 48 as well for determining the “indexed cost of acquisition”. The object of the legislature is to tax the gains arising on transfer of a capital acquired under a gift or will by including the period for which the said asset was held by the previous owner. This object cannot be defeated by excluding the period for which the said asset was held by the previous owner while determining the indexed cost of acquisition of that asset to the assessee.CIT v. Manjula J. Shah (Bom.)(High Court) www.itatonline.org

S. 48 : Capital gains - Cost of acquisition - Indexed cost - Date of allotment letter - Stamp duty – Interest - Processing charges. (S. 45)Stamp duty, interest, processing fee, development charges, fire fighting charges, generator charges, etc. paid to the builder form part of cost of acquisition incurred by the assessee for acquiring the ownership of the flat and therefore, assessee is entitled to deduction of all aforesaid payments under section 48(ii) on computation of capital gain on the sale of flat.Assessee is also entitled to indexation from 1995, when he started making the payment to builder and received the allotment letter and not from the date of conveyance deed in 2001. (A. Y. 2007-08)Praveen Gupta v. ACIT (2011) 52 DTR 334 / 137 TTJ 307 (Delhi)(Trib.)

S. 48 : Capital gains – Computation – Fair market value.


Provision contained in section 48 regarding computation of capital gains contemplates ascertainment of full value of consideration received or accruing as a result of transfer capital asset, said provision does not contain words to effect “ fair market value” etc. Where there was no evidence on record that transferees were related to directors of assessee company and that assessee had received amount more than stated consideration, income was to be computed by Assessing Officer on basis of consideration actually received. (A. Y. 2006-07).Dy. CIT v. Jindal Equipment Leasing & Consultancy Services Ltd. (2011) 131 ITD 263 / 10 ITR 128 (Delhi)(Trib.)

S. 48 : Capital gains – Shares - Fees paid for Portfolio Management services - Cost of acquisition - Diversion of income.Fees paid by assessee for PMS was not inextricably linked with particular instance of purchase and sale of shares and securities and sale of shares and securities so as to treat the same as expenditure incurred wholly and exclusively in connection with cost of acquisition, improvement, of shares and securities so as to be eligible for deduction in computing capital gains under section 48. Payment of fees by assessee for PMS did not amount to diversion of income by an overriding title. ( A. Y. 2004-05).Devendra Motilal Kothari v. Dy. CIT (2011) 132 ITD 173 / 136 TTJ 188 / 50 DTR 369 (Mum.)(Trib.)

S. 48 : Capital gains – Computation – Shares - Indexation - Preference shares.Once shares are specifically covered by indexation of costs ,and unless there is a specific exclusion clause for “preference shares”, it cannot be open to Assessing Officer to decline indexation benefits to preference shares. (A. Y. 2005-06).G. D. Metsteel (P) Ltd. v. ACIT (2011) 47 SOT 62 / 64 DTR 161 / 142 TTJ 641 (Mum.)(Trib.)

S. 48 : Capital gains – Computation - Professional management fee paid to asset management company.Professional fees and profit sharing fees paid to an asset management company, cannot be allowed as deduction under section 48 while computing the capital gains. The Tribunal followed the ratio of Devendra Motilal Kothari v Dy. CIT (2011) 13 Taxman15 and Pradeep Kumar Harlalka v ACIT (A. Y. 2006-07). Homi K. Bhabha v. ITO (2011) 48 SOT 102 (Mum.)(Trib.)

S. 48 : Capital gains – Deduction – Compensation - To free the encumbrance of lessee. Assessee purchased an Aircraft from MFL subject to the rights of MAL (lessee) under the lease agreement between MFL and MAL, compensation paid by assessee to MAL for surrendering its pre-existing rights in order to resell the Air craft and deliver the same to the purchaser free of all encumbrances is inextricably connected to the transfer of air craft the same is allowable as deduction under section 48(1). (A. Y. 2003-04) ITO v. Taj Services (P) Ltd. (2011) 64 DTR 105 / (2012) 143 TTJ 70 (Mum.)(Trib.)

S. 48 : Capital gains – Non-resident – Indexation – DTAA - India-Canada – Shares. (S. 90, Art. 24)Denial of the benefit of the second proviso to section 48 to a non resident assessee while computing capital gains from the sale of shares would not amount to discriminatory treatment in terms of Art. 24 of the DTAA with Canada.Transworld Garnet Company Ltd., In Re. (2011) 333 ITR 1 / 197 Taxman 428 / 239 CTR 152 / 52 DTR 161 / 225 Taxation 355 (AAR)

S. 49 : Capital gains - Cost with reference to certain mode of acquisition - Family arrangement - Company assets – HUF – Director. (S. 45)


Assessees are Directors in a company AG. By way of family arrangement half of the land owned by company came to the share of the present assessees and other half went to the share of another family group. Assessees sold their share of land for an amount of Rs. 2.9 crores. Assessees computed the capital gains by applying the provision of section 49(1). The Assessing Officer held that assets in question are not the property of HUF but it was owned by company AG and there was no distribution of its assets, because there was no liquidation of the company. Consequently, the said capital asset continued to be owned by AG and did not became the property of the assessees hands therefore section 49(1) would not apply. The Court directed the Assessing Officer to compute the capital gains in the said company and give credit of taxes paid by assessee.CIT v. Shashi Charla (2011) 334 ITR 129 / 51 DTR 232 / (2010)195 Taxman 148 / 243 CTR 394 (Delhi)(High Court) / CIT v Atul Charla / Baldev Charla / Jyoti Chrala (2011) 51 DTR 232 / (2010)195 Taxman 148 / 243 CTR 394 / 334 ITR 129 (Delhi)(High Court)

S. 49 : Capital gains - Cost with reference to certain mode of acquisition - Capital gains - Cost of acquisition. (S. 50C)Once a particular amount is considered as full value of consideration at the time of its purchase, the same shall automatically become the cost of acquisition at the time when such capital asset is subsequently transferred. Section 50C applies to a capital asset being ‘land or building or both’ and not to ‘any right in land or building or both’. Leasehold rights in plot of land is not ‘land or building or both’ and hence section 50C does not apply to leasehold rights. (A. Y. 2006-07)Atul G. Puranik v. ITO (2011) 58 DTR 208 / 11 ITR 120 / 141 TTJ 69 / 132 ITD 499 (Mum.)(Trib.)

S. 50 : Capital gains - Depreciable assets - Transfer of undertakings - Tangible and intangible assets. (S. 45)In the case of transfer of entire business undertaking, section 50 has application as far as tangible assets are concerned, assessee having transferred its entire marketing undertaking consisting of both tangible and intangible assets to another company, Assessing Officer is directed to apportion and / or segregate the amount of consideration received by the assessee by way of transfer of tangible assets out of the total consideration for assessment under the head capital gains under section 45, read with section 50. (A. Y. 1996-97)Kwality Ice Creams (India) Ltd. v. CIT (2011) 52 DTR 366 / 198 Taxman 65 / 336 ITR 100 / 239 CTR 449 (Cal.)(High Court)

S. 50 : Capital gains - Depreciable assets - Export undertaking - Block of assets. [S. 2(11), 10B]On expiry of tax holiday period specified in section 10B undertaking comes in automatically for regular assessment and income chargeable has to be computed in accordance with normal provisions, therefore, on expiry of period mentioned under section 10B, block of assets. Viz., plant and machineries of industry are available for working out relief under section 50(2). (A.Y.1993-94)S. Muthurajan v. Dy. CIT (2011) 202 Taxman 356 (Mad.)(High Court)

S. 50 : Capital gains – Depreciable assets - Loss - Carry forward and set off of brought forward business loss. [S. 2(11)]Income assessed by the assessee in the relevant year on sale of factory building, plant and machinery although not taxable as profits and gains of business or profession is an income in the nature of business though assessed as capital gains under section 50 and therefore, assessee is entitled to set off of brought forward business losses against the said capital gains. (A. Y. 2005-06).


Digital Electronics Ltd. v. Addl. CIT (2011) 49 DTR 484 / 135 TTJ 419 (Mum.)(Trib.)Editorial:- See J. K. Chemicals Ltd. v ACIT, ITA No. 8206/Bom/1089 and 8618/Bom/89 Bench ‘A’ dt. 1-11-1993, Sri Padmavathi Srinivasa Cotton Ginning Factory v Dy. CIT (2009) 29 DTR 1 (Visakha)(Trib)

S. 50 : Capital gains - Depreciable assets - Block of assets. [S. 2 (11)]Section 50(1)(iii) does not make a distinction between block of assets of one unit and block of assets of another unit, even if they are independent units. Even if new asset is not used for the purpose of business, its cost will have to be deducted from full value of consideration received or accruing on transfer of block of assets, while computing short term capital gains. (A. Y. 1989-90)Dy. CIT v. Ansal Properties & Infrastructure Ltd. (2011) 44 SOT 236 / 60 DTR 294 / 141 TTJ 237 (Delhi)(Trib.)

S. 50 : Capital Gains - Depreciable assets – Indexation Block of assets. [S. 2(11)]Assessee claimed depreciation on capital asset (flat) for two years as it was used as office premises which was allowed. Flat was the only asset in the block of assets. No depreciation was claimed for latter years as the flat was not used for the purposes of business but leased on rent. Assessing Officer and CIT(A) held that the as the flat being only asset in the block of assets the capital gains is assessable as short term capital gains. On appeal the Tribunal held that the moment the assessee stopped claiming depreciation in respect of the flat and even let out the same for rent, it ceased to be a business asset. The Tribunal directed the Assessing Officer to allow benefit of indexation as claimed by the assessee treating the sale as long term capital asset.Prabodh Investment & Trading Company Pvt. Ltd. v. ITO, ITA No. 6557/Mum/2008 Bench ‘C’ dt. 28-2-2011 (2011) 43–A BCAJ - April P. 34 (Trib.)

S. 50 : Capital gains - Depreciable assets - Block of assets. [S. 2(11)]If any capital asset on which depreciation has been allowed under Income Tax Act 1961, or Indian Income Tax Act 1922, and which otherwise qualifies to form a part of block of assets as on 1-4-1988, special provisions contained in section 50 shall apply on transfer of such asset. Therefore, as regards plant and machinery assessee was allowed depreciation upto 1984, they constituted block of assets hence, provision of section 50 would be applicable. (A. Y. 1996-97) Shree Changdeo Sugar Mills Ltd. v. Jt. CIT (2011) 44 SOT 479 / 139 TTJ 646 / 58 DTR 340 (Mum.)(Trib.)

S. 50 : Capital gains – Depreciable assets - Block of assets. [S. 2(11)].Provisions of section 50 are not attracted in a case whereon the asset transferred depreciation was neither claimed nor allowed. (A. Y. 2006-07)Divine Construction Co. v. ACIT (2011) 138 TTJ 72 / 53 DTR 461 (Mum.)(Trib.) S. 50 : Capital gains - Depreciable assets - Income include loss - Sale of entire assets of manufacturing unit.On the sale of entire assets of manufacturing unit, case of assessee falls with in the ambit of section 50 because the word “income” includes within in the ambit the “loss”, Assessing Officer is directed to hear the assessee and compute the loss as provided in section 50(2). (A. Ys. 2005-06 and 2006-07). Sony India (P) Ltd. v. Addl. CIT (2011) 56 DTR 156 / 141 TTJ 432 (Delhi)(Trib.)

S. 50 : Capital gains – Depreciable asset - Long term.Capital gains arising on transfer of a capital asset (Flat) on which depreciation was allowed for two years but thereafter the assessee stopped claiming deprecation and also gave the flat on rent is chargeable as long term capital gains after allowing the benefit of indexation.


Prabodh Investment & Trading Company Pvt. Ltd., ITA No. 6557/Mum/2008, dt.28-02-2011, A.Y. 2004 – 2005, `C’ Bench, Mumbai ITAT, BCAJ pg. 24, Vol. 43-A, Part 1, April 2011.

S. 50 : Capita gains - Capita loss - Depreciable assets - Set off of brought forward long term capital loss. (S. 74)Prescriptions of section 50 are to be extended only up to the stage of computation of capital gains and therefore, capital gain resulting from transfer of depreciable assets which were held for a period of more than three years would retain the character of long term capital gain for all other provisions and consequently qualify for set off against brought forward loss from long term capital assets. (A. Y. 2005-06).Manali Investments v. ACIT (2011) 139 TTJ 411 / 56 DTR 218 (Mum.)(Trib.)

S. 50 : Capital gains - Capital loss - Depreciable assets - Setoff of long term capital gains against short term capital gains. [S. 2(11), 74(1)(b)]Under section 74(1)(b), the assessee is entitled to claim of set off of long term capital loss against the capital gains income arising from the sale of office premises being depreciable asset, the gain of which is short term due to the deeming provisions of section 50(2) but the asset is long term. (A. Y. 2005-06).Komac Investments & Finance (P) Ltd. v. ITO (2011) 62 DTR 196 / 132 ITD 290 (Mum.)(Trib.)

S. 50B : Capital gains - Slump sale – Depreciation - Block of assets. [S. 2(11), 32, 43(6)(i)(c)]In the case of slump sale, depreciation has to be allowed on the assets sold in slump sale up to date of transfer and allowable depreciation has to be computed for all years after 1st April 1998, for computing value of assets to be reduced from block of assets irrespective of the fact whether in the books the assessee had charged depreciation or not. (A. Y. 2003-04).Dy. CIT v. Warner Lambert (India) (P) Ltd. (2011) 56 DTR 121 (Mum.)(Trib.)

S. 50B : Capital gains - Sale of entire business as going concern - Slump sale. (S. 45)Assessee having transferred the assets and liabilities pertaining to its business as one whole unit as a going concern for a lump sum consideration without assigning any separate value to land, building / structure, plant and machinery, office equipment, furniture and fixtures and vehicles, the sale was a slump sale and therefore, the same is not exigible to tax under the head “Capital Gains”. (A. Y. 1999-2000)CIT v. Chemical Industries Consulting Bureau (2011) 51 DTR 283 (Karn.)(High Court)

S. 50B : Capital gains - Depreciable assets - Slump sale. (S. 2(42C), 45, 50)Sale of an industrial undertaking as a whole which includes land building, machinery, equipments, etc. as a going concern with all the assets and liabilities, was assessable under section 50B treating the transaction as a “slump sale” and not under section 50 as a sale of depreciable assets. (A. Y. 2003-04)CIT v. Accelerated Freeze Drying Co. Ltd. (2011) 53 DTR 44 / 198 Taxman 18 / 240 CTR 90 / 337 ITR 440 (2011) Tax. L. R. 448 (Ker.)(High Court)

S. 50B : Capital gains - Slump sale - Capital gains - Transfer of undertaking - Non money consideration - Cost of acquisition not determinable. (S. 2(42C), 45)In order to constitute a “slump sale” under section 2(42C), the transfer must be as a result of a “sale” i.e. for a money consideration and not by way of an “Exchange”. The difference between a sale and an exchange is this that in the former the price is paid in money, whilst in the latter it is paid in goods by way of barter. The presence of money consideration is an essential element in a transaction of sale. As the undertaking was transferred in consideration of shares & bonds, it was a case of “exchange” and not


“sale” and so section 2(42C) and section 50B cannot apply. As regards taxability under section 45 & 48, the “capital asset” which was transferred was the “entire undertaking” and not individual assets and liabilities forming part of the undertaking. In the absence of a cost/date of acquisition, the computation & charging provisions of section 45 fail and the transaction cannot be assessed (Premier Automobiles Ltd. v. ITO (2003) 264 ITR 193 (Bom.) distinguished)Bharat Bijilee Limited v. ACIT (Mum.)(Trib.) www.itatonline.org

S. 50B : Capital gains - Slump sale - Sale of undertaking - Notional depreciation. [S. 43(6)(c)(i)(c)]When assessee transferred its entire assets by way of slump sale, depreciation for earlier assessment year which was not claimed by it cannot be notionally allowed in computing the capital gains under section 50B, provisions of sections 43(6)(c)(i)(c)(b) have no application where the entire assets forming part of block are sold by way of slump sale. (A. Y. 2001-02).Dharampal Satyapal Ltd. v. Dy. CIT (2011) 138 TTJ 74 / 53 DTR 177 (Delhi)(Trib.)

S. 50C : Capital gains - Full value of consideration - Depreciable assets - Stamp valuation - Applies to depreciable assets. (S. 2(11), 48, 50)There are two deeming fictions created in section 50 and section 50C for computing capital gains on building. While section 50 modifies the “cost of acquisition” for purposes of section 48, section 50C modifies the term “full value of the consideration received or accruing as a result of transfer of the capital asset”. The two deeming fictions operate in different fields and there is no conflict between them. As section 50C was inserted to prevent assessee’s indulging in under-valuation, there is no logic why it should not be applied to a depreciable building.ITO v. United Marine Academy (2011) 138 TTJ 129 / 9 ITR 639 / 130 ITD 113 / 54 DTR 177 (Mum.)(SB)(Trib.)

S. 50C : Capital gains - Full value of consideration - Stamp duty valuation - Does not apply to transfer of “leasehold rights” as it is not “land or building”.Section 50C is a deeming provision which extends only to a capital asset which is “land or building or both”. A deeming provision cannot be extended beyond the purpose for which it is enacted. If a capital asset cannot be described as “land or building or both”, section 50C cannot apply. A lease right in a plot of land is neither “land or building or both”. The distinction between a capital asset being “land or building or both” and any “right in land or building or both” is well recognized. “Land or building’ is distinct from “any right in land or building”. Consequently, section 50C does not apply to leasehold rights. (A. Y. 2006-07)Atul G. Puranik v. ITO (2011) 58 DTR 208 / 11 ITR 120 / 141 TTJ 69 / 132 ITD 499 (Mum.)(Trib.)

S. 50C : Capital gains - Full value of consideration - Stamp valuation - – Transfer - Granting development rights for demolition and reconstruction of building results in “transfer of land & building”. [S. 2 (47), (45)]Where there is transfer of existing land & building which was demolished by builder for fresh construction and documents were registered in such cases there involves a “transfer of land / FSI in case of grant of development right. Thus, it does include cost of acquisition.Chairanjeev Lal Khanna v. ITO (Mum.)(Trib.) Source: www.itatonline.org

S. 50C : Capital gains - Full value of consideration - Stamp valuation - Ownership of land. (S. 45)Assessee purchased certain land through her father in law who was her power of attorney holder. Subsequently, assessee sold said land again through her father in law. The assessing officer applied the provisions of section 50C. On appeal Commissioner (Appeals) held that since assessee’s own name did not


appear in revenue records as owner of land, provisions of section 50C did not apply. On further appeal to Tribunal, the Tribunal held that in order to apply provisions of section 50C, it is not necessary that assessee should be direct owner of property. The Tribunal confirmed the view of Assessing Officer. (A. Y. 2003-04)ITO v. Sushma Gupta (Smt.) (2011) 44 SOT 568 (Delhi)(Trib.)

S. 50C : Capital gains - Full value of consideration - Stamp valuation officer – District valuation officer (DVO).The DVO determined fair market value at Rs. 46.48 lakhs, which is lower than the value for the purpose of stamp duty at Rs. 1.18 Crores. As per the provisions of section 50C(2) the capital gains is required to be computed by considering the fair market value of the property which was at Rs. 46,48,781 as the full value of the consideration received or accruing to the assessee as a result of the transfer of capital asset. Assessing Officer cannot disregard the value determined by the DVO under section 50(C)(2) read with 16A of the Wealth-tax Act and proceed to compute long term capital gain in accordance with the value determined by stamp valuation authority. (A. Y. 2005-06).Bharti Jayesh Sangani v. ITO (2011) 55 DTR 212 / 138 TTJ 661 / 128 ITD 345 (Mum.)(Trib.)

S. 50C : Capital gains - Full value of consideration - Stamp valuation - Reference to valuation.Assessing Officer can refer for valuation of capital assets to valuation officer under section 50C if he finds that consideration received is less than value adopted by stamp valuation authority for purpose of stamp duty. (A. Y. 2006-07).ITO v. Chandrakant R. Patel (2011) 131 ITD 1 / 140 TTJ 430 / 11 ITR 317 / 56 DTR 449 (Ahd.)(Trib.)

S. 50C : Capital gains –- Full value of consideration - Value adopted by Assessing Officer.The assessee pointed out strong reasons that sale consideration is less than value determined for stamp duty, such cases have to be referred to DVO and in such cases sale consideration which has been deemed to be value adopted for stamp duty purposes as per main provisions, would be value adopted by DVO. As such the matter when once referred to the DVO, the valuation given by the DVO had to be adopted as deemed consideration (A.Y. 2006-2007)Nandita Khosla (Mrs) v. I.T.O. (2011) 46 SOT 90 (Mum)(Trib.) S. 50C : Capital gains – Full value of consideration - Computation – Valuation by stamp valuation authority- Distric caluation officer.Assessing Officer cannot disregard the value determined by the DVO under section 50C(2) r.w.s 16A of Wealth Tax Act and proceed to compute long term capital gain in accordance with the value determined by stamp valuation authority. (A. Y. 2005-06).Bharti Jayesh Sanghani (Smt) v. ITO (2011) 55 DTR 212 / 128 ITD 345 / 138 TTJ 661 (Mum.)(Trib.)

S. 50C : Capital gains -- Full value of consideration - May - Valuation by stamp authority.If stamp valuation adopted by stamp authority is disputed before Assessing Officer, then Assessing Officer is bound to refer matter to DVO for determining fair market value of property. The term “may” used in sub section (2) of section 50C is to be read as “shall”. (A. Y. 2004-05).Manjula Singhal v. ITO (2011) 46 SOT 149 / 141 TTJ 511 (Jodh.)(Trib.)

S. 50C : Capital gains - Full value of consideration - Stamp valuation - Power of assessing officer.


Once document is with stamp authority, value adopted by stamp duty authority is to be considered as value of asset for purpose of clause (b) of section 50C. Assessing Officer can not substitute value which the stamp authority ought to have adopted for purpose of stamp duty. (A. Y. 2004-05).Hasmukhbhai M. Patel v. ACIT (2011) 46 SOT 419 (Ahd.)(Trib.)

S. 50C : Capital gains - Full value of consideration - Development rights – Transfer – Valuation - Transfer of property Act, S. 53A. [S. 2 (47)(v), 45)]Provisions of section 50C were applicable to transfer of development rights in the property. Once the assessee handed over the possession of the property to the developer against payment then the property deemed to have been transferred as per deeming provisions of section 2(47)(v). Not making changes in municipality records is not relevant. Valuation officer has valued much less than the stamp authority, hence, there the valuation has to be accepted. (A. Y. 2006-07)Arif Akhatar Hussain v. ITO (2011) 59 DTR 307 / 140 TTJ 413 / 45 SOT 257 (Mum.)(Trib.)

S. 50C : Capital gains - Full value of consideration- - Stamp valuation not challenged by assessee under section 50C(2).Assessee sold a piece of land value of which sale deed was registered was found to be value below value determined by Stamp Valuation Authority. Assessing Officer invoked provisions of section 50C and brought to tax differential. As the assessee has accepted the valuation determined by Stamp Valuation Authority and not availed the opportunity under sub section(2) of section 50C for demonstrating that fair market value was less than stamp duty valuation, Tribunal held that Assessing Officer had rightly invoked the provision of section 50C. (A. Y. 2006-07)Sanjaybhai Z. Patel v. ACIT (2011) 48 SOT 231 (Ahd.)(Trib.)

S. 50C : Capital gains - Full value of consideration- - Stamp valuation - Transfer took place on 28-12-2000.Transfer of land took place on 28-12-2000. Section 50C which applies to transfer of plot of land and considers value assessed by Stamp Valuation Authority to be deemed full value of sale consideration for purpose of computing capital gain was inserted by Finance Act, 2002 with effect from 1-4-2003 and hence not applicable to the facts of the assessee. (A. Y. 2005-06).Rajshree Bihani (Smt) v. ITO (2011) 48 SOT 594 (Kol.)(Trib.)

S. 51 : Capital gains - Advance money received - Cost of acquisition. (S. 48)The assessee was the co-owner of an immoveable property acquired prior to 31-3-1981. Both the co-owners agreed to sell the property in 1994 and they have received advances in installment. Transfer took place in the year 2003-04. Assessing Officer and Commissioner (Appeals) held that advance reduced by the assessee should be deducted from the value of property as on 1-4-1981, while computing cost of acquisition. The Tribunal held that the provisions of section 51 are applicable to an aborted transaction only. In the case of the assessee, the advances were received from transaction which was not aborted, therefore Assessing Officer was not justified in reducing the advance money received from cost of acquisition. (A. Y. 2004-05).Upendra Shah v. ITO, ITA No. 1730/Mum/2009 dated 30-8-2011. 299 (2011) 43-B BCAJ (December P35) Bench “F”

S. 54 : Capital gains – Exemption - Investment in two houses.Assessee was not entitled to exemption in respect of two independent residential houses situated at different locations. (A. Y. 2005-06)Pawan Arya v. CIT (2011) 237 CTR 210 / 49 DTR 123 / 200 Taxman 66 (P&H)(High Court)


S. 54 : Capital gains – Exemption-Deposit of amount in capital gains account scheme by date mentioned under section 139 4) - Eligible for exemption.If a person has not furnished the return of the previous year within time allowed under Sub section (1) i.e. before 31st July of the Assessment year, the assessee can file the return before expiry of one year from the end of the relevant previous year. The assessee has deposited the amount before filing of return under section 139(4), therefore the assessee is entitled the benefit of exemption under section 54. (A. Y. 2006-07).CIT v. Jagriti Agrawal (Ms) (2011) 339 ITR 610 / 203 Taxman 203 / 64 DTR 333 (P&H)(High Court)

S. 54 : Capital gains –Exemption- Long term capital gains - Self financing scheme - DDA. [S. 2(29A), 2 (42A)]Allottee of a flat under self financing scheme of the DDA gets title to the property on issuance of allotment letter as clarified vide Circular No. 471 dt 15-10-1986, and therefore, capital gain arising on sale of flat by the assessee on 6th Jan., 1989 which was allotted to him on 2nd Feb., 1982, by issuance of an allotment letter was a long teram capital gain, irrespective of the date of allotment of specific flat number and delivery of possession on 15th May, 1986, assessee was entitled to exemption under section 54 on reinvestment of sale proceeds in another house. ( A. Y. 1989-90).Vinod Kumar Jain v. CIT (2011) 244 CTR 346 / (2010) 195 Taxman 174 / 46 DTR 185 (P&H)(High Court)

S. 54 : Capital gains –Exemption- Profit on sale of property used for residential house - Investment of sale consideration - No requirement that such investment should be in the name of assessee only - Property purchased in the joint names of assessee and husband. (S. 54EC)To claim exemption under section 54 and 54EC what is material is investment of sale consideration in acquiring residential premises or constructing a residential premises or investing amount in bonds set out in section 54EC, there is no requirement that such investments should be in name of assessee only. Assessee sold her residential house property and invested part of sale proceeds in purchasing residential house property and specified bonds in joint names of assessee and her husband. The Court held that as entire consideration had flown from assessee and no consideration had flown from her husband, merely because either in sale deed or in bonds her husband’s name is mentioned, in law, he would not have any right, and assessee could not be denied benefit of deduction under section 54 and 54EC. (A. Y. 2007-08).DIT v. Jennifer Bhide (2011) 203 Taxman 208 (Karn.)(High Court)

S. 54 : Capital gains – Exemption-Profit on sale of property used for residence - Exemption is available to multiple sales & purchases of residential houses. (S. 45)Though section 54 refers to capital gains arising from “transfer of a residential house”, it does not provide that the exemption is available only in relation to one house. If an assessee has sold multiple houses, then the exemption under section 54 is available in respect of all houses if the other conditions are fulfilled. If more than one house is sold and more than one house is bought, a corresponding exemption under section 54 is available. However, the exemption is not available on an aggregate basis but has to be computed considering each sale and the corresponding purchase adopting a combination beneficial to the assessee. (A. Y. 2006-07)The decision of the Special Bench in ITO v Sushila Jhaveri (2007) 292 ITR (AT) 1 is distinguishable.Rajesh Keshav Pillai v. ITO (2011) 44 SOT 617 / 60 DTR 402 / 141 TTJ 183 (Mum.)(Trib.)

S. 54 : Capital gains – Exemption-Transfer - Purchase of new flat - Section 53A of Transfer of Property Act, 1882. (S. 2(47), 45)


http://www.itatonline.org/f/o.php?url=http://indiankanoon.org/doc/982382/

Assessee sold a building on 30-4-2004 and claimed deduction under section 54 in respect of capital gain arising on sale of building as he has invested in a new flat on 25-6-2003. i.e. with in one year from date of transfer of building. Assessing Officer was of the view that as registration of transfer deed of building was dated 26-8-2004 hence, claim under section 54 was denied. The Tribunal held that buyer had performed their part of their obligation as on 30-4-2004, in such a situation, mere non registration of transfer deed would not change date of transfer of building to 26-8-2004. Tribunal held that assessee was entitle to deduction under section 54. (A. Y. 2005-06).Sureshchandra Agarwal v. ITO (2011) 48 SOT 210 (Mum.)(Trib.)

S. 54B : Capital Gains - Investment foragricultural purposes - Assesses name - Name of wife and other relations.Deduction under section 54B of the Act will be admissible only in respect of investment made in the purchase of a new asset in his own name, however, deduction shall not be available in respect of the amount invested in the purchase of new asset in the name of wife and other relations.ITO v. Rameshwar Sharma (2011) Tax World Feb., P. 114 (Jaipur)(Trib.)

S. 54EA : Capital gains – Exemption – Investment - Time limit - Compensation. (S. 45(5), 54H)Enhanced compensation for land acquired in 1992 having been received by the assessee in 1997 and invested immediately in specified bonds for the purpose of section 54EA, assessee was entitled to claim exemption under section 54EA notwithstanding the fact that on the dates relevant for the assessment year 1998-99 section 54H did not contain section 54EA. (A. Y. 1998-99).CIT v. J. Palemar Krishna (2011) 244 CTR 618 (Karn..)(High Court)

S. 54EC : Capital gains - Profit on sale of property used for residential house - Investment of sale consideration - No requirement that such investment should be in the name of assessee only - Property purchased in the joint names of assessee and husband. (S. 54)To claim exemption under section 54 and 54 EC what is material is investment of sale consideration in acquiring residential premises or constructing a residential premises or investing amount in bonds set out in section 54EC, there is no requirement that such investments should be in name of assessee only. Assessee sold her residential house property and invested part of sale proceeds in purchasing residential house property and specified bonds in joint names of assessee and her husband. The Court held that as entire consideration had flown from assessee and no consideration had flown from her husband, merely because either in sale deed or in bonds her husband’s name is mentioned, in law, he would not have any right, and assessee could not be denied benefit of deduction under section 54 and 54EC. (A. Y. 2007-08).CIT v. Voith Paper Fabrics India Ltd. (2011) 64 DTR 58 / 245 CTR 516 (P&H)(High Court)

S. 54EC : Capital gains - Investment in Bonds - Six months from the end of month. (S. 45)During the previous year relevant to the assessment year under consideration the assessee sold shares of two companies on 24th February 2005. The assessee invested entire sale consideration on 30th August 2005, in the bonds specified under section 54EC. i.e. REC Bonds. The Tribunal held that the word used in section is “any time with in a period of six months after the date of such transfer”. The term “month” is not defined in the Income-tax Act, 1961. Applying the expression used in the General clauses Act, 1897, the term six months should be reckoned from the end of month in which the transfer takes place. On the facts as the invest were made on 30th August, 2005, the Tribunal held that the assessee is entitled to exemption under section 54EC. (A. Y. 2005-06).


Yahya E. Dhariwala v. Dy. CIT, ITA No. 5501/Mum/2009 dated 25-11-2011 Bench ‘G’ 420 ( 2012) 43B BCAJ (2012) Jan., P. 32

S. 54EC : Capital Gains - Investment in bonds - Cheque issued within six months – Cleared after six months.For the purpose of computation of LTCG in case of NABARD bonds which were not specified asset as on 1/4/2006 and investment was not within 6 months of transfer, the law has to be read as it stood on the date of transfer of capital asset. Thus, section 54EC relief is available even though cheque was encashed and bonds were allotted later. Kumarpal Amrutlal Doshi v. Dy. CIT (Mum.)(Trib.) www.itatonline.org

S. 54EC : Capital gains - Deduction allowable before set-off of brought forward loss.While section 54EC is an exemption provision which exempts capital gains and takes them outside the purview of chargeable “capital gains”, section 74 deals with the carry forward and set off of loss under the head “capital gains”. The stage at which set off of carried forward long term capital loss is to be given is subsequent to the stage at which income under the head capital gains is computed and deduction under section 54EC is to be given in the course of the latter. Accordingly, section 54EC deduction has to be given before set-off of losses. (A. Y. 2005-06) The Tata Power Co. Ltd. v. ACIT (2011) 47 SOT 470 (Mum.)(Trib.)

S. 54EC : Capital gains - Exemption – Date of payment - considered date of delivery / investment. The Tribunal held that since the assessee had delivered the cheque to NABARD by 09-02-2006, the date of payment would be the date of delivery of the cheque. The date when the cheque was encashed by NABARD cannot be said to be the date of investment. (A. Y. 2006-07)Kumar Amrutlal Doshi v. Dy. CIT, ITA No. 1523/Mum/2010, dt. 09-02-2011, ‘G’ Bench, Mumbai ITAT, BCAJ Pg. 31, Vol. 43-A, Part 1, April 2011.

S. 54EC : Capital gains - Sale proceeds of tenancy rights - Wife and daughters were co-holders.Assessee invested the sale proceeds of Tenancy rights in specified bonds in his name along with wife and daughters were co holders of said bonds. Exemption under section 54EC cannot be denied to the assessee. (A. Y. 2007-08).ACIT v. Vijay S. Shirodkar (2011) 48 SOT 8 (Mum.)(Trib.)

S. 54F : Capital gains - Exemption in case of investment in residential house – Deposit in capital gain scheme. [S. 45(3)]Where assessee had earned capital gains by virtue of section 45(3) i.e. on account of introducing capital asset in a partnership firm by way of capital contribution, the assessee could not claim benefit of section 54F by constructing a new house if he had not deposited the sale proceeds in capital gains scheme account. Further since the assessee had utilized borrowed amount to construct new property he was debarred from claiming benefit under section 54F. (A. Y. 1995-96)CIT v. V. R. Desai (2011) 197 Taxman 52 (Ker.)(High Court)

S. 54F : Capital gains - Investment in residential house -Sale proceeds from out of transfer of an asset other than a residential house acquisition of property prior to transfer of asset – deduction allowed.The assessee purchased a residential house and within one year of such purchase, sold his insurance survey business and claimed deduction under section 54F against the purchase of residential house. The Assessing


Officer rejected the same on the ground that the property was not purchased out of sale consideration of the transferred asset. It was held that the assessee was entitled to the deduction under section 54F since the section itself provides for acquisition of property prior to transfer of asset.CIT v. R. Srinivasan (2011) 198 Taxman 26 (Mad.)(Mag.)(High Court)

S. 54F : Capital gains - Investment in residential house - Revision of orders prejudicial to revenue - Exemption - Capital gains - Investment in house with in time specified under section 139(4). (S. 263)Commissioner passed the order under section 263 withdrawing exemption under section 54F, on the ground that new house was registered in favour of the assessee beyond the due date prescribed under sub section (1), of section 139 and that the assessee failed to deposit the sale proceeds as provided under section 54F(4). High Court held that Tribunal was justified in setting aside the order of the Commissioner by holding that the investment made by the assessee being with in time specified under section 139 (4) ,the assessee is eligible for exemption under section 54F in view of the binding decision of the Jurisdictional High Court. (A. Y. 2006-07).CIT v. Vrinder P. Issac (Smt.) (2011) 64 DTR 376 (Karn.)(High Court)

S. 54F : Capital gains – Exemption – Purchase of new residential house -Deposit under Capital Gains accounts scheme.Assessee having deposited the sale proceeds of property in his bank account under the capital gains account scheme within the prescribed period and purchased a new property by availing of a loan which was paid out of the same bank account, he has complied with the provisions of Capital Gains Accounts Scheme and, therefore, assessee is entitled to exemption under section 54F. (A. Y. 2006-07)P. Thirumoorthy v. ITO (2011) 49 DTR 91 / 135 TTJ 75 / 7 ITR 10 (UO)(Chennai)(Trib.)

S. 54F : Capital gains – Exemption – Investment in residential house - Time limitWhere the assessee had purchased a flat after one year of sale of original asset and constructed a new house within three years of sale of original asset proviso (ii) to section 54F was not attracted and assessee was entitled to exemption under section 54F in respect of new house constructed by him. (A. Y. 2006-07)P. R. Kulkarni & Sons (HUF) v. Addl. CIT (2011) 49 DTR 442 / 135 TTJ 630 (Bang.)(Trib.)

S. 54F : Capital gains – Exemption - Purchase price of new house adjusted - Construction of new house. (S. 45)Assessee sold the land to MTDC on 31st March 2005, and possession of new constructed bungalow has been given by the MTDC to the assessee on 31st March 2008 and even otherwise as the entire purchase price of the new house property was adjusted on 31st March 2005, itself i.e. the date of transfer of land in question to MTDC, assessee was entitled to exemption under section 54F. The contention of the revenue stating that as construction was not started prior to date of filing of return i.e. 31st July 2005, the assessee should have deposited the consideration received on transfer of land in capital gains account with the bank which has not been done. The Tribunal held that there was no occasion for depositing the amount in question as it was not received by the assessee any point of time. According to the Tribunal the view of Assessing Officer was not correct. (A. Y. 2005-06).Chetan Vithal Tupe v. ACIT (2011) 64 DTR 218 / 47 SOT 1 (Pune)(Trib.)

S. 54F : Capital gains – Exemption - Investment in residential house - Cost of acquisition - Advocate fee – Brokerage - Expenditure on laying tiles, white-washing, electrical rewiring, and wood work. (S. 45)


Tribunal held that expenses relating to advocate fee and brokerage of property would be included in cost of acquisition. Expenditure incurred by assessee on laying tiles, white-washing, electrical rewiring, and wood work after acquisition of property could not be treated as part of acquisition cost. (A. Y. 2008-09).S. Sudha (Smt) v. ACIT (2011) 48 SOT 335 / 10 ITR 206 (Chennai)(Trib.)

S. 54F : Capital gains – Exemption - Investment in residential house - Two commercial properties. (S. 45)Assessee sold two commercial properties/ capital assets and claimed deduction under section 54F on ground of purchase of two residential units being ground and first floor in a Group Housing Complex. Assessing Officer disallowed same on ground that deduction was not allowable as two distinct properties were purchased. Commissioner (Appeals) considering all the factors held that assessee had in possession was one single unit comprising of two floors of one and same double storeyed residential house having common stair case kitchen, etc. The Tribunal held that assessee would be entitled to exemption as claimed. (A. Y. 2005-06).ACIT v. Sudha Gurtoo (2011) 48 SOT 393 / 7 ITR 653 (Delhi)(Trib.)

S. 54F : Capital gains - Exemption-Investment in residential house - (S. 2(47), 45, 50C).Assessee transferred her 1/3 share in land which was sold vide agreement dated 28-12-2000, for a total consideration of Rs. 24-10 lakhs to orginal purchaser in part performance of contract. Possession was handed over on 28-12-2000. Subsequently on request of the purchaser conveyance deed was entered in to in flavour of nominee during previous year 2005-06. Assessee purchased a residential flat for a total consideration of Rs 23-50 Lakhs vide agreement for sale dated 23-3-2001 and possession of said property was delivered to assessee on 27-4-2001, it means that long term capital gain arising out of sale of land was invested in residential house, therefore exemption under section 54F would be allowable. (A. Y. 2005-06).Rajshree Bihani (Smt.) v. ITO (2011) 48 SOT 594 (Kol.)(Trib.)

S. 54F : Capital gains – Exemption - Investment in two adjacent flats. (S. 45)The assessee had purchased two adjacent flats which were interconnected and used as one residential house. Assessing Officer denied the exemption. On appeal the Tribunal held that the Assessing Officer shall allow the exemption in respect of both the flats if it is found that the flats are being used as one residential house and the investment was made by assessee himself. In appeal by revenue the Bombay High Court up held the decision of Tribunal.CIT v. Joe B. Fernandes ITA No. 1467 of 2007 dt. 10-12-2008 429 (2012) 43. B.BCAJ (January- 2012 – P. 41)Editorial:- Departmental S.L.P. No. ( C ) 23581of 2009 dated 7-9-2009 was rejected by Supreme Court. (2010)322 ITR (st) 8 / CIT v. Rashmi Khanna : S.L.P. ( C ) No. 30894 of 2009 dt. 9-11-2009 (2010)322 ITR (st) 8

S. 54F : Capital gains – Exemption - Stamp duty valuation. (S. 45, 50C)Capital gains arising from the transfer of any long term capital asset for the purpose of section 54F has to be worked out applying section 48 without imposing section 50C into it, when sale consideration was shown at Rs. 20,00,000/- stamp duty valuation was Rs. 36,00,000/- and the assessee invested in new house Rs. 24,00,000/- including Rs. 20,00,000/- sale consideration, he could claim exemption under section 54F only of Rs. 18,06,494/- and not entire Rs. 36,00,000/-. (A. Y. 2005-06).Gouli Mahadevappa v. ITO (2011) 49 DTR 207 / 128 ITD 503 / 9 ITR 129 / 135 TTJ 489 (Bang.)(Trib.)Editorial:- Gyan Chand Batra v ITO (2010) 133 TTJ 482 / 45 DTR 41 (Jaipur)(Trib.) Tribunal has taken different view.

S. 54F : Capital gains – Exemption - Deposit in savings bank account.


Where the assessee had deposited sale proceeds in normal savings account as against scheme specified by Central Government through notification in official Gazette as per section 54F(4), it violated provisions of section 54F(4), hence, not eligible for exemption. (A. Y. 1996-97).Thakorlal Harkishandas Intwala v. ITO (2011) 43 SOT 347 / 140 TTJ 21 (Ahd.)(Trib.)

S. 55 : Capital gains - Cost of acquisition - Determination of fair value as on 1-4-1981.Assessee acquired 1/9 right in a property. She sold her share of property. She adopted 1 lakh per ground as fair market value of property as on 1-4-1981. Inspector visited concerned sub registrar Office and gathered the details on basis of fair market value of Rs. 15,000 per ground. The Assessing Officer adopted the guideline value of registrar’s office for computing capital gains. The Tribunal held that the guidline value collected from sub-registrar office is only a guiding factors for valuing a property and such guideline value need not be market value for all time. Market value has to be determined by so many external factors including prevelant market conditions hence detailed enquiry is needed for arriving at a reasonable market value of property. Accordingly the Tribunal remanded the matter for fresh consideration. (A. Y. 2007-08)ITO v. Usha Ramesh (Smt) (2011) 133 ITD 67 (Chennai)(Trib.)(TM)

S. 55(2)(b) : Capital gains - Cost of acquisition - Fair market value - 1-4-1981.Fair market value of land at Rs. 330 per square yard as on Ist April,1981 adopted by the Tribunal in view of sale of land by Investment Trust on 1st June,1981 and other comparable sale instances in the same area which is not shown to be erroneous the same has to be accepted as against Rs. 60/- per square yard adopted by the Assessing Officer. (A. Y. 1995-96). CIT v. Bhupindera Flour Mills (P) Ltd. (2011) 59 DTR 307 (P&H) (High Court)

S. 55(2)(b) : Capital gains - Cost of acquisition. (S. 2(22B), 50C)Cost of acquisition of the property under section 55(2)(b)(i) will be its fair market value as on 01-04-1981 as determined by the registered valuer and not the circle rate. (A. Y. 2005-06).Pyare Mohan Mathur HUF v. ITO, (2011) 46 SOT 315 (Agra)(Trib.)

S. 55A : Capital gains - Reference to valuation Officer - Fair market value. (S. 48)Section 55A, is meant only to ascertain fair market value of a capital asset but not meant to determine full value of consideration received as result of transfer and therefore it has its own limitation for its operation. Since section 48 do not prescribe determination of capital gain on fair market value it is out of ambit of reference prescribed under section 55A. (A. Y. 2006-07).ITO v. Chandrakant R. Patel (2011) 131 ITD 1/ 140 TTJ 430 / 11 ITR 317 / 56 DTR 449 (Ahd.)(Trib.)

F.- Income from other sources.

S. 56 : Income from other source - Fixed deposit placed with bank as performance guarantee.Fixed deposit placed with Bank as performance guarantee as condition for being awarded contract work. Interest on fixed deposits not assessable as income from other sources. (A. Y. 2003-04).CIT v. Jaypee Dsc Ventures Ltd (2011) 335 ITR 132 / 56 DTR 305 (Delhi)(High Court)

S. 56 : Income from other sources - Business income - Letting out factory.The assessee let out its factory with all machineries with effect from September 8, 1983 as per lease agreement for a period of 11 months. After the expiry of lease period, lease agreement was not renewed.


The Court held that one has to see whether the intention of the assessee is to go out of business altogether or to come back and restart the same. Except lease agreement, no material has been produced by the assessee before the Assessing Officer or this court to come to the conclusion that the assessee is likely to come back and restart the business. Accordingly the court held that income to be treated as income from other sources. (A. Ys. 1997-98 to 1999-2000).CIT v. Venkateswara Agro Chemicals and Minerals P. Ltd. (2011) 338 ITR 428 (Mad.)(High Court)

S. 56 : Income from other sources - Business income - Interest income.During the year under consideration, assessee company had taken loans amounting to Rs. 56.88 Crores from its holding company and same was advanced to four companies belonging to same group. Assessee claimed that the said interest is taxable as income from business income. The Tribunal held that since there was nothing on record to show that assessee company was in business of finance or money lending in year under consideration, net interest income earned by it was chargeable to tax under head income from other sources. (A. Y. 2002-03, 2004-05 and 2006-07).Vidhyavihar Containers Ltd. v. Dy. CIT (2011) 133 ITD 363 (Mum.)(Trib.)

S. 56(2)(v) : Income form other sources - Gifts received by minor sons - Maternal uncle. (S. 64)Section 56(2)(v), read with Explanation speaks of relationship between the donor and donee and not deemed assessee, maternal uncle of the assessee who made gifts of Rs. 5 Lakhs to two minor sons of the assessee is not a “relative” of the donees with in the meaning of explanation to section 56(2)(v) and therefore, the impugned sum is chargeable to tax in the hands of the assessee under the provisions of section 56 read with section 64. (A. Y. 2005-06). ACIT v. Lucky Pamnani (2011) 49 DTR 501 / 135 TTJ 607 / 129 ITD 489 (Mum.)(Trib.)

S. 56(2)(v) : Income from other sources amount received and repaid as loan.Amount received and repaid as a loan cannot come within the ambit of section 56(2)(v). (A. Y. 2006-07) CIT v. Saranapal Singh (HUF) (2011) 198 Taxman 202 / 237 CTR 50 / (2010) 48 DTR 95 (P&H)(Mag.)(High Court)

S. 56(2)(v) : Income from other sources - Amount received by legal heir for abstaining form contesting the will of deceased.Assessee, a legal heir of deceased having received a compromise amount under a settlement with the legatee for agreeing to the Court granting probate in respect of the last will of the deceased and withdrawing his caveat against grant of probate, the abstinence of the assessee from contesting the will constituted the consideration for payment and therefore the provisions of section 56(2)(v) are not attracted and the amount received by the assessee cannot be treated as income under section 56(2)(v). (A. Y. 2006-07).Purvez A. Poonawala v. ITO (2011) 138 TTJ 673 / 55 DTR 297 / 47 SOT 380 (Mum.)(Trib.)

S. 56(2)(v) : Income from other sources – Gift received from HUF – Exempt – HUF is a “relative” under section 56(2)(v), (vi) & (vii)Where assessee receives gift from HUF it was held that though the definition of the term “relative” does not specifically include a Hindu Undivided Family, a ‘HUF” constitutes all persons lineally descended from a common ancestor and includes their mothers, wives or widows and unmarried daughters. As all these persons fall in the definition of “relative”, an HUF is ‘a group of relatives’. As a gift from a “relative” is exempt, a gift from a ‘group of relatives’ is also exempt since the singular will include the plural. (A. Y. 2005-06).


Vineetkumar Raghavjibhai Bhalodia v. ITO (2011) 46 SOT 97 / 58 DTR 412 / 140 TTJ 58 / 12 ITR 616 (Rajkot)(Trib.)

S. 56(2)(viia) : Income from other sources - Receipt of shares without consideration - Shares of quoted company. (S. 92 to 92F)Applicant is to receive contribution of shares of GIL without consideration. GIL is a company in which public are substantially interested and its shares are listed on BSE, therefore no income is liable to tax within the meaning of section 56(2)(viia). Consequently ,provisions of sections 92 to 92F are not applicable.Goodyear Tire & Rubber Co. In Re. (2011) 240 CTR 209 / 54 DTR 281 / 334 ITR 69 / 199 Taxman 121 (AAR).

S. 57(iii) : Income from other sources - Deductions - Interest – Assessing Officer can lift veil & determine legal effect but cannot ignore legal effect on ground of “substance”.It is held by the Larger Bench that under section 57(iii), expenditure laid out or expended wholly or exclusively for the purpose of making or earning income is deductible. It is the purpose of the expenditure that is relevant but the purpose need not be fulfilled. CIT v. Rajendra Prasad Moody (1978) 115 ITR 519 (SC) followed. The assessee must act bona fide & show nexus between the advancing of funds and his business interest. The dominant purpose for making the investment must be to earn income & to ascertain the purpose the Assessing Officer may lift the veil (CIT v. Swapna Roy (2011) 331 ITR 367 (All) & Punjab Stainless Steel Industries v. CIT (2010) 324 ITR 396 (Delhi) followed);It was also held that legal effect of a transaction cannot be displaced by probing into the “substance of the transaction”. Thus, the exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe. (A. Y. 1986-87).CIT v. Rockman Cycle Industries Pvt. Ltd. (2011) 331 ITR 401 / 51 DTR 169 / 238 CTR 363 (P&H)(FB)(High Court)

S. 57(iii) : Income from other sources - Deductions - Fixed deposit in banks.Where the assessee borrowed funds from bank and invested the same in Fixed Deposits (‘F.D’) and earned more interest on the F.D. than the interest payable on the borrowed funds taking advantage of Export Import policy of the Government interest paid on the borrowing was held to be allowable as deduction under section 57(iii) of the Act from the interest earned on F.D. as there was direct nexus between the interest earned and interest paid by the assessee. (A. Y. 2005-06 & 2006-07).CIT v. Taj International Jewellers (2011) 50 DTR 348 / 335 ITR 144 (Delhi)(High Court)

Chapter VIAGGREGATION OF INCOME AND SET OFF OR CARRY FORWARD OF LOSS

S. 68 : Cash credits - Share application money - Satisfactory explanation as to the ‘nature of the source’.The Hon’ble High Court held that in order to provide satisfactory explanation as to the “nature and source” of a sum found credited in his books, the initial burden is on the assessee. The assessee is required to prove (a) Identity of the shareholder; (b) Genuineness of transaction; and (c) credit worthiness of shareholders; (A. Ys. 2003-04 & 2004-05)CIT v. Oasis Hospitalities Pvt. Ltd. (2011) 198 Taxman 402 / 238 CTR 402 / 333 ITR 119 / 51 DTR 74 (Delhi)(HighCourt)

S. 68 : Cash credits - Work in progress - Partners capital account - Burden of proof.WIP in a construction project transferred by a contractor firm to the Assessee firm and credited to the Capital Accounts of partner. Such credit could not be treated as Cash Credit since the transactions are genuine and identity of parties are established. (A. Y. 2005-06)


CIT v. S. K. Banerjee J. V. Transport Plaza (2011) 241 CTR 152 / 335 ITR 563 / 55 DTR 1 (Bom.)(High Court)

S. 68 : Cash credits - Share application money.. Where the assesse had provided to the assessing authority the name, age, address, date of filing the share application and number of shares applied by each shareholder, addition under section 68 of the Act cannot be made. (2000-01 & 2002-03)CIT v. STL Extrusion (P) Ltd. (2011) 333 ITR 269 / 53 DTR 97 (MP)(High Court)

S. 68 : Cash credits - Gifts - Relation – Occasion - Unexplained investments. (S. 69)Where the donors who had made the gifts to the assessee having appeared before the Assessing Officer, submitted affidavit on oath confirming the gifts made by them, citing their old relations with the assessee and proved their capacity to make gifts, said gifts could not be treated as non genuine simply because there was no occasion for making the gifts or there was no blood relation between the donors and the donee or that the gifts were made by donors by taking loans. The order of Tribunal deleting the addition was confirmed. (A. Y.2003-04).CIT v. Mayawati (Ms.) (2011) 338 ITR 563 / 59 DTR 177 / 201 Taxman 1 / 243 CTR 9 (Delhi)(High Court)Editorial- Delhi Tribunal in Mayawati (2010) 48 DTR 233 (Delhi) (Trib) was affirmed.

S. 68 : Cash credit - Share application money - Identity of shareholders.Assessee having established identity of shareholders, addition under section 68 could not be made on the ground that assessee failed to explain the source of credit. Department was free to proceed against shareholders in accordance with law. (A. Y. 1992-93).Hindustan Inks & Resins Ltd. v. Dy. CIT (2011) 60 DTR 18 (Guj.)(High Court)

S. 68 : Cash credits - Assessee’s Assessing Officer cannot question Creditor’s I. T. Return.If the creditor discloses his PAN and claims to be an assessee, the Assessing Officer cannot himself examine the return and P&L A/c. of the creditor and brand the same as unworthy of credence. Instead, he should enquire from the creditor’s Assessing Officer as to the genuineness of the transaction and whether such transaction has been accepted by the creditor’s Assessing Officer. So long it is not established that the return submitted by the creditor has been rejected by the creditor’s Assessing Officer, the assessee’s Assessing Officer is bound to accept the same as genuine when the identity of the creditor and the genuineness of transaction through account payee cheque has been established.CIT v. Dataware Pvt. Ltd. (Cal.)(High Court) www.itatonline.org

S. 68 : Cash credits - Burden of proof - Loan.When an unexplained credit is found in books of account of an assessee initial burden is placed on assessee and once that onus is discharged, it is for revenue to prove that credit found in with respect of deposits found in the books of account of assessee is undisclosed income of assessee. Assessee returned the money, tax was deducted at source, assessee not required to prove the source of source. (A. Y.1998-99).CIT v. Kinetic Capital Finance Ltd. (2011) 202 Taxman 548 (Delhi)(High Court)

S. 68 : Cash credits - Share application money - Failure to prove identity and credit worthiness.High Court confirmed the order of Tribunal where the Tribunal held that the assessee has failed to prove the identity and credit worthiness, share application money the addition was justified as cash Credits. (A. Y. 2005-06).Power Drugs Ltd. v. CIT (2011) 62 DTR 276 / 245 CTR 623 (P&H)(High Court)


S. 68 : Cash credits - Burden of proof - Loan confirmation – PANs - Report of inspector - Natural justice.The Court held that Tribunal was not justified in confirming the addition under section 68 after taking in to consideration of Inspector’s report, without giving adequate opportunity to the assessee to explain the information received by the Assessing Officer from the inspector. Assessee has produced the loan confirmation disclosing the Permanent Account numbers ( A.Y.1997-98).S. K. Bothra & Sons (HUF) v. ITO (2011) 62 DTR 234 / 203 Taxman 436 (Cal.)(High Court)

S. 68 : Cash credits - Gift – Non-resident – Partners capital account.There is no rigid rule that whenever credit entry is in the capital account of a partner, addition could not be made in the hands of firm even when credit entry is, on the face of it, bogus or a device to evade tax. Held that the Assessing Officer was justified in making addition on account of unexplained NRI gifts allegedly received by the partners and brought in to the books of account of the firm through capital accounts of partners. (A.Y.1993-94)CIT v. Deepak Iron & Steel Rolling Mills (2011) 63 DTR 196 / 336 ITR 307 / 245 CTR 340 (P&H)(High Court)

S. 68 : Cash credits – Deposits - Burden of proof - Public notice.Assessee company raised deposits by public notice and brought on record every possible information regarding the depositors which was included in the application forms submitted by them, the Court held that it has discharged the initial onus that lay on it under section 68, hence addition could not be made merely for the reason that no confirmation letters were filed in respect of some depositors. (A. Y. 1997-98)CIT v. Samtel Color Limited (2011) 64 DTR 46 (Delhi)(High Court)

S. 68 : Cash credits - Gift from father in law - Cash withdrawals not proved.Assessee received gift of Rs. 8 lakhs from father in law, however the father in law failed to prove the source of gifts on the basis of confirmation filed, therefore addition was justified. (A. Y. 2005-06).Mukesh Shaw v. ITO (2011) 64 DTR 353 / (2012) 246 CTR 82 (Jharkhand)(High Court).

S. 68 : Cash credits - Gift.Assessee has filed address of both the donors, however, revenue authorities did not examine them in person before making addition, further the revenue authorities failed to bring any evidence on record showing that amount received by assessee from donors was actually her own undisclosed income. Addition confirmed by the CIT(A) was deleted. (A. Y. 2002-03).Amita Devi Sanganeria (Smt) v. ACIT (2011) 129 ITD 72 / 53 DTR 214 / 137 TTJ 521 (Gau.)(TM)(Trib.)

S. 68 : Cash credits – Gift.Assessee received the gift by way of cheques which have been confirmed by the donors in their affidavits and disclosed in their respective returns, the same could not be treated as non genuine. (A. Y. 2005-06).Dy. CIT v. Vishwanath Prasad Gupta (2011) 52 DTR 346 / 130 ITD 73 / 57 DTR 89 / 139 TTJ 257 (Jab.)(TM)(Trib.)

S. 68 : Cash credits - Share application money.Assessee had established identity of each of share holder, and also proved that each of them was income tax assessee and share application money credited to their accounts was duly reflected in their income tax returns and balance sheets, hence, the order of Commissioner (Appeals) deleting the addition was confirmed. (A. Y. 2005-06)Dy. CIT v. Dolphine Marbles (P) Ltd. (2011) 129 ITD 163 / 139 TTJ 129 / 57 DTR 58 (Jab.)(TM)(Trib.)


S. 68 : Cash credits - Gifts.Assessee received gift of Rs. 1 lakh from ten individuals. It was noted from the records that donors had deposited monies in their bank account on same day or one day prior to making of gifts through account payee cheques. It was observed that, personal withdrawals of donors for their house hold expenses were petty and it did not support status of donors to gift of Rs. 1 lakh, besides none of donors was relative of assessee, in view of the facts gifts received by the assessee confirmed as cash credits. (A. Y.2001-02)Arvind Kumar Mohani v. ITO (2011) 129 ITD 117 / 54 DTR 33 / 138 TTJ 403 (Jab.)(TM)(Trib.)

S. 68 : Cash credits – Gift – Failure to produce donors.No addition could be made simply rejecting explanation and evidences filed on record in support of the gift without any scrutiny about the confirmation and without bringing any conclusive evidence brought on record merely on the plea that the assessee failed to produce donors for examination. (A. Y. 2006-07)P. R. Kulkarni & Sons (HUF) v. Addl. CIT (2011) 135 TTJ 630 / 49 DTR 442 (Bang.)(Trib.)

S. 68 : Cash credits - Existence of books of account.Where the assessee had not maintained books of account, there was no legal scope to invoke provisions of section 68. Existence of books of account by assessee is a condition precedent for making addition under section 68. (A. Y. 2002-03) Madhu Raitani (Smt.) v. ACIT (2011) 45 SOT 231 / 10 ITR 91 (Gau.)TM)(Trib.)

S. 68 : Cash credits - Share application money.Assessee company having filed letters of the share applicant companies written to the ACIT confirming that they had applied for shares in the assessee company giving details of drafts, copies of acknowledgment of returns, certificates of incorporation and balance sheets of the said companies where in investment made in the assessee company is shown, it has discharged the onus which lay upon it under section 68 establishing the identity and credit worthiness of each share holder. The Tribunal held that addition can not be made under section 68. (A. Y. 2005-06).Dy. CIT v. Dolphine Marbles (P) Ltd. (2011) 57 DTR 58 / 129 ITD 163 / 139 TTJ 129 (Jab.)(TM)(Trib.)

S. 68 : Cash credits - Confirmation - Satisfaction of Assessing Officer – to be based on proper appreciation of materials and surrounding circumstances available on record.Assessee had filed confirmation and copy of bank statement as well as cash book. It could be said that assessee had proved genuineness of loan and no addition could be made under section 68 of the Income Tax Act. Opinion of Assessing Officer for not accepting explanation offered by assessee under section 68 as not satisfactory. It must be based on proper appreciation of material and other surrounding circumstances available on record and Assessing Officer can not reject each and every explanation of assessee. (A. Y. 2000-01).Umesh Electricals v. ACIT (2011) 131 ITD 127 / 60 DTR 385 / 141 TTJ 288 (Agra)(TM)(Trib.)

S. 68 : Cash Credits - Share application money - Burden of proof.Mere submission of share application forms, PAN names and address and ROC registration etc. was not sufficient in view of the fact that these companies were found to be non-existent. On the facts the assessee failed to produce any of its directors or employees of the share applicants, as their identity was not proved ,the onus cast on the assessee was not discharged. Addition under section was confirmed. (A. Ys. 2005-06 to 2006-07).


Agarwal Coal Corporation (P) Ltd. v. Addl. CIT (2011) 63 DTR 201 / 142 TTJ 409 (Indore)(Trib.)

S. 69 : Unexplained investments – Difference in statement of value of stock furnished to bank and entries in books of accounts addition justified.Where the stock statement of hypothecated goods furnished bank was at variance with stock recorded in books of accounts. It was held that addition was justified as the assessee neither denied statement made to bank nor furnished valid explanation of discrepancy. (A. Y. 1995-96).B. T. Steels Ltd. v. CIT (2011) 196 Taxman 362 / (2010) 47 DTR 227 / 328 ITR 471 / 236 CTR 471 (P&H)(High Court)

S. 69 : Unexplained investments – Income from undisclosed sources - Genuineness of sale of shares - (S. 54F)Purchase and sale of shares said to have been made by the assessee being the solitary transaction in shares by him allegedly made through a broker who is not registered with the stock exchange and concerned company as well as the said broker having denied the transaction, Assessing Officer was justified in not accepting the said transaction as genuine by applying the test of human probabilities and treating the impugned amount as income from undisclosed sources. (A. Y. 1997-98).CIT v. Hakumat Rai (2011) 237 CTR 513 / 49 DTR 266 (P&H)(High Court)

S. 69 : Unexplained investments - Income from undisclosed sources - Addition - Set off on account of intangible.If the intangible additions are made as undisclosed income during survey for earlier assessment years, while considering the assessment of subsequent assessment year and making addition of unexplained investment in stock, the Assessing Officer should consider the question of set off of the intangible addition made in appeal. (A. Y. 1997-98).Balram Saha v. CIT (2011) 56 DTR 209 / 334 ITR 383 (Cal.)(High Court)

S. 69 : Unexplained investments - Search and seizure – Jewellery - CBDT circular.The court held that the CBDT circular had been issued for the purpose of non seizure on the basis of recognized customs prevailing in Hindu Society and unless the revenue showed anything to the contrary, it could safely be presumed that source to extent as stated in Circular No. 1916 stands explained, accordingly the order of Tribunal deleting the addition was confirmed.CIT v. Ratanlal Vyaparilal Jain (2011) 199 Taxman 90 / 339 ITR 351 / (2010) 235 CTR 568 / 45 DTR 290 (Guj.)(Mag.)(High Court)

S. 69 : Unexplained investments - Income from undisclosed source - Statement in the course of search – Retraction. [S. 132(4)]Merely on the basis of statement made under section 132(4), in respect of loans, addition under section 69 as income from undisclosed source cannot be made when the said statement was retracted and evidence to show the genuineness of loan was filed. The Court also referred the Circular of CBDT No. F.NO.286/2/2003 IT (Inv) dt 10th March 2003. (A. Y.1994-95).M. Narayanan & Bros. v. ACIT (2011) 60 DTR 233 / 339 ITR 192 / 243 CTR 588 (Mad.)(High Court)

S. 69 : Unexplained investments - Statement of family members of sellers under Foreign Exchange Regulation Act.Assessee purchased the property from joint owners of property who were family members. Sale consideration was shown at Rs. 4 lakhs in the deed. In the statement recorded under Foreign Exchange


Regulation Act senior most member of family who was responsible for sale of property admitted that actual sale consideration was Rs. 16 lakhs. High Court held that the addition was justified. (A.Ys. 1997-98 to 1999-2000).CIT v. T. O. Abraham (2011) 202 Taxman 632 (Ker.)(High Court)

S. 69 : Unexplained investments - AIR information - Second owner of the units of mutual funds.Addition on account of unexplained investment cannot be made in the hands of the assessee on the basis of AIR information, when the assessee was only the second owner of the units of mutual funds and the identity of the first owner was established and they are assessed to tax.S. Ganesh v. ACIT (2011) TIOL 87 ITAT-Mum. 701 / (2011) 42-B. BCAJ (March P. 33)(Trib.)

S. 69 : Unexplained investments - Income from undisclosed sources - Statement on oath - Stamp duty valuation. [S. 132(4)]Price of the plots paid by the assessee being consistent with the circle rate which the stamp duty has been paid and the department having not found any document or evidence to establish that the assessee has made more payment than that found recorded in his accounts, the statement made by the assessee under section 132(4) surrendering the amount could not have been taken as basis for making addition as unexplained investments in plots. (A. Y. 2006-07).ACIT v. Raj Dharwala (Dr) (2011) 63 DTR 113 (Jodh.)(Trib.)

S. 69A : Unexplained money – Claim for redemption fine – Deduction not allowed.It was held that section 69A does not provide for any deduction, thus claim for redemption fine is not admissible. Adjudication, confiscation and later redemption fine does not affect the assessment in case of seized articles under section 69A. (A. Y. 1989-90)P. Sonam v. CIT (2011) 196 Taxman 335 (Ker.)(High Court)

S. 69A : Unexplained money - Statement of third party – Survey.No incriminating material was found during search proceedings. Merely on the basis of statement of third party no addition can be made.CIT v. Concorde Capital Management Company Ltd. (2011) 334 ITR 346 / (2009) 25 DTR 97 / 183 Taxman 172 (Delhi)(High Court)

S. 69A : Unexplained money - Search and seizure – Jewellery - Streedhan.During search at assessee’s premises 906.900 gms. jewellary was found from assessee, assessee explained that he was married 25 years back and jewellery was received by his wife in form of ‘stree dhan’ or on their occasions, such as, birth of a child etc. The High Court held that collecting jewellery of 906.900 gms by a women in a married life of 25 years in the form of stree dhan or other occasions is not abnormal hence the assessing officer was unjustified treating only 400 gms as ‘reasonable’ and treating remaining jewellary as ‘unexplained’, accordingly the addition was deleted. (A. Y.2006-07).Ashok Chaddha v. ITO (2011) 202 Taxman 395 / 63 DTR 353 / 245 CTR 416 (Delhi)(High Court)

S. 69A : Unexplained money - Sale proceeds of shares.Where the shares sold by the assessee were received by the assessee in her demat account on July 3, 2003 transferred from another client and were not those shares stated to be purchased by the assessee on June 17, 2002. The credit in demat account of the assessee on July 3, 2003 remaining unexplained and hence addition was justified. (A. Y. 2004-05).


Kusum Lata (Smt) v. ACIT (2011) 10 ITR 737 / 127 ITD 378 (Delhi)(Trib.)

S. 69A : Unexplained money - Gift - Onus on assessee to prove – Occasion.When assessee received the gift onus is on him not only to establish identity of person making gift but also his capacity to make such gift and he is also required to demonstrate, what kind of relationship or what kind of love and affection donor has for assesse and to explain circumstances in which gift were made. (A. Y. 2001-02).Sushil Kumar Mohanani v. ITO (2011) 131 ITD 237 / 138 TTJ 150 / 54 DTR 1 (Jab.)(TM)(Trib.)

S. 69B : Amounts of investments not fully disclosed in books of account – Undisclosed income.Addition under section 69B of the Act alleging undisclosed investment cannot be made merely on the basis of District Valuation Officer’s (D.V.O.) report when the books of accounts of the assessee are not rejected nor any incriminating material was found during the search to suggest that assessee had made any payment over and above the consideration mentioned in the return.CIT v. Bajrang Lal Bansal (2011) 335 ITR 572 / 51 DTR 287 / 241 CTR 64 (Delhi)(High Court)

S. 69B : Amounts of Investments not fully disclosed in books of account - Income from undisclosed sources - Reference to DVO - Block assessment - Search and seizure. (S. 142A)Proviso to section 142A has no retrospective effect, assessment by Assessing Officer and appeal by CIT(A) having been decided prior to 30th Sept., 2004, it was not open to the Assessing Officer to order valuation of property by DVO.CIT v. Naveen Gera (2011) 56 DTR 170 / (2010) 328 ITR 516 (Delhi)(High Court)

S. 69C : Unexplained expenditure - Payment by assessee to hospital doctors - Fees received which was distributed.In the course of search unaccounted collection of fees was noticed in the names of doctors which claimed to be distributed to various doctors whether as regular employees or as consultants. The Court held that addition cannot be made in the hands of assessee, department should have issued the notice to the Doctors for confirmation of the payments and if they deny then only proceedings can be initiated under section 69C. On the facts the assessee has discharged the burden by providing the particulars of payments made to doctors. High Court confirmed the order of Tribunal which has deleted the addition. (A. Ys. 2000-01 to 2003-04).CIT v. Lakshmi Hospital (2011) 62 DTR 261 / 245 CTR 471 / 201 Taxman 300 (Ker.)(High Court)

S. 69C : Unexplained expenditure - Statement of Director before Central Excise Authorities.Additions cannot be made merely on the basis of statement made by the Director before Central Excise Authorities, without any supporting evidence regarding suppression of production. (A. Ys. 2004-05, 2005-06).ITO v. Arora Alloys Ltd. (2011) 12 ITR 263 (Chandigarh)(Trib.)

S. 70 : Set off or carry forward and set off – Set off of loss - Capital gains - Capital loss - Set off of indexed long term capital loss against non indexed long term capital gains. (S. 48, 55, 112)Provisions of section 70(3) existed much prior to the mode of computation of capital gain without applying the benefit of indexation which were introduced later by an amendment in the year 2000. It cannot be therefore that the legislature would have contemplated while enacting the provisions of section 70(3) a situation as contemplated by proviso to section 112(1), when it used the expression ‘similar computation’ in


section 70(3). Expression ‘similar computation’ used in section 70(3) refers to the computation under section 48 to 55 and not the computation under section proviso to section 48 vis-à-vis proviso to section 112(1). The Assessee was justified in setting off indexed long-term capital loss against non-indexed long-term capital gains. (A. Y. 2004-05)Vipul A. Shah v. ACIT (2011) 63 DTR 272 / 142 TTJ 807 / 47 SOT 189 (Mum.)(Trib.)

S. 71 : Set off of loss - Set off from one head against income from another - Capital loss - Capital gains.Assessee sold certain shares of Company “A” and claimed capital loss. Assessing Officer disallowed loss holding that assessee sold shares so as to claim set off this loss against capital gains arising on sale of land. Tribunal held that since shares were duly transferred and recorded in books of account and further, assessee also explained the circumstances in which he sold shares, capital loss on sale of shares can not be disallowed. (A. Y. 2004-05). Hasmukhbhai M. Patel v. ACIT (2011) 46 SOT 419 (Ahd.)(Trib.)

S. 72 : Carry forward and set off of business losses - Exempted income. [S. 10B(6), 10B(8)]Where the assessee had forfeited the claim under section 10B because they were de-bonded by the Development Commissioner and hence, in the Income return filed for the Asst. year 1999-2000 deduction under section 10B was not claimed, the Tribunal held that technically non compliance of section 10B(8) should not deprive the assessee from claiming the benefit of carry forward of business loss computed for that year. (A. Y. 1999-2000).CIT v. Torry Harris Sea Foods (P) Ltd. (2011) 55 DTR 239 / 242 CTR 111 (Ker.)(High Court)

S. 72 : Carry forward and set off of business losses - Hotel business - Agreement with another company for running hotels - Disputes - Hotel business run by court receiver - No cessation of business - Brought forward losses.The assessee was in the business of running hotels and for that purpose had entered into an agreement with another company to run the same. Disputes arose between the assessee and the company, the court pending adjudication of dispute appointed a court receiver to run the hotel business of the assessee. The dispute was decided by the court and the possession of the hotel was handed over to the assessee, the assessee ran the hotel business on its own. The Hon’ble High Court held that there was no cessation of business by the assessee, as the business was managed by the court receiver, who was none other than its own directors, and the business and assets were also never divested with the receiver, and therefore the assessee was entitled to carry forward and set off losses and depreciation relating to earlier years. (A. Ys. 1990-91 to 1992-93).CIT v. Dencomar Hotels (Goa) Ltd. (2011) 332 ITR 441 / (2009) 222 CTR 606 / (2008) 15 DTR 191 (Bom.)(High Court)

S. 72 : Carry forward and set off of business losses - Dividend Income - Shares held for business. Under section 72(1)(i), the brought forward business loss can be set-off against “the profits and gains of any business or profession carried on ” by the assessee. Section 72(1)(i) does not use the word “assessable under the ‘head‘ profits & gains of business”. The answer to the question as to whether the securities formed part of the trading assets of the business and the income there from was income from the business has to be decided on commercial principles and not on the basis of the classification of ‘heads of income’ in section 14. Though for the purpose of computation of the income, dividends are assessable under the head “Other Sources”, it does not cease to be part of the income from business if the securities are part of the trading assets. Accordingly, the assessee is eligible for set-off of dividend income as against business loss


(CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) & CIT v. New India Investment Corporation Ltd. (1978 ) 113 ITR 778 (Cal.) followed).Gangan Trading Co. Ltd. v. Dy. CIT (Mum.)(Trib.) www.itatonline.org

S. 72 : Carry forward and set off of business losses - Speculation business – Derivatives – Same business. (S. 43(5), 73, 263)Loss from trading in derivatives treated as speculation loss in earlier years carried forward. The said loss can be set off against the profit from same business. i.e. allowable against the profit from trading in derivatives after amendment. Revision order of commissioner under section 263 was quashed on merit. (A. Y. 2006-07). Gajendra Kumar T. Agrawal v. ITO (2011) 11 ITR 640 (Mum.)(Trib.)

S. 72 : Carry forward and set off of business losses - Gains arising from “business assets” not eligible for set-off against brought forward business loss.The assessee sold land & building used for business purposes. Though the gain was offered as capital gains, the assessee claimed, relying on CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) and other judgements, that as the assets were “business assets”, the gains there from were eligible for set-off against the brought forward business loss Under section 72. The issue was referred to a Special Bench. HELD by the Special Bench against the assessee:Section 72(1) allows brought forward business loss to be set-off against the “profits & gains of any business or profession” of the subsequent year. The expression “profits & gains of business” means income earned out of business carried on by the assessee and not just income connected in some way to the business or profession carried on by the assessee. The land & building were fixed & capital assets used by the assessee for its business purposes. The gains arising there from were assessable as capital gains and were not eligible for set-off against the brought forward business loss under section 72 ( CIT v. Express Newspapers Ltd. (1964) 53 ITR 250 (SC) followed; CIT v. Cocanada Radhaswami Bank Ltd. (1965) 57 ITR 306 (SC) distinguished; Steelcon Industries reversed)Nandi Steels Ltd v. ACIT (2012) 66 DTR 1 / 13 ITR 494 (Bang.)(SB)(Trib.)

S. 72A : Carry forward and set off of accumulated loss and unabsorbed depreciation allowance - Carry forward and set off - Amalgamation of companies. (S. 72, 78, 79)Amalgamating company was not having loss and provisions of sections 72A, 78 and 79 not being applicable, benefit of carry forward of losses of amalgamated company cannot be denied. Provisions of section 72A, trigger only when the losses of the amalgamating company are to be carried forward by the amalgamated company. As the amalgamating company was a profit making company, section 72A is not applicable. Provisions of section 79 are not applicable as more than 51 percent of the share holdings is in the same hands. As provisions of section 78 are not applicable benefit of carry forward cannot be denied. (A. Y. 2006-07).Wrigley India (P) Ltd. v. Addl. CIT (2011) 62 DTR 201 / 142 TTJ 23 (Delhi)(Trib.)

S. 73 : Losses in speculation business - Delivery based loss on shares also speculation loss.It is held that the Explanation to section 73 creates a fiction that the loss suffered by certain companies from the business of purchase & sale of shares shall be deemed to be speculation loss. The definition of speculative transaction in section 43(5) not applicable to Explanation to section 73. The CBDT Circular dated 24.7.1976 cannot be treated as guide for interpretation of section 73 when the provision is very clear and free from any ambiguity. (A. Y. 1994-95)


Paharpur Cooling Towers Ltd. v. ACIT (2011) 52 DTR 41 / 239 CTR 394 / 338 ITR 295 / 198 Taxman 83 (Cal.)(High Court) Editorial:- Refer Paharpur Cooling Towers Ltd. v. Dy. CIT (2003) 85 ITD 745 (Kol.)

S. 73 : Losses in speculation business – Speculative loss.Where the Company amended its memorandum and articles of association so as to enable it to make money lending as its main business, the loss on account of sale and purchase of shares was allowed to be adjusted against other business income as the assessee’s case fell under exception clause of section 73 of the Act. (A. Y. 1997-98).CIT v. Front Line Securities Ltd. (2011) 50 DTR 337 (Delhi)(High Court)

S. 73 : Losses in speculation business – Explanation - Grant of loans.When in respect of the assessment of the assessee of the for Asst. years 1998-99,1996-97 and 1995-96, the Tribunal specifically held that the principal business of the assessee was grant of loans, the assessee comes within the exception to the Explanation under section 73, and therefore the Tribunal was not justified in holding that the business loss was to be treated as speculation loss. (A. Y. 1997-98).PCBL Industrial Ltd. v. CIT (2011) 58 DTR 25 / 337 ITR 536 / 242 CTR 220 (Cal.)(High Court)

S. 73 : Loss in speculation business - Set off of business loss - Speculative transaction - Purchase and sale of shares. [S. 43(5)]Assessee, company dealing with transaction of sale and purchase of shares and suffering loss. The Transaction should be treated to be speculative transaction within the meaning of section 73, though it is not speculative nature as there has been actual delivery of share scripts. Business loss arising out such transaction could be carried forward and set off only against speculative transaction and not from any other head. (A. Y.1991-92)R.P.G. Industries Ltd. v. CIT (2011) 338 ITR 313 / 241 CTR 19 / 198 Taxman 349 / 54 DTR 73 / Tax. L. R. 913 (Nov.)(Cal.)(High Court)

S. 73 : Losses in speculative business - Loss in share dealings – Speculative transactions. [S. 43(5)]Badla charges claimed by the assessee company were rightly treated to be speculative loss in view of Explanation to section 73, since entire share trading activity was deemed to be speculative, provisions of Explanation to section 73 being deeming provisions, section 43(5) cannot override section 73. (A. Y. 2001-02).Dartmour Holdings (P) Ltd. v. ITO (2011) 51 DTR 321 / 136 TTJ 432 (Mum.)(Trib.)

S. 73 : Losses in speculative business - Speculation loss - Shares valuation of closing Stock - Trading in shares – Investment - Capital gains - Company.Loss from valuation of closing stock cannot be excluded while determining the loss from share trading business, therefore, explanation to section 73 is applicable even to the loss arising from the valuation of closing stock of shares.If the shares are held by the assessee company as investment and not as stock in trade, the second condition of Explanation to section 73 Viz . business of purchase and sale of shares is not satisfied and therefore, capital gain arising from the sale of shares held as investment is not hit by Explanation to section 73. (A. Y. 2001-02).Krishnalakshmi Multi Trade (P) Ltd. v. ACIT (2011) 55 DTR 167 / 138 TTJ 623 / 130 ITD 584 (Ahd.)(Trib.)


S. 73 : Loss in speculation business - Bills rediscounting business - Sale and purchase of shares.Assessee was mainly doing business of bill discounting / rediscounting, under contractual obligation between the assessee and parties to the bills. Bills were re discounted and placed only as collateral security. The Tribunal held that activity of bills rediscounting would amount to granting of loans and advances and accordingly, explanation to section 73 would not be applicable, hence loss on account of sale and purchase of shares could not be treated as speculation losses, though the object clause of memorandum of Association showed that advancing the money was only ancillary object. (A. Y.1996-97).Momaya Investments (P) Ltd. v. ITO (2011) 132 ITD 604 / 63 DTR 192 / 142 TTJ 761 (Mum.)(Trib.)

S. 74 : Losses under the head capital gains - Setoff of long term capital loss against short term capital gains - Capital gains - Capital loss - Depreciable assets. (S. 2(11), 50)Under section 74(1)(b), the assessee is entitled to claim of set off of long term capital loss against the capital gains income arising from the sale of office premises being depreciable asset, the gain of which is short term due to the deeming provisions of section 50(2) but the asset is long term. (A. Y. 2005-06).Komac Investments & Finance (P) Ltd. v. ITO (2011) 62 DTR 196 / 132 ITD 290 (Mum.)(Trib.)

S. 79 : Carry forward and set off losses in the case of certain companies - Merger - Change in share holdings.Due to merger of IIPL holding 98% shares of assessee company with the assessee company, the share holders of the IIPL were allotted shares but there was no change in the management which continued to be with persons of the family who were having the control and management of the IIPL as well as of the assessee company and therefore, provisions of section 79 were not violated and the assessee was entitled to carry forward of loss. (A. Y. 2004-05 & 2005-06).Dy. CIT v. Select Holiday Resorts (P) Ltd. (2011) 52 DTR 14 / 138 TTJ 304 (Delhi)(Trib.)

S. 79 : Carry forward and set off losses in case of certain companies - Company in which public are substantially interested. [S. 2(18)] Although the assessee company was originally registered as a private company, it became public company by virtue of the provisions of section 3(iv)(c) of the Companies Act when GT Ltd., a public company, acquired more than fifty percent shares of the assessee company in the preceding year. Assessee had satisfied condition of Item(B) of section 2(18)(b) as well as in much as GT Ltd. held more than 50 percent of the shares of the assessee company during the whole of the previous years in question. Therefore, assessee company became a company in which the public are substantially interested by fulfilling the requisite conditions and consequently, application of as section 79 is automatically ruled out. Hence, CIT was not justified in setting aside the orders allowing set off of brought forward losses of an earlier year against the income of the year under consideration. (A. Y. 2004-05 & 2005-06) Meredith Traders (P) Ltd. v. ITO (2011) 62 DTR 404 (Mum.)(Trib.)

Chapter VI-ADEDCUTIONS TO BE MADE IN COMPUTING TOTAL INCOME

S. 80 : Submission of return for losses - Carry forward - Belated filing of return. [S. 139(3)]Assessee is not entitled to carry forward the business loss if the return is not filed within the prescribed time limit under section 139(1). Assessing the income by the Assessing Officer will not mandate to carry forward the loss. (A. Y. 1999-2000)Joginder Paul (HUF) v. CIT (2011) 239 CTR 566 / 331 ITR 31 / 53 DTR 170 (P&H)(High Court)


S. 80 : Submission of return for losses - Carry forward of unabsorbed depreciation. [S. 32(2), 139(3)]Period of limitation for filing loss return not applicable for carrying forward of unabsorbed depreciation. Section 80 and 139(3) apply to business loss and not to unabsorbed depreciation governed under section 32(2). (A. Y. 2001-02).CIT v. Govind Nagar Sugar Ltd. (2011) 334 ITR 13 / 56 DTR 35 / 244 CTR 266 (Delhi)(High Court)

S. 80CCB : Deduction - Investment made under Equity Linked Savings Scheme – Transfer -Switchover. [S. 2(47), 45(6)]Units of mutual funds by way of switchover not being units in respect of which assessee had claimed deduction under section 80CCB(1) nor those units were originally issued under a plan formulated under any equity linked savings scheme, they were not of the type of units mentioned in sub section (2) of section 80CCB and therefore, surplus arising to the assessee on account of switch over of the units can not be assessed as capital gains under section 45(6). (A. Y. 2000-01).A. Vadivel & Ors. v. Dy. CIT (2011) 142 TTJ 875 (Chennai)(Trib.)

S. 80G : Deduction - Donation to certain funds, charitable institutions - Educational institutions. (S. 11AA)Assessee filed application under section 80G(5)(vi) which was rejected on the ground that assessee society was running five educational institutions and was charging high fee and further its profit ranged from 20.44% to 28.49 and further assessee was enhancing earning capacity of institutions through acquiring of buildings and fixed assets and not fulfilling any noble objects. The Court held that solely because the assessee was charging fees and was getting surplus would not be a reason to deny registration under section 80G(5)(vi) when the consideration laid down in Rule 11AA had been complied with. CIT v. Gaur Brahmin Vidya Pracharini Sabha (2011) 203 Taxman 226 (P&H)(High Court)

S. 80G : Deduction - Donation to certain funds - Charitable institutions - Salaries of preachers. Assessee church society incurred expenditure on T.V. telecast and salaries of preachers. Preachers were generally engaged to spread teachings of Lord Jesus Christ, therefore, salaries paid to preachers cannot be considered to be an expenditure incurred for charitable activities. If salaries to preachers was taken out from the category of expenditure for charitable activities, expenditure on religious activities would be more than 5 percent of total income, thus assessee would be hit by sub section 5(ii) read with sub section (5B) of section 80G. (A. Y. 2010-11).Church of Christ Social Service Society, Amalapuram v. CIT (2011) 48 SOT 1 (Visakhapatanam)(Trib.)

S. 80G : Deduction – Donations - Renewal of application - Failure to take any action.Where assessee Trust filed an application seeking renewal of approval under section 80G(5)(vi) and Commissioner failed to take any action on said application within time limit prescribed by Rule 11AA(6) of Income-tax Rules 1962, it was held that assessee became legitimately entitled for approval of renewal, a s applied for. (A. Y. 2010-2011).S. Lakha Singh Bahra Charitable Trust v. CIT (2011) 133 ITD 201 (Amritsar)(Trib.)

S. 80HH : Deduction –Profits and gains from newly established undertakings- Process of ship breaking activity, whether “production” of “newgoods” - Words and Phrases - “Manufacture” and “Production”, scope of.In view of Explanation 2 added to section 10(15(iv)(c), usance interest paid for purchase of imported ship


for ship breaking is exempt from payment of income tax. Distinct articles emerge in process of ship breaking. Process of ship breaking is akin to “production”. Assessee entitled to benefit of sections 80-HH and 80-I.“Manufacture” and “Production” are distinct terms. Reiterated, “production” has a wider connotation than “manufacture”. “Production” takes in bringing into existence new goods by a process which may or may not amount to “manufacture”. It also includes bye-products, intermediate products and residual products which emerge in course of manufacture of goods.Vijay Ship Breaking Corporation and Others v. CIT (2010) 10 SCC 39 (SC)

S. 80HHC : Deduction – Export – Profit of business – For purpose of section 115JA/JB – Deduction to be computed as per P & L profit and not normal provisions. The deduction under section 80HHC is to be worked out not on the basis of regular income tax profits but it has to be worked out on the basis of the adjusted book profits in a case where section 115JA is applicable. Accordingly, the deduction claimed by the assessee under section 80HHC & 80HHE has to be worked out on the basis of adjusted book profit under section 115JA and not on the basis of the profits computed under regular provisions of law applicable to computation of profits and gains of business. (A. Y. 2000-01)View of Special Bench in Dy. CIT v Syncome Formulations 106 ITD 193 upheld. CIT v. Bhari Information Technology Systems (P) Ltd. (2011) 245 CTR 1 / 62 DTR 337 / (2012) 340 ITR 593 (SC)

S. 80HHC : Deduction – Export - Profits of business - Interest on deposits – Inter - Corporate deposits.Finding of the authorities below that interest income received by the assessee company on bank deposits and inter-corporate deposits is a part of business profit not having been shown to be perverse, the same cannot be excluded from the business profit while calculating the deduction under section 80HHC.CIT v. Sociendade De Fomento Industrial Ltd. (2011) 237 CTR 141 / 49 DTR 161 / 335 ITR 472 / 199 Taxman 45 (Bom.)(High Court)

S. 80HHC : Deduction – Export – Receipts - Freight – Insurance - Packing charges - Sales tax set off.90% of receipts from freight and insurance, packing charges, sales tax set off and gross service income was be excluded from the profits of the business in terms of explanation (baa) to section 80HHC of the Income Tax Act. (A. Y. 2003-04).CIT v. Dresser Rand India P. Ltd. (2011) 330 ITR 453 (Bom.)(High Court)Editorial:- Refer, CIT v Dresser Rand India Pvt. Ltd. (2010) 323 ITR 429 (Bom). In Pfizer Ltd. (2010) 233 CTR 521 / (2011) 330 ITR 62 (Bom) distinguished.

S. 80HHC : Deduction - Export - Separate books - Profits of all businessFor the purpose of section 80HHC of the Act, even though the assessee had maintained separate books for each business, deduction under section 80HHC is to be computed on the basis of profit derived from all these business. (A. Y. 2003-04).G. J. Fernandez v. ACIT (2011) 52 DTR 345 / 241 CTR 100 (Karn.)(High Court)

S. 80HHC : Deduction - Export - Fluctuation in foreign exchange - Export turnover.Surplus realization due to fluctuation in foreign exchange rates is part and parcel of the export turnover for the purpose of section 80HHC.Raghunath Exports (P) Ltd. v. CIT (2011) 240 CTR 79 / 330 ITR 57 / 52 DTR 151 (Cal.)(High Court)

S. 80HHC : Deduction – Export - Composite services


Professional charges received by the assessee for procuring order and rendering composite services are to be reduced while computing deduction under section 80HHC of the Act as the same do not form part of export sales proceeds. (A. Y. 2001-02).Anil Dang v. ITO (2011) 55 DTR 349 (Karn.)(High Court)

S. 80HHC : Deduction – Export - Sale of scrap - Total turnover.Sale of scrap cannot be excluded from “Total turnover” which shall increase the denominator of the formula for determining the extent of benefit admissible to an assessee under section 80HHC. (A. Ys. 1989-90 to 1991-92).CIT v. Bicycle Wheels (India) (2011) 244 CTR 453 / 335 ITR 384 / 61 DTR 243 (P&H)(High Court)

S. 80HHC : Deduction – Export - Different business - Export turnover - Total turnover.Assessee carried on the business of growing and manufacturing of tea in its own estates, which was sold in the domestic market as well as export, assessee also maintained separate books of account in respect of exporting of tea purchased by it. It was contended that different businesses of the assessee are required to be considered separately for the purpose of calculating the deduction under section 80HHC of the Act. High Court held that different business of the assessee cannot be considered separately for the purpose of calculating deduction under section 80HHC. The deduction under section 80HHC was required to be computed by aggregating the profits, export turn over and total turnover of all the business and not separately with reference to the profits, export turnover and total turnover of each business. (A. Y. 1991-92).Duncans Industries Ltd. v. CIT (2011) 62 DTR 305 / 202 Taxman 677 (Cal.)(High Court)

S. 80HHC : Deduction – Export – Computation - Total turnover - Two units.When an assessee runs and manages two separate units, one of which is engaged fully and partially in earning through exports then, in calculation of proportionate deductible profits for the purpose of deduction under section 80HHC the “Total turnover of the business” would include only the turn over of the export business and not that of the domestic business (A. Y. 1997-98).CIT v. Padmini Technologies Ltd. (2011) 64 DTR 217 (Delhi)(High Court)

S. 80HHC : Deduction- Export-Processed – Blending of different types of tea. Blending of different types of tea comes within the purview of the “processed” under the meaning of section 80HHC(3)(a). Hence, it is the claim is allowable under section 80HHC. (A. Ys. 1996-97, 1997-98)Stewart Holl (India) Ltd. v. CIT (2011) 245 CTR 71 / 338 ITR 194 / 61 DTR 290 (Cal.)(High Court)

S. 80HHC : Deduction – Export - Interest on Loan given to employees - Business income. Interest earned on loans given to employees is to be treated as part of business income for the purpose of computation of deduction under section 80HHC. (A. Y. 2004-05)Kirloskar Ebara Pumps v. Dy. CIT (2011) 138 TTJ 211 / 48 DTR 348 (Pune)(Trib.)

S. 80HHC : Deduction – Export - Job work charges.Job work charges could not be excluded from profits of business under clause (baa) of Expl. to section 80HHC.ACIT v. Wolkem India Ltd. (2011) 142 TTJ 888 (Jd.)(Trib.)

S. 80HHD : Deduction – Convertible foreign exchange - Shopping commission - Foreign tourists.


Assessee was receiving the commission from shopkeepers and not in foreign exchange from the tourists directly. Assessee was not eligible for deduction under section 80HHD. CIT v. Le Passage to India Tour and Travels (P) Ltd. (2011) 57 DTR 98 / 241 CTR 535 / 335 ITR 69 (Delhi)(High Court)

S. 80HHD : Deduction – Convertible foreign exchange- Interest - Tour operator – Foreign tourists - Income derived.Interest earned by assessee tour operator by making deposits of advances received from foreign tourists cannot be said to have been derived from the services provided to foreign tourists and, therefore, such interest income did not qualify for benefit of section 80HHD, more so as it was received from banks in India in Indian currency and not in foreign exchange.Lotus Trans Travels (P) Ltd. v. CIT (2011) 332 ITR 463 / 241 CTR 530 / 53 DTR 267 (Delhi)(High Court)

S. 80HHE : Deduction – Export - Computer software - Company - Book profit. (S. 115JA)In case of assessment under section 115JA deduction claimed under section 80HHE has to be worked out on the basis of adjusted book profit under section 115JA and not on the basis of profits computed under regular provisions applicable to computation of profits and gains of business. (A. Y. 2000-01)CIT v. Bhari Information Technology Systems (P) Ltd. (2011) 245 CTR 1 / 62 DTR 337 / (2012) 340 ITR 593 (SC)

S. 80HHE : Deduction - Export - Computer software – Non-resident - Discrimination clause - DTAAAs per Article 26(2) of India-USA DTAA Taxation of a PE of a USA resident shall not be less favorable than the taxation of a resident enterprise carrying on the same activities. Thus exemptions and deductions available to Indian enterprises would also be granted to the US enterprises if they are carrying on the same activities. Therefore, assessee was entitled to section 80HHE deduction as admissible to a resident assessee (Automated Securities Clearance Inc. v. ITO (2008) 118 TTJ 619 (Pune) reversed; Metchem Canada Inc. v. Dy. CIT (2006) 99 TTJ 702 (Mum) referred to); Further where the provisions contained in the DTAA are capable of clear and unambiguous interpretation, it is not necessary to refer to the commentary on the OECD Model Convention, the US Technical Explanation or decisions of any foreign jurisdiction (CIT v. P. V. A. L. Kulandagan Chettiar (2004) 267 ITR 654 (SC) followed). (A. Y. 2002-03 to 2004-05)Rajeev Sureshbhai Gajwani v. ACIT (2011) 52 DTR 201 / 129 ITD 145 / 137 TTJ 1 / 8 ITR 616 (Ahd.)(SB)(Trib.)

S. 80HHE : Deduction – Export - Computer software - Form 10CCAF - Export turnover retained abroad.Benefit of deduction under section 80HHE cannot be denied to the assessee simply because the income certified for deduction is nil in form no 10CCAF for the reason that the computation of total income as per return was loss. Assessee is entitled to deduction under section 80HHE on the amount of export turnover retained abroad to the extent of its outstanding dues to that company and the amount retained by assessee’s foreign branch in respect of expenses incurred by it on behalf of assessee provided there is nexus between the outstanding payable / expenditure incurred abroad and the business of export which has yielded the income. (A. Y. 2002-03). 3i Infotech Ltd. v. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 / 129 ITD 422 (Mum.)(Trib.)

S. 80HHF : Deduction – Export - Film software - Export turnover.Claim of the assessee that the meaning of “total turnover” in clause (j) of Explanation to section 80 HHF should be restricted only to the export turnover of the business of exports and not the entire business is





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not sustainable. While computing deduction under section 80HHF by multiplying “export turnover” with the “profits of the business” as divided by the total turnover of the business. (A. Y. 2000-2001).SRI Adikari Brothers Television Networks Ltd. v. ACIT (2011) 52 DTR 295 / 137 TTJ 424 / 130 ITD 439 (Mum.)(Trib.)

S. 80I : Deduction - Profits and gains from industrial undertakings - Reconstruction of business.Where assessee firm was formed by reconstruction of a business already in existence as a sole proprietary concern, it did not fulfil condition laid down in section 80I(2)(i) and therefore, it was not entitled to deduction under section 80I. In order to claim deduction under section 80I an Industrial undertakings has to fulfil all four clauses under section 80I(2), and if it does not fulfil even one clause thereof, deduction is not allowable. (A. Y. 1992-93).ACIT v. Goel Udyog (2011) 45 SOT 444 (Delhi)(Trib.)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Revision - High Court order - Reassessment. (S. 263)In appeal against the order of Tribunal, the High Court set aside the order of Tribunal, against the Order of the High Court the assessee filed an SLP before the Supreme Court. On 5th Jan., 2011 the Apex Court permitted the department to proceed with reassessment, without prejudice to rights and contention of parties. Assessing Officer passed the order disallowing the deduction under section 80IA. Considering the peculiar facts the Apex Court set aside the matter to the file of CIT(A) to decide a fresh uninfluenced by the earlier order of CIT under section 263 as well as impugned order passed by High Court.Teknika Components v. CIT (2011) 63 DTR 186 / 202 Taxman 623 / 245 CTR 231 (SC)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Manufacture – Production - Coating with oxides of noble metals on titanium metal electrode / anode.Coating with oxide of noble metals on titanium metal electrode / anode bringing about in its character and use for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is manufacture or production of article or thing within the meaning of section 80 IA and entitled to deduction. (A. Y. 1994-95).Titanor Components Ltd. v. CIT (2011) 55 DTR 157 / 241 CTR 255 / 197 Taxman 441 (Delhi)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Transport subsidy.Source of transport subsidy is not the business of the assessee but the scheme framed by the Central Government and therefore, ’transport subsidy’ received from the Government by the assessee cannot be included in profits derived from the industrial undertaking and is not eligible for deduction under section 80 IA. CIT v. Maharani Packaging (P) Ltd. (2011) 55 DTR 340 (HP)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Transport subsidy - Industrial undertaking.Transport subsidy received by the assessee under the scheme framed by the Central Government cannot be profits derived from the industrial undertaking and is not eligible for deduction under section 80 IA of the Act.CIT v. Maharani Packaging (P) Ltd. (2011) 55 DTR 340 (HP)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Liquidated damages - Interest on delayed payment.


Interest on delayed payment of sale amount is eligible for deduction under section 80IA, further, during the course of the business the assessee receives / pay liquidated damages for not honouring a contract for sale of products and therefore, such income is directly derived from the industrial undertaking, thus eligible for deduction under section 80IA. (A. Y. 2000-01).CIT v. Prakash Oils Ltd. (2011) 58 DTR 279 (MP)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Developing, operating and maintaining industrial park - Withdrawal of approval - Writ maintainable. (Art. 226)As per the scheme, what was required to be done by the petitioner was to provide for infrastructural facilities before last date envisaged under the scheme. There after there was no obligation on the part of the petitioner to ensure that industrial units on such plots must also come into existence and commence their production activities, therefore impugned show cause notice for withdrawal of approval of assessee’s Industrial Park was quashed and the CBDT was directed to notify the same. Ordinarily Courts do not encourage litigation at the show cause notice state but where the show cause notice is based on premise which is legally not sustainable, writ petition held to be maintainable.Ganesh Housing Corporation Ltd. v. Padam Singh Under secretary (2011) 61 DTR 1 / 339 ITR 441 / 24 CTR 194 (Guj.)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Set off of carry forward losses.After set off of carried forward losses, the income of the assessee for the A.Y was Rs.14,57,200/- while the profit from industrial undertaking were Rs. 98.43 lacs. The Tribunal restricted the deduction to Rs. 14,57,200. The High Court up held the order of Tribunal. (A.Y. 1996-97).CIT v. Tridoss Laboratories Ltd. (2011) 224 Taxation 382 / (2010) 328 ITR 448 (Bom.)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings- infrastructure development-- Develops and operates or maintains and operates an industrial park - Information Technology park.Section 80IA(4)(iii), only postulate that section would apply to any undertaking which develops, develops and operates or maintains and operates an industrial park notified by Central Government in accordance with a scheme framed for a period beginning on 1-4-1997 and ending with 31-3-2006. Section does not contain a condition to effect that industrial park must commence operation by 31-3-2006. The Court held that stipulation in para. 3 of Industrial Park Scheme, 2002, that industrial park should be developed, developed and operated or to be maintained and operated for period beginning on 1-4-1997 and ending on 31-3-2006 must be read harmoniously with Para. 9 of scheme which contemplates a situation where commencement of any industrial park is delayed by more than one year from date indicated in application in which a fresh approval has to be granted.Silver Land Developers (P) Ltd v. Empowered Committee (2011) 203 Taxman 529 / (2011) Vol. 113 (6) Bom. L. R. 4143 (Bom.)(High Court)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Infrastructure development - Absorption of loss in earlier year, section 80-IA unit loss to be set-off against section 80-IA profits.It was held that deduction under section 80-IA has to be computed after deduction of the notional brought forward losses and depreciation of business even though they have been allowed set off against other income in earlier years as concluded by the ITAT Special Bench judgement in ACIT v Gold Mine Shares & Finance (P) Ltd. 113 ITD 209 (Ahd.)(SB) against the assessee. (A. Ys. 2001-01 & 2002-03)Hyderabad Chemical Supplies Ltd. v. ACIT (2011) 53 DTR 371 / 137 TTJ 732 (Hyd.)(Trib.)




S. 80IA : Deductions - Profits and gains from industrial undertakings - Initial year - Substantial expansion - Take over of existing units. (S. 80IB)Conditions as laid down for claiming deduction under section 80IA / 80IB are to be complied within the initial year and not in all the assessment years in which the assessee is eligible for deduction. Once the assessee has complied with the conditions as laid down in sections 80IA / 80IB in the initial year, expansion or extension of the existing unit by acquiring assets of another units in a subsequent year does not disentitle the assessee to claim deduction under sections 80IA/80IB in respect of increased profit due to such expansion or extension of industrial undertaking. (A. Ys. 2004-05 & 2005-06).Aqua Plumbing (P) Ltd. v. ACIT (2011) 59 DTR 22 / 46 SOT 366 / 140 TTJ 496 (Agra)(Trib.)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Generation and supply of power - Deemed generation of power.Assessee entered into agreement for supply of power. Agreement providing that if power not required, compensation charges to be paid. Amount received for deemed generation of power is entitled to deduction under section 80IA as the compensation has direct nexus with the business of generation of power. (A. Y. 2004-05).Magnum Power Generation Ltd. v. Dy. CIT (2011) 11 ITR 493 / (2012) 49 SOT 54 (URO)(Delhi)(Trib.)

S. 80IA : Deductions - Profits and gains from industrial undertakings - Computation - Electricity.Electricity generated by assessee, collected by Electricity Board and releases to assessee when ever required. Assessee neither selling nor buying as far as captive consumption of power is concerned. Assessee paid consumption of power more than contribution. Market value to be taken for consumption. Under section 80IA(8) market value means the value determined by market forces. In the captive consumption of power generated by the assessee company no market force was operating. Market forces came in to the picture only when the assessee bought power from Tamil Nadu Electricity Board like any another consumer. The value paid for such consumption was the market value and in the present case it was 3.50 per unit. Therefore the contention of the assessee was to be accepted and the assessing authority was to recomputed the profit and gains of the eligible unit for the purpose of section 80IA on the basis of the unit price of electricity generated by the assessee company at 3.50 per unit. (A.Y. 2007-08).Sri Velayidhaswamy Spinning Mills P. Ltd. v. Dy. CIT (2011) 12 ITR 353 (Chennai)(Trib.)

S. 80IA : Deductions - Profits and gains from industrial undertakings-Infrastructure development-- Derived from - Flay ash - Generation and sale of electricity – Not eligible. Assessee was engaged in business of generation of and sale of electricity. Flash ash was a by product generated out of production of electricity. Assessee used Fly ash in making fly ash bricks. Assessee claimed that profit earned on sale of fly ash bricks is also eligible profits for the purpose of claiming of deduction under section 80IA. The Tribunal held that brick making unit of assessee was a separate unit with a distinct set up and process, separate technology and manpower etc., profits derived from manufacture and trade of bricks, could not constitute “operational income” of “Power generating unit” of assessee, therefore assessing officer was justified in rejecting assesee’s claim. (A. Ys. 2004-05 to 2006-07). ACIT v. Godavari Power & Ispact Ltd. (2011) 133 ITD 502 (Bilaspur)(Trib.)

S. 80IA : Deductions - Profits and gains from industrial undertakings-Infrastructure development- - Solid Waste Management – Organisation must participates in the policy making etc. - Cleaning the beaches.An activity can be considered as a solid waste management activity in a case where an organization involves itself in a comprehensive activity of not only collection, transport and treatment of waste but also


participates in the policy making etc. The Activity of the assessee i.e. clearing the beaches, without being involved in control of generation, disposal and policy, making cannot be considered as a solid waste management activity, hence, the assessee is not eligible for deduction under section 80IA though the activity carried on was approved by BMC. (Solid Waste Management Department). (A. Y. 2004-05).Anthony Motors (P) Ltd v. ACIT (2011) 64 DTR 470 (Mum.)(Trib.)

S. 80IA(4) : Deductions - Profits and gains from industrial undertakings - Infrastructure development -- Deduction available even to contractor who merely develops but does not operate & maintain the infrastructure facility.Relying on the judgement of the Larger Bench in B. T. Patil & Sons Belgaum Construction (P) Ltd. v. ACIT (2009) 126 TTJ 577 (Mum)(TM)(Trib.), the assessee’s claim for deduction under section 80-IA(4) was denied by the Tribunal on the ground that the assessee was only a contractor and had not complied with all the conditions specified in sub-clauses (a), (b) & (c) of clause (i) of section 80-IA(4). The order was recalled pursuant to the assessee’s MA claiming that the judgement of the Bombay High Court in ABG Heavy Industries Ltd. 322 ITR 323 covered the issue in its favour. HELD deciding the issue afresh:The contractor who merely develops but does not operate or maintain the infrastructure facility is eligible for deduction under section 80IA(4). Harmonious reading of section 80-IA(4) led to the conclusion that the deduction was available to an assessee who (i) develops or (ii) operates and maintains or (iii) develops, operates and maintains the infrastructure facility. The 2001 amendment made it clear that the three conditions of development, operation and maintenance were not intended to be cumulative in nature. A developer who is only developing the infrastructure facility cannot be expected to fulfill the condition in sub-clause (c) which is an impossibility and requiring it to be fulfilled will be an absurdity. B. T. Patil & Sons Belgaum Construction (P) Ltd. v. ACIT (2009) 126 TTJ 577 (Mum)(TM)(Trib.) impliedly held not good law). Laxmi Civil Engineering Pvt. Ltd. v. ACIT (Pune)(Trib) www.itatonline.org (2011) BCAJ July P. 33 Vol. No 43A, Part 4

S. 80IA(4)(ii) : Deductions - Profits and gains from industrial undertakings –Infrastructure development .Assessee ran a proprietary business providing telecommunication services to her subscribers within a limited radius of 500 meters on the basis of an agreement entered with BSNL. In computing her total income for the Assessment years 2002-03 to 2006-07 the assessee claimed deduction under section 80IA(4)(ii) of the Income Tax Act, 1961. The assessing authority held that the assessee herself had not developed any telecommunication service system nor was she operating and maintaining any system independently. Assessee was running the business as a franchise of BSNL. The Tribunal held that the Assessee a private commercial venture not involving development of infrastructure not entitled to special deduction. (A. Ys. 2002-03 to 2006-07).ITO v. A. Jayalakshmi (Smt) (2011) 12 ITR 371 (Chennai)(Trib.)

S. 80IA(4)(iii) : Deductions - Profits and gains from industrial undertakings - Income from developing, operating or maintaining industrial park.Assessee having constructed multistoried buildings for the purpose of developing infrastructure facilities as approved by the Ministry of Industry and Commerce and leased out to five /four floors to some tenants who are carrying on their diverse operations as functionally independent units, each floor could be taken as independent unit, and deduction under section 80IA(4)(iii) could not be denied on the ground that all the floors of the same building occupied by same tenant cannot be construed as one unit and that it was not operating five units in Asst. Year 2007-08 and four units in the next year as stipulated in the approval granted by the said Ministry. Once the projects are approved and notifications are made by the appropriate


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authorities the approval and notification run back to the date of commencement of the activities and therefore, deduction under section 80IA(4)(iii) cannot be declined on the ground that the assessee has started functioning even before the formal order of approval and notification. (A. Y. 2007-08 & 2008-09).Primal Projects (P) Ltd. v. Dy. CIT (2011) 139 TTJ 233 / 56 DTR 291 (Bang.)(Trib.)

S. 80IA(4)(iv) : Deductions - Profits and gains from industrial undertakings - Income from generation of power - - Captive consumption of electricity.Assessee is entitled to deduction under section 80IA in respect of notional income from generation of electricity which was captively consumed by itself.Tamilnadu Petro Products Ltd. v. ACIT (2011) 338 ITR 643 / 51 DTR 67 / 238 CTR 454 (Mad.)(High Court)

S. 80IA(5) : Deductions - Profits and gains from industrial undertakings - Initial assessment year - Loss & Depreciation of eligible unit prior to “initial assessment year”, if set-off against other income, not notionally carried forward.In A.Y. 2006-07 the assessee installed a windmill, the profits of which were eligible for 100% deduction under section 80-IA. Owing to depreciation and loss, the assessee did not claim section 80-IA deduction in A.Y. 2006-07 & 2007-08 and set-off the loss and depreciation against other income. In A.Y. 2008-09, the assessee earned profits from the windmill and claimed deduction under section 80-IA. The Assessing Officer & CIT(A) relied on the Special Bench decision in ACIT v. Goldmines Shares & Finance (P) Ltd. (2008) 116 TTJ 705 (Ahd)(SB) and held that in view of section 80IA(5), the loss and unabsorbed depreciation of the eligible unit, though set-off against the other income, had to be “notionally” carried forward for set-off against the profits of the eligible undertaking. On appeal by the assessee, HELD allowing the appeal:Though in ACIT v. Goldmines Shares & Finance (P) Ltd. (2008) 116 TTJ 705 (Ahd)(SB) it was held that in view of section 80IA(5), the eligible unit had to be treated as the only source of income and the profits had to be computed after deduction of the notionally brought forward losses and depreciation of the eligible business even though they were in fact set-off against other income in the earlier years, the Madras High Court held in Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT (2010) 38 DTR 57 held that such a notional exercise was not contemplated by section 80IA(5). It was held that the fiction in section 80-IA(5) that the eligible unit is the only source of income begins from the “initial assessment year” which is not the same thing as the year of commencement of activity. The law contemplates looking forward to a period of ten years from the initial assessment and does not allow the Revenue to look backward and find out if there is any loss of earlier years and bring forward notionally even though the same were set off against other income of the assessee and the set off against the current income of the eligible business. Once the set off has taken place in an earlier year against the other income, the Revenue cannot rework the set off amount and bring it notionally. The fiction in section 80-IA(5) is for a limited purpose and does not contemplate to bring set off amount notionally. The judgement of a constitutional court has overriding effect over the decision of a Special Bench of the Tribunal and the latter cannot be followed. (A. Y.2008-09).Anil H. Lad v. Dy. CIT (Bang.)(Trib.) www.itatonline.org

S. 80IA(8) : Deductions - Profits and gains from industrial undertakings - Tariff fixed by MERC for sale of power does not reflect “market value”.It is held that under section 80-IA(8), the transfer of goods from an eligible business to a non-eligible business is required to be taken at “market value”. But the tariff determined by MERC is based on the concepts of ‘clear profits’ and ‘reasonable return’ and does not reflect the “market value” of the electricity. Further, the tariff is fixed for both activities of generation and distribution of power and may not reflect the true rates with regard to only the activity of generation. Thus, even after the fixation of tariff by MERC, the


profits from the business of generation of power has to be worked out on the basis of the price paid to the outside party for purchase of power. Reliance Infrastructure Ltd. v. Addl. CIT (2011) 9 ITR 84 / 60 DTR 419 (Mum.)(Trib.)

S. 80IA(8) : Deductions - Profits and gains from industrial undertakings-Infrastructure development.– Generation and distribution of electricity - Captive consumption - Price at which SEB supplied to its consumer to be considered as market price.Assessee had two undertakings i.e. undertaking engaged in business of generation and distribution of electricity and other one was a steel division. Steel division drew the electricity from the undertaking which generated the electricity. The income of Electricity division is exempt under section 80IA. The assessing found that the assessee has charged more rate than it has charged to State Electricity Board (SEB). The Assessing Officer took the view that the assessee has inflated the profit of eligible undertaking and deflated taxable profits of steel undertaking hence invoked the provision of section 80IA(8). The Tribunal held that price at which SEB supplied to its consumer to be considered as market price in respect of electricity drawn for captive consumption of assessee’s steel division for the purpose of section 80IA(8) and not price at which electricity was sold by assessee to SEB, accordingly upheld the order of Commissioner(Appeals). (A. Ys. 2004-05 to 2006-07). ACIT v. Godavari Power & Ispact Ltd. (2011) 133 ITD 502 (Bilaspur)(Trib.)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Interest - Miscellaneous income.Interest on deposits would not be allowable towards the deduction under section 80IB. Miscellaneous income (reversal of LD charges), the matter was remanded to the Tribunal for fresh consideration. (A. Y. 2003-04).CIT v. Dresser Rand India P. Ltd (2011) 330 ITR 453 (Bom.)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Manufacture or Production – Job work - Compound rubber - Interest from customers - Belated payments - Business incomeProduction of compound rubber on job work for the tyre manufacturing companies by the assessee amounts to “production of an article or thing” qualifying for deduction under section 80IB. There is nothing in section 80IB to indicate that article or thing produced or manufactured should be final product in itself. If the interest is assessable as business income then only it qualifies for deduction under section 80IB as profit earned. In the absence of relevant details of the interest received by the assessee from the customers for belated payment of job work charges matter remanded to the Assessing Officer for reconsideration.Midas Polymer Compounds (P) Ltd. v. ACIT (2011) 237 CTR 401 / 331 ITR 68 / 50 DTR 139 / 197 Taxman 481 (Ker.)(FB)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Central excise duty refund - Transport and interest subsidy.Central Excise Duty refund has inextricable link with manufacturing activity hence eligible for deduction under section 80IB, however, transport and interest subsidies have no direct nexus with the business of industrial undertaking hence not eligible for deduction under section 80IB. (A. Y. 2006-07)CIT v. Meghalaya Steels Ltd. (2011) 221 Taxation 79 / 332 ITR 91 / 55 DTR 27 / 241 CTR 384 / 201 Taxman (Mag.)135 (Gau.)(High Court)


S. 80IB : Deductions - Profits and gains from industrial undertakings - Small scale industrial undertaking - Not claiming the relief in initial year cannot be the bar for claiming in later years.Registration of an Industrial undertaking as a small scale industrial undertaking under Industries (Development and Regulations) Act, 1951, is not a condition precedent for treating the same as a small–scale industrial undertaking and it is sufficient if it fulfills the eligibility criteria for being regarded as a small scale industrial undertaking for the purposes of said Act. Assessee cannot be deprived the benefit of section 80IB merely because he has not claimed such benefit in the initial year in which he was eligible to claim the benefit. (A. Y. 2004-05).Praveen Soni v. CIT (2011) 333 ITR 324 / 54 DTR 334 / 241 CTR 542 / 199 Taxman 26 (Delhi)(High Court)

S. 80IB : Dedcutions - Profits and gains from industrial undertakings - Manufacture or production - Converting raw fish into finished fish.Process involved in converting raw fish into tinned fish did not amount to manufacture and therefore assessee was not entitled to deduction under section 80IB. (A. Y. 2004-05).CIT v. Gitwako Farma (I) (P) Ltd. (2011) 241 CTR 449 / 55 DTR 124 / 332 ITR 471 (Delhi)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Sale of scrap – Manufacture - Labour charges.Activity of forging which involves heat treatment of material to produce automobile parts is “manufacture” and therefore, labour charges and job work charges earned by the assessee for doing the job of forging for customers are gains derived from industrial undertakings and the same are entitled for deduction under section 80IB. Sale of scrap which generated in the process of manufacturing activity and proximate there to constitute gains derived from Industrial undertaking for the purpose of computing deduction under section 80IB. (A. Y. 2004-05).CIT v. Sadhu Forgings Ltd. (2011) 57 DTR 194 / 242 CTR 158 / 336 ITR 444 (Delhi)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Job work- Miscellaneous receipts.Deduction under section 80IB is allowable on profits of job work and also on miscellaneous receipts, rebate/discounts and balances written off.CIT v. Metalman Auto P. Ltd. (2011) 199 Taxman 149 / 152 DTR 385 / 336 ITR 434 (Mag.)(P&H)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Manufacture – Production - Assembling of different parts of windmill.Different parts of windmill when assembled get transformed in to an ultimate product which is commercially known as a “windmill” which amounts to manufacture or production with the meaning of section 80IB(2)(iii). (A. Y. 2005-06).CIT v. Chiranjeevi Wind Energy Ltd. (2011) 333 ITR 192 / 243 CTR 195 / 58 DTR 302 (Mad.)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - ‘Production’.The word ‘production’ is wider in scope than ‘manufacture’ and would include by-products and other residual products resulting during the course of manufacture. Hence the activity of converting boulder into grits/stone chips/powder may not be ‘manufacturing’ but would amount to ‘production’ and therefore the assessee would be entitled to deduction under section 80-IB on the said activity.CIT v. Mallikarjun Georesources Associates (2011) 201 Taxman 86 (Uttarakhand)(Mag.)(High court)


S. 80IB : Deductions - Profits and gains from industrial undertakings - Refund of Excise Duty – Transport subsidy.Refund of Excise Duty has a direct nexus to the manufacturing activity of the assessee and hence the same qualifies for deduction under section 80-IB.Transport subsidy & Interest Subsidy- Transport & Interest Subsidies received by the assessee, cannot be said to be derived from the industrial activity and the same would not qualify for deduction under section 80-IB. (A. Y. 2006-07)CIT v. Meghalaya Steels Ltd. (2011) 332 ITR 91 / 241 CTR 384 / 55 DTR 27 201 Taxman 135 (Mag.) (Gau.)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Derived from Payments Disallowed – [S. 40(a)(ia)]Payments disallowed under section 40(a)(ia), has to be treated as part of “profits and gains of business or profession” and therefore, the same qualifies for deduction under section 80IB. (A. Ys. 2002 -03, 2003-04, 04-05, 2006-07) ITO v. Computer Force (2011) 136 TTJ 221 / 128 ITD 116 / 49 DTR 298 (Ahd.)(Trib.)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Interest - Miscellaneous income.Interest on deposits would not be allowable towards the deduction under section 80-IB as the same is treated as miscellaneous income. (reversal of LD charges). The matter was remanded to the Tribunal for fresh consideration. (A. Y. 2003-04).CIT v. Dresser Rand India P. Ltd. (2011) 330 ITR 453 (Bom.)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Manufacture or production – Manufacture need not be final product – Rubber compound used in tyre manufacturing.To avail benefit under section 80-IB, product manufactured need not be a final product, it could be saleable intermediate product, as in the present case a rubber compound used in the manufacture of tyres, which was manufactured by processing rubber with chemicals, oil, etc., and the same was inferred by the High Court as manufacture for the purposes of section 80-IB.Midas Polymer Compounds P. Ltd. v. ACIT (2011) 331 ITR 68 / 237 CTR 401 / 50 DTR 139 / 197 Taxman 481 (Ker.)(FB)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Derived from – Rebate – Discounts – Labour job receipts.Labour job receipts, miscellaneous income consisting of rebate and discounts and balance written off. etc., were held to be incomes ‘derived from’ industrial undertaking eligible for deduction under section 80-IB of the Act. (A. Y. 2004-05)CIT v. Metalman Auto P. Ltd. (2011) 52 DTR 385 / 336 ITR 434 (P&H)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Industrial undertakings – Job Work.Amount received on account of job work is not a result of manufacturing or producing article or thing and therefore, the assessee is not entitled to claim deduction under section 80-IA and 80-IB of the Act. (A. Y. 2000-2001)Friends Castings P. Ltd. v. CIT (2011) 50 DTR 61 / 238 CTR 377 / (2012) 340 ITR 305 (P&H)(High Court)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Export – After deduction under section 80-IA. (S. 80HHC)


Deduction under section 80HHC of the Act is to be allowed after reducing the amount of deduction allowable under section 80-IA of the Act. (A. Y. 2000-01)Friends Castings P. Ltd. v. CIT (2011) 50 DTR 61 / 238 CTR 377 / (2012) 340 ITR 305 (P&H)(High Court)Editorial:- Refer Bombay High Court in the case of CIT v Associated Capsules Pvt. Ltd. (2011) 332 ITR 42 (Bom)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Manufacture or production – Job Work – Knitted fabrics.Where the assessee is engaged in the business of manufacture and sale of knitted fabrics and garments was held to be eligible for deduction under section 80-IB of the Act in respect of job work done by it for others. (A. Y. 2004-05)CIT v. Vallabh Yarns P. Ltd. (2011) 51 DTR 236 / 335 ITR 518 (P&H)(High Court)

S. 80IB : Deductions – Profits and gains from industrial undertakings - Manufacture - Number of employees - Job workers (Hired through Contractor) – Condition of section 80IB(2)(vi) complied. Manufacturing activity was carried out at the factory premises of the assessee with the help of permanent employee and job workers. The total number of workers employed by the assessee directly and those hired through a contractor in the manufacturing activity being more than ten condition set out in section 80IB(2)(iv) stood complied, even though the workers employed by the assessee directly were less than ten. Assessee was held to be entitled to deduction under section 80IB. (A.Y. 1999-2000).CIT v. Jyoti Plastic Works (P) Ltd. (2011) 339 ITR 491 / 63 DTR 345 / 203 Taxman 546 / (2011) Vol. 113(6) Bom.L.R.4083 (Bom.)(High Court)

S. 8OIB : Deductions - Profits and gains from industrial undertakings - Excise Refund –Subsidy - Despite Liberty India, Excise Refund Eligible for section 80IB.Following Delhi High Court decision in CIT v Dharampal Premchand (2009) 317 ITR 353, it was held that excise duty refund was eligible under section 80-IB on the ground that (a) there was a direct nexus between the refund of excise duty and the undertaking and (b) if the proper accounting methodology was followed for the payment and refund of excise duty, the net effect on the P&L A/c was nil. Also, the refund of excise duty is the assessee’s own money coming back and is not income at all. ( A. Y. 2007-08)J. K. Aluminium Co. v. ITO (Delhi)(Trib.) Source: www.itatonline.org

S. 80IB : Deductions - Profits and gains from industrial undertakings - Processing of Seeds – Manufacture.Processing of seeds by the assessee which is bought from the agriculturists, does not result in manufacturing of any new article or thing, therefore the assessee is not eligible to claim deduction under section 80-IB. (A. Ys. 2002-03 to 2004-05)ITO v. Daftri Agro (2011) 135 TTJ 729 / 50 DTR 215 / 130 ITD 496 (Hyd.)(Trib.)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Manufacture – Production - Water purification system - Out sourcing - Twenty or more workers.Assessee himself is making the final product i.e., water purification system, it cannot be said that he is not engaged in manufacture merely because, some material is readily purchased from the market and some raw material is got manufactured by outsourcing , assessee having employed twenty or more workers during the major part of the year, there is substantial compliance of the condition of employment of minimum number of workers and therefore assessee is entitled for deduction under section 80IB, more so when similar deduction has been allowed in the preceding years. (A. Y. 2001-02).


http://itatonline.org/archives/index.php/liberty-india-vs-cit-supreme-court

P. L. Patel v. ITO (2011) 60 DTR 53 / 142 TTJ 57 (Mum.)(Trib.)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Infrastructure development undertakings - Job work charges - Apportionment of receipts.Assessee-HUF was engaged in manufacturing of moulds for ball pens and, supplying same to ball pen manufacturing concerns. It also provided services to buyers by way of repair and maintenance of moulds sold to them and charged job work charges ,which included receipt on account of sale of spare parts and repair and maintenance charges. The Tribunal held that income earned by assessee could not be from repairs and maintenance charges could not be equated at par with income from manufacturing and hence not eligible deduction in terms of section 80IB. Since in the absence of record of assessee it was not possible to decide how much was for repairs and how much for was job charges it was estimated at 50% of receipt as job work charges on which the assessee would entitled deduction under section 80IB and balance 50% as receipt on account of repair and maintenance charges on which the assessee would not be entitled to get deduction under section 80IB. (A. Y.2005-06).Dy. CIT v. Rajesh Kumar Drolia (2011) 132 ITD 23 / 12 ITR 1 / 141 TTJ 257 / 61 DTR 71 (Kol.)(SB)(Trib.)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Amalgamation of companies -Subsidiary company.Subsidiary company carried on business during intervening period from 1st April 2005 till the order sanctioning amalgamation scheme, is deemed to have been carried on for on behalf of the assessee company , as per instruction no F.NO 15/5/63–IT (AI) dt. 13th December, 1963, the assessee is entitled to deduction under section 80IB, if other conditions are satisfied. (A. Y.2006-07).Wrigley India (P) Ltd. v. Addl. CIT (2011) 62 DTR 201 / 142 TTJ 23 (Delhi)(Trib.)

S. 80IB : Deductions - Profits and gains from industrial undertakings - Derived - Modvat credit - Modvat credit is “derived” from industrial undertaking.The assessee availed/set off Modvat credit of excise duty of earlier years amounting to Rs. 1.93 crores. The Assessing Officer held that section 80-IB deduction was not admissible on the said Modvat credit on the ground that the “source of the income was government policy imposing excise duty at differential rate” and it was not “derived” from the industrial undertaking. This was reversed by the CIT(A). On appeal by the department, HELD dismissing the appeal:The payment of central excise duty has a direct nexus with the manufacturing activity and similarly, the refund of the Central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of Central excise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of central excise duty and its refund. Consequently, it is “derived” from the industrial undertaking and eligible for section 80-IB deduction (CIT v. Meghalaya Steels 332 ITR 91 (Gau.) and J.K. Aluminium v. ITO (ITAT Delhi) followed) ACIT v. The Total Packaging Services (Mum.)(Trib.) www.itatonline.org

S. 80IB : Deductions - Profits and gains from Industrial undertakings – Manufacture - Ginning and processing of cotton – Derived – Interest - Income from weigh bridges etc. - Not eligible.Assessee engaged in business of manufacturing activity of ginning and processing of cotton, cannot claim deduction under section 80IB with regard to excess cash, interest credited and income earned from weigh bridges, as said items of income could not be said to have been derived from or have nexus with eligible industrial undertaking. (A. Y. 2007-08).Maa Vaishno Devi v. Dy. CIT (2011) 48 SOT 399 (Indore)(Trib.)


S. 80IB : Deductions - Profits and gains from industrial undertakings - Reconstruction - New unit.Assessee having set up a new unit after closing the old unit at a new place for manufacturing new type of telephone instruments by employing new technology in a newly constructed business premises and making substantial investment in plant and machinery, it is not a case of splitting up of old business and therefore claim for under section 80IB could not be disallowed on the ground that the assessee has merely shifted its business from one place to another and not started a new business. (A. Ys. 2002-03, 2003-04, 2004-05 & 2006-07)ITO v. Computer Force (2011) 136 TTJ 221 / 128 ITD 116 / 49 DTR 298 (Ahd.)(Trib.)

S. 80IB(10) : Deduction –Undertaking -Development and construction of thehousing project- - Disallowance on account of non-payment of deduction at source - (S. 80AB, 40(a)(ia), 29)Where the Assessing Officer makes additions to income of assessee under section 40(a)(ia), for non-compliance of tax deduction at source, such additional income also should be considered for the purpose of allowing deduction under section 80IB(10) as per section 80AB, read with section 29. (A. Y. 2006-07)S. B. Builders & Developers v. ITO (2011) 50 DTR 299 / 136 TTJ 420 / 45 SOT 335 (Mum.)(Trib.)

S. 80IB(10) : Deduction -Undertaking -Development and construction of thehousing project- - Date of completionTribunal held that what is crucial is not the date of issue of letter by local authority, but date mentioned in the letter certifying completion of the project. Therefore, it rejected the contention of the revenue to the effect that the date of completion shall be taken as the date on which the certificate is physically issued by the local authority.D. K. Construction v. ITO (2011) BCAJ Feb., 24 (ITAT - Indore) (572) (2011) 42 B. BCAJ) (Trib.)

S. 80IB(10) : Deduction -Undertaking -Development and construction of the housing project undertaking - Pre A. Y. 05-06.A project approved as “housing project” by local authority eligible for deduction under section 80-IB(10) irrespective of extent of commercial user Where the legislature has provided that the deduction under section 80IB(10) is available to all housing projects approved by a local authority, the result is that even projects with commercial user approved as a “housing project” are eligible for deduction. Thus, the Tribunal was justified in confirming the deduction only to projects having commercial area upto 10% of BUA. If the project is approved as a “housing project” deduction under section 80-IB(10) is allowable irrespective of the commercial area. It was further held that the insertion of clause (d) to section 80-IB(10) w.e.f. 1.4.2005 to deny section 80-IB(10) deduction to projects having commercial user beyond the prescribed limits is not retrospective. (A. Y. 2003-04). CIT v. Brahma Associates (2011) 333 ITR 289 / 51 DTR 298 / 239 CTR 30 / 197 Taxman 459 / 2011 VOL 113 (2) Bom. L. R. 0995 (Bom.)(High Court)

S. 80IB(10) : Deduction – Undertaking -Development and construction of the housing project – Joint development agreement - Owners of land.Assessee developer had entered into joint development agreement with owners of land for construction of residential flats consisting of four wings in consideration of giving 49% of the constructed area to land owners and all other conditions of section 80IB(10) having been found to be fulfilled, deduction under section 80IB(10) could not be denied. (A. Ys. 2005-06 to 2007-08)Mudhit Madanlal Gupta v. ACIT (2011) 51 DTR 217 (Mum.)(Trib.)


S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project- Property developer – Owner - Car parking area.Assessee a property developer paying full consideration to land owner and building housing project, all work in connection with project done by assessee, assessee is considered as de facto owner of land, assessee is entitled to deduction under section 80IB(10). Car parking area not to be included in reckoning permissible area of residential area. (A. Ys. 2001-02, 2005-06) ACIT v. C. Rajini (Smt) (2011) 9 ITR 487 / 140 TTJ 218 / 58 DTR 554 (Chennai)(Trib.)

S. 80IB(10): Deduction - Undertaking -Development and construction of the housing project - Built up area of two units exceeded 1500 square feet - Assessee not entitled for deduction.The Assessing Officer conducted spot enquiry and physical inspection revealed that individual residential unit measuring less than 1500 sq. feet in built up area on paper was never meant to be sold as such but was always to be sold together with adjoining unit. The built up area of the two units exceeded 1500 sq. feet. Assessee had only one electricity meter for two adjacent flats. All 104 units have been sold to adjoining pairs to 52 families and the buyers have been shown either same persons or husband and wife and only one entity was shown in the broucher for two flats. The Tribunal held that CIT(A) was justified in confirming the order of Assessing Officer refusing to grant deduction under section 80IB(10). (A. Y. 2003-04).Thistle Properties (P) Ltd. v. ACIT (2011) 55 DTR 81 / 138 TTJ 538 / (2012) 134 ITD 6 (Mum.)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project- Commercial area - Projects commenced prior to 1-4-2005 - Restriction of 5% is not applicable.The Tribunal noted that the assessee’s project had commenced prior to 1-4-2005. It also noted that in the case of Brahma Associates, the High Court has held that the amendment to section 80IB is prospective in operation. Since the assessesse’s project had commenced in December 2003, the Tribunal held that amendment to section 80IB(10) w.e.f. Assessment Year 2005-06, restricting the commercial area to 5% is not applicable to projects commenced prior to 1-4-2005. (A. Y. 2005-06).ITO v. Chheda Construction Co., ITA No. 2764/Mum/2009, dt.27-04-2011, ‘C’ Bench, BCAJ pg. 29, Vol. 43-A, Part 3, June 2011 (Mum.)(Trib.)

S. 80IB(10) : Deduction – Undertaking -Development and construction of the housing project - Pro-rata basis - - Residential buildings - Area exceeding 1500 square feet.Whether deduction should be allowed in the case of flats having build up area not exceeding 1500 sq. ft., even though some of the flats were exceeding 1500 sq. ft. On reference to third member, the third member held that in view of order passed by Calcutta High Court in CIT v Bengal Ambuja Housing Development Ltd. (IT Appeal no 458 of 2006 dated 5-1-2007), assessee was entitled to deduction under section 80IB(10) in respect of flats having built up area not exceeding 1500 square feet and not entitled for deduction in respect of those flats having their built up area exceeding 1500 square feet. The third member also held that in view of CIT v Brahma Associates (2011) 197 Taxman 459 (Bom)(High Court), finding of Vice President on the issue of fixing limit of 10 percent cap does not hold good. (A. Ys. 2005-06 & 2006-07).Sanghvi & Doshi Enterprise v. ITO (2011) 131 ITD 151 / 60 DTR 306 / 141 TTJ 1 (Chennai)(TM )(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project -- Completion of entire project.


For claiming deduction under section 80IB, it is not necessary for assessee to compute entire project and even on partial completion of project, assessee would be eligible for deduction under section 80IB. (A. Y. 2005-06).Nagarjuna Homes v. ITO (2011) 46 SOT 287 (Hyd.)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project - - Development agreement - Not Owner - Commencement certificate.Deduction under section 80IB(10) can not be denied on the ground that the assessee is not the owner of the property which he undertakes to develop, nor can it be denied on the ground that development agreement is not registered. Merely because the commencement was obtained prior to 1-10-1998, it does not mean that the assessee has commenced the development and construction of the project unless the assessee has taken some effective steps on the site. (A. Ys. 2003-04 and 2004-2005).Essem Capital Markets Ltd. v. ITO (2011) TIOL 196 ITAT–Mum. 171-(2011) 43A – BCAJ (May . P 31)

S. 80IB(10) : Deduction – Undertaking -Development and construction of the housing project - – Date of completion.Tribunal held that what is crucial is not the date of issue of letter by local authority, but date mentioned in the letter certifying completion of the project. Therefore, it rejected the contention of the revenue to the effect that the date of completion shall be taken as the date on which the certificate is physically issued by the local authority.D. K. Construction v. ITO, ITA No. 243/Ind/2010, dt. 6-12-2010, ITAT Indore Bench, BCAJ P. 24, Vol. 42-B, Part 5, February 2011 (Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project - - Commercial area 8.8%.Commercial area of the residential plus commercial project did not exceed 8.8% of total area, further, deduction is eligible to housing project approved by the local authority as such or as “residential plus commercial project” having residential as well as commercial units to the extent permitted under the DC Rules. Assessee is entitled to deduction under section 80IB(10). (A. Y.2004-05).Bhumiraj Homes Ltd. v. Dy. CIT (2011) 60 DTR 65 / 11 DTR 699 (Mum.)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project - - Sale of pair of flats in the name of family members exceeding 1000 square feet - Amendment with effect from 1-4-2010 is prospective in nature.Under pre-amended section as long as a residential unit has less than specified area, is as per duly approved plans and is capable of being used for residential purposes on stand alone basis, deduction under section 80IB(10), cannot be declined in respect of same merely because end user, by buying more than one such unit in name of family members has merged those residential units in to a larger residential unit of a size which is in excess of specified size. Amendment made to section 80IB(10) with effect from 1-4-2010, is prospective in nature. (A. Ys. 2003-04 & 2004-05).Emgeen Holdings (P) Ltd. v. Dy. CIT (2011) 47 SOT 98 (Mum.)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project -- Ownership of Land.


When the assessee has taken possession of land after the payment of full consideration and developed it, the assessee has fulfilled all the conditions laid down in section 80IB(10), therefore entitled to deduction under section 80IB. (A. Ys. 2001-02 & 2005-06)ACIT v. C. Rajini (Smt) (2011) 140 TTJ 218 / 58 DTR 554 / 9 ITR 487 (Chennai)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project - - Jointly development.Assessee entered in to an agreement for jointly developing a housing project on its land, undertaking the responsibility of obtaining all statutory clearance permissions, etc. for putting up the housing project on the land as well as responsibility to remove all structures and unauthorized occupants of the land and agreeing to share the gross sale proceeds the housing project with the other company in an agreed ratio, the activities undertaken by the assessee are activities relating to development of housing project and therefore are activities relating to development of the housing project and, therefore, it is to be treated as a developer entitled to deduction under section 80IB(10). (A. Ys. 2002-03 to 2005-06).ACIT v. Bombay Real Estate Development Company (P) Ltd. (2011) 64 DTR 137 (Mum.)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project - - Combined area of flats - Built up area.When as per the approved plan the assessee has sold each flat under separate agreement which are less than 1000 sq. Ft. deduction under section 80IB can not be denied to the assessee merely because some of the purchasers have purchased more than one flat and combined the same and area of such flats is more than 1000 sq. ft. of built up area. The definition of “Built up area” as given in sub section 14(a) of section 80IB is inserted by the Finance (No. 2) Act, 2004 w.e.f. 1st April, 2005 and therefore the same is applicable only in respect of the projects approved after 1st April, 2005 and consequently, balcony / terrace cannot be included in the built up area of the flats in the hosing projects approved prior to 1st April 2005. (A. Ys. 2005-06 to 2007-08).Haware Constructions (P) Ltd. v. ITO (2011) 64 DTR 251 (Mum.)(Trib.)

S. 80IB(10) : Deduction - Undertaking -Development and construction of the housing project - - Land in the name of owner - Not in the name of Developer - Built up area - Open terrace.Assessee having purchased land and developed a housing project consisting of residential flats having built up area of less than 1500 sq. ft. each by incurring all expenses and taking all the risk involved therein and received entire sale consideration from the buyers after completion of the housing project in its own right, deduction under section 80IB(10) could not be denied on the ground that the permissions and approvals by the local authorities were in the name of the housing society (Land owner) and not in the name of the assessee. As per the definition given in section 80IB(14)(a), built up area means, inner measurement of the residential unit at the floor level including the projections and balconies as increased by the thickness of the walls but does not include the common areas shared with other residential units. Open terrace is open to sky would not be part of the inner measurement of the residential unit at any floor level. The Assessing Officer was not justified in rejecting the assesee’s claim by taking the open terrace, the built up area of each of the 110 units less than 1500 sq. ft., therefore the claim of assessee was allowed. (A. Y. 2006-07).Amaltas Associates v. ITO (2011) 64 DTR 329 / 142 TTJ 849 / 131 ITD 142 (Ahd.)(Trib.)

S. 80IC : Deduction –Special category States- Conversion of proprietorship concern in to partnership - Not transfer of Capital asset. [S. 45(3), 80IA(12)]


Conversion proprietorship in to a partnership was nether a case of amalgamation nor transfer of capital asset attracting the provisions of section 45(3) for charge of capital gains tax, the assessee would not be denied the deduction section under section 80IC for remaining unexpired period after such conversion (A. Y. 2006-07).CIT v. Mega Packages (2011) 203 Taxman 236 (P&H)(High Court)

S. 80J :Deduction- New industrial undertakings - Use of old parts – Splitting – Reconstruction - Manufacture -Detonators.Assessee investing huge amount to purchase new machinery to replace out dated unit for manufacturing of basic material. New machinery increasing production as well as enabling the assessee to produce one more product. Assessee using few parts of old machinery the value was less than 10% of new unit. Use of old parts does not amount to spliting or reconstruction of old unit. Assesssee is entitled to deduction under section 80J. (A. Y. 1982-83).CIT v. I.D.L.Chemicals Ltd. (2011) TAX L. R. 389 (AP)(High Court)

S. 80P : Deduction - Co-operative Societies – Income from co-operative bank.Income received by a co-operative bank from deposits, whether or not they are made to discharge of a statutory obligation or otherwise, being income from banking business would be eligible for exemption under section 80P. (A. Y. 1997-98)CIT v. Andhra Pradesh State Co-operative Bank Ltd. (2011) 200 Taxman 220 / 60 DTR 281 / 336 ITR 516 / 244 CTR 86 (AP)(High Court)

S. 80P : Dedcution - Co-Operative Societies – Interest - Exempted income. (S. 14A)Deduction under section 80P(2)(d) is available after deducting the expenditure incurred in earning the income. (A.Y. 2002-03).The Punjab State Co-operative Milk Producers Federation Ltd. v. CIT (2011) 336 ITR 495 / 245 CTR 432 (P&H)(High Court)

CHAPTER VIIIREBATES AND RELIEFS

S. 88E : Rebate – Securities transaction tax-Life Insurance - Pubic provident fund - Book profit – Company - STT. (S. 115JB)Rebate under section 88E is allowable in respect of payment of STT even if total income assessed under section 115JB. (A. Y. 2005-06).CIT v. Horizon Capital Ltd. (2011) 64 DTR 306 / 245 CTR 601 (Karn.)(High Court)

S. 88E : Rebate - Securities Transaction Tax. [S. 40(a)(ib)]Disallowance of deduction for securities transaction tax under section 40(a)(ib) could not deprive the assessee of rebate under section 88E. (A. Y. 2006-07).ITO v. Chunilal T. Mehata (2011) 7 ITR 50 / 136 TTJ 77 / 51 DTR 378 (Kol.)(Trib.)

CHAPTER IXDOUBLE TAXATION RELIEF

S. 90 : Double taxation relief – Agreement with foreign countries- Liaison office.


Liaison office of a South Korean company carrying on activities of identifying the buyers, negotiating with them, procuring purchase orders, forwarding the same to head office in Korea, following up with the customer for realisation of payments and offering after sales services was held to be a Permanent Establishment (P.E.) and the profits earned in India through this liaison office are taxable in India as per Article 5 of the DTAA between India and South Korea. (A. Y. 2001-02 to 2006-07)Jebon Corporation India Liaison Office v. CIT (Int. Taxation) & Anr. (2011) 55 DTR 113 / 245 CTR 300 (Karn.)(High Court)

S. 90 : Double taxation relief – Agreement with foreign countries- Royalty – DTAA - India-Singapore. (Art. 12)Assessee, a Singaporean company, which is engaged in providing international telecommunication connectivity services, the amount received by it from Indian customers is for use of “process” besides for use of or right to use industrial, commercial or scientific equipment and therefore, payments made by Indian customers to the assessee company are royalty with in the meaning of Art. 12(3) of the Indo–Singapore DTAA. (A. Y. 2002-03 & 2003-04). Verizon Communications Singapore PTE Ltd. v. ITO (2011) 54 DTR 65 / 45 SOT 263 (Chennai)(Trib.)

S. 90 : Double taxation relief – Agreement with foreign countries- DTAA - India-Australia - Interest on tax refund not “effectively connected” with PE. [Art. 11(4)]Under Article 11(4) of the DTAA, interest from indebtedness “effectively connected” with a PE of the recipient is taxable under Article 7 and not under Article 11. The payment of tax was the responsibility of the foreign company and the fact that it was discharged by way of TDS did not establish effective connection of the indebtedness with the PE. In order to be “effectively connected”, it is not necessary that the interest income has to be necessarily business income in nature. Even interest assessable under “other sources” can qualify. (Asst year 2003-04 )ACIT v. Clough Engineering Ltd. (2011) 138 TTJ 385 / 9 ITR 618 / 55 DTR 34 / 130 ITD 137 (Delhi)(SB)(Trib.)

S. 90 : Double taxation relief - Agreement with foreign countries -Liaison office – DTAA - India-South Korea. (Art. 5)Liaison office of South Korean company carrying on commercial activities of identifying the buyers, negotiating with the buyers, agreeing to the price ,procuring purchase orders and forwarding the same to the head office and the follow up activities relating to realization of payments from customers and offering after sales support is a PE as defined under Art. 5 of the DTAA between India and South Korea and therefore, the business profits earned in India through this liaison office are taxable in India. (A. Ys. 2001-02 to 2006-07).Jebon Corporation India Liaison Office v. CIT (2011) 55 DTR 113 (Karn.)(High Court)

S. 90 : Double taxation relief - Agreement with foreign countries -Interest on income tax refund - India-German – DTAA. [Art 11, 8 (3)]Interest on income tax refund is chargeable to tax under art 11 of Indo –German DTAA , Authorities below were justified in rejecting the contention of the assessee for its inclusion in Art. 8(3) as only interest on funds which are connected with the operation of ships or aircrafts is covered with in the ambit of Art. 8(3). (A. Y. 2004-05).Hapag Lloyd Container Line GMBH v. ADIT (2011) 56 DTR 185 / 131 ITD 122 / 141 TTJ 169 / 131 ITD 122 (Mum.)(Trib.)


S. 90 : Double taxation relief - Agreement with foreign countries - Permanent establishment – Agent – DTAA – India. (Art. 5)Even though agents acts independently in ordinary course of business, if they devote their activities wholly or mostly on behalf of foreign enterprise, they would be considered as PE of foreign enterprise irrespective of whether they conclude contracts binding on their principal or not. (A. Y. 1997-98).Reuters Limited Construction House v. Jt. CIT (2011) 62 DTR 322 / 48 SOT 246 / 7 ITR 422 (Mum.)(Trib.)

S. 90 : Double taxation relief - Agreement with foreign countries - Permanent establishment - Offshore transportation - Installation of pipelines – DTAA – India-Mauritius. [Art. 5(2)]Activities of off shore transportation and installation of pipelines carried out by assessee, a Mauritian company, through marine vessel amount to assembling definition of the Art. 5(2) of the Indo Mauritius DTAA includes only those assembly projects which last for more than nine months. Matter was restored to the Assessing Officer to ascertain the period of existence of the assessee in India and thereafter to decide the existence of Permanent Establishment. (A. Y. 2007-08).GIL Mauritius Holdings Ltd. v. ADIT (2011) 63 DTR 282/( 2012) 143 TTJ 103 (Delhi)(Trib.)

S. 90 : Double taxation relief - Agreement with foreign countries - Permanent establishment – DTAA - India-France – Onus on Assessing Officer has to show foreign company has a permanent establishment in India. Under India-France DTAA, even dependent agent is not PE in absence of finding that transactions are not at ALP (Article 5)The assessee, a French company, engaged in the operation of ships in international traffic, claimed that it did not have a PE in India and that no part of its income was chargeable to tax in India. The Assessing Officer & DRP held that as the assessee had an agent in India which concluded contracts, obtained clearances and did the other work, there was a PE in India under Articles 5(5) & 5(6) of the DTAA. On appeal by the assessee, HELD allowing the appeal:(i) In order to constitute a PE under Article 5(1) & 5(2), three criteria are required to be satisfied viz; physical criterion (existence), functionality criterion (carrying out of business through that place of physical location) & subjective criterion (right to use that place). There must exist a physical “location”, the enterprise must have the “right” to use that place and the enterprise must “carry on” business through that place. An “agency” PE will not satisfy this condition because the enterprise will not have the “right” to use the place of the agent. Under Article 5(6) of the India-French DTAA (which is at variance with the UN & OECD Model Conventions), even a wholly dependent agent is to be treated as an independent agent unless if it is shown that the transactions between him and the enterprise are not at arms’ length. The Department’s argument that as the Assessing Officer had not examined whether the transactions were done in arm’s length conditions, the matter should be restored to him is not acceptable because the onus was on the Revenue to demonstrate that the assessee had a PE. The onus is greater where the very foundation of DAPE rested on the negative finding that the transactions between the agent and the enterprise were not made under at arms length conditions. A negative finding about transactions with the dependent agent not being at ALP is sine qua non for existence of a DAPE under the India-France DTAA. The Assessing Officer could not be granted a fresh inning for making roving and fishing enquiries whether the transactions were at arm’s length conditions or not (Airlines Rotables Ltd. v. Dy. CIT (2010) 44 SOT 368 followed); (ii) (Observed, on a conceptual note, taking note of revenue’s plea but without deciding) If as a result of a DAPE, no additional profits, other than the agent’s remuneration in the source country – which is taxable in the source state anyway de hors the existence of PE, become taxable in the source state, the very approach to the DAPE profit attribution seems incongruous. Further, before accepting the DAPE profit


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neutrality theory, as per DIT v. Morgan Stanley and Co. Inc. (2007) 292 ITR 416 (SC), the arm’s length remuneration paid to the PE must take into account ‘all the risks of the foreign enterprise as assumed by the PE’. In an agency PE situation, a DAPE assumes the entrepreneurship risk in respect of which the agent can never be compensated because even as DAPE inherently assumes the entrepreneurship risk, an agent cannot assume that entrepreneurship risk. To this extent, there may be a subtle line of demarcation between a dependent agent and a dependent agency PE. The tax neutrality theory, on account of existence of DAPE, may not be wholly unqualified at least on a conceptual note. Delmas, France v. ADIT (Mum.)(Trib.) www.itatonline.org

S. 90 : Double taxation relief – Agreement with foreign countries -Royalty – DTAA - India-Sri Lanka. (Art . 7, 12)Applicant, a Sri Lankan company having undertaken a contract for dredging from an Indian company and granted non transferrable and non exclusive right to the Indian company to use its proprietary software as part of the agreement in order to transfer the scientific experience in hydrology possessed by the applicant without transfer of intellectual property rights in the software and therefore, consideration received by the applicant falls under the term “royalties” and is liable to tax under Art. 12 of the DTAA between India and Sri Lanka and not under Art 7 thereof.Lanka Hydraulic Institute Ltd. (2011) 241 CTR 314 / 199 Taxman 232 / 56 DTR 11 / 337 ITR 47 (AAR)

S. 91 : Double taxation relief - Countries with which no agreement exists - Federal Taxes - Foreign State – DTAA - Tax Credit.The view that State taxes cannot be allowed as a deduction and also cannot be taken into account for giving credit is incongruous and results in a contradiction. While section 91 allows credit for Federal & State Taxes, the DTAA allows credit only for Federal Taxes. The result is that the section 91 is more beneficial to the assessee & by virtue of section 90(2) it must prevail over the DTAA. Though section 91 applies only to a case where there is no DTAA, a literal interpretation will result in a situation where an assessee will be worse off as a result of the provisions of the DTAA which is not permissible under the Act. Section 91 must consequently be treated as general in application and must prevail where the DTAA is not more beneficial to the assessee. Accordingly, even an assessee covered by the scope of the DTAA will be eligible for credit of State taxes under section 91 despite the DTAA not providing for the same. (A. Y. 2000-01)Tata Sons Ltd. v. Dy. CIT (2011) 9 ITR 154 / 135 TTJ 1 / 43 SOT 27 / 48 DTR 321 (Mum.)(Trib.)

CHAPTER XSPECIAL PROVISIONS RELATING TO AVOIDANCE OF TAX

S. 92 : Avoidance of tax – Transfer pricing –International transaction- Royalty - Deductibility of expenses.Section 92 does not apply in respect of payments of royalty etc. which are not the part of regular business carried on between a resident and Non resident.( A. Y. 1997-98 & 1998-99).CIT v. Nestle India Ltd. (2011) 57 DTR 65 / 337 ITR 103 (Delhi)(High Court)

S. 92 : Avoidance of tax - Transfer pricing - International transaction - Arm’s length price - Debit balances.A continuing debit balance in the account of the Associated Enterprise by itself does not amount to an international transaction under section 92B in respect of which arm’s length price adjustment can be made. Even assuming that the continuing debit balances of AEs can be treated as “International Transactions” the


right course of applying the CUP method would have been by comparing this not charging of interest with other cases in which other enterprises have charged the interest, in respect of over dues in respect of similar business transactions, with independent enterprises. As no exercise has been carried out addition was deleted. (A. Y. 2004-05).Nimbus Communications Ltd. v. ACIT (2011) 43 SOT 695 / 55 DTR 163 / 139 TTJ 214 (Mum.)(Trib.)

S. 92A : Avoidance of Tax - Transfer pricing – International transaction-Associated enterprises – De facto control of an unrelated party - Unrelated parties also considered “associated enterprises”. If one enterprise controls the decision making of the other or if the decision making of two or more enterprises are controlled by same person, these enterprises are required to be treated as ‘associated enterprises’. Though the expression used in the statute is ‘participation in control or management or capital’, essentially all these three ingredients refer to de facto control on decision making. The argument, based on Dy. CIT v. Quark Systems (P) Ltd. (2010) 38 SOT 307 (SB), that exceptionally high and low profit making comparables are required to be excluded from the list of TNMM comparables is not acceptable. Merely because an assessee has made high profit or high loss is not sufficient ground for exclusion if there is no lack of functional comparability. While there is some merit in excluding comparables at the top end of the range and at the bottom end of the range as done in the US Transfer Pricing Regulations, this cannot be adopted as a practice in the absence of any provisions to this effect in the Indian TP regulations. (Benefit of +/- 5% adjustment as directed in UE Trade Corporation 44 SOT 457 to be given);The adjustment made by the TPO with regard to the advertisement expenditure incurred by the assessee was without jurisdiction because the Assessing Officer had not made any reference on this issue to the TPO. As the reference to the TPO is transaction specific and not enterprise specific, the TPO Officer has no power to go into a matter which has not been referred to him by the Assessing Officer. Even the CBDT Instructions are clear on this (3i Infotech Ltd. v. Dy. CIT (2011) 136 TTJ 641 followed) (A. Y. 2006-07).Diageo India Pvt. Ltd. v. ACIT (2011) 47 SOT 252 / 63 DTR 33 / 142 TTJ 287 (Mum.)(Trib.)

S. 92B : Avoidance of tax - Transfer pricing - International transaction.Where a transaction is incurred into by AEs being a resident and non resident , transaction shall amount to an international transaction falling under section 92B(1), therefore when either or both of AEs are non-resident, transaction entered into would amount to an international transaction within the meaning of section 92B(1), therefore, it does not matter that transactions in question are not “cross border transaction”. (A. Y. 2006-07).ITO v. Tianjin Tianshi India (P) Ltd. (2011) 133 ITD 123 / 142 TTJ 841 (Delhi)(Trib.)

S. 92C : Avoidance of tax -Transfer pricing - International transaction. - Computation of arms length price.The High Court made certain observations on merits, while remanding the matter to the TPO, virtually concluding the matter. The TPO was directed to proceed with the matter uninfluenced by the observations/directions given by the High Court. (A. Y. 2005-06) Maruti Suzuki India Ltd. v. Addl. CIT (2011) 335 ITR 121 / (2010) 236 CTR 225 / 198 Taxman 102 / 47 DTR 233 (SC)

S. 92C : Avoidance of tax - Transfer pricing – International transaction. Computation - Arm’s length price - Opportunity of being heard. (S. 144C)Order was passed by TPO without granting extension of time sought by the petitioner for furnishing more documents and giving an opportunity of personal hearing to it and also documents were not consider


which were already on record in their right perspective the impugned order was set aside and TPO was directed to pass an order and also personnel hearing. (A. Y. 2007-08).Toyota Kirloskar Motor (P) Ltd. v. Addl. CIT (2011) 52 DTR 393 / 239 CTR 537 / 197 Taxman 477 (Karn.)(High Court)

S. 92C : Avoidance of tax - Transfer pricing – International transaction. - Royalty - Business expenditure.Payment of royalty by assessee company to its US based holding company is not hit by the provisions of section 92 in the absence of any comparable case on record to determine the ordinary profit in similar business and the price fixed has been accepted as ALP by the TPO. Payment of royalty being a business expenditure which is incurred wholly and exclusively for the purpose of business of the assessee ,it is to be allowed as business expenditure. (A. Ys. 1999-2000 to 2001-02). CIT v. Oracle India (P) Ltd. (2011) 59 DTR 222 / 243 CTR 103 / (2011) Tax L.R. 905 (Delhi)(High Court)

S. 92C : Avoidance of tax - Transfer pricing – International transaction. - Computation - Selection of comparables.Held that in the absence of any perversity in the finding of the Tribunal in the selection of a different set of comparables for determination of ALP and recomputation of ratio of operating profit/total cost at 21.97% as against 35.26% adopted by TPO, no interference is warranted. The High court further upheld the decision of the Tribunal of allowing depreciation on administrative assets for determining the operating profits while computing the ALP. (A. Y.2005-06).CIT v. Rakhra Technologies (P) Ltd. (2011) 243 CTR 505 / 60 DTR 159 (P&H)(High Court)

S. 92C : Avoidance of tax - Transfer pricing – International transaction. -Computation - Arm’s length - Selection of comparables -Substantial question of law. (S. 260A)Tribunal having admitted the additional ground for exclusion of Datamatics Technologies Ltd. as comparable and remanded the case to the Assessing Officer directing that the assessee shall be entitled to produce all relevant material for proper determination of ALP and thereafter Assessing Officer having passed an order in favour of the assessee on consideration of the material produced by it, no substantial question of law arises. (A. Y. 2004-05).CIT v. Quark Systems India (P) Ltd. (2011) 244 CTR 542 / 62 DTR 182 (P&H)(High Court)

S. 92C : Avoidance of tax - Transfer pricing - International transaction – Computation - Arms length - Air time sale – DTAA – India-United Kingdom. (Article 7) Assessee was a British company and was part of BBC group. It had appointed an Indian company, BWIPL as its authorized agent in India under an airtime sales agreement to solicit orders for sale of advertisement airtime on channel at rates and on terms and advertising provided by assessee and pass on such orders to assessee for acceptance and confirmation. In consideration of service provided by BWIPL, it was to receive 15 percent marketing commission of advertisement revenues received by assessee from Indian advertisers. Assessee claimed that since BWIPL had been remunerated from arm’s length price no further income was taxable in India. Tribunal has accepted the contention of assessee and allowed the appeal. On appeal the High Court upheld the order of Tribunal. (A. Y. 2002-03).DIT v. BBC Worldwide (2011) 203 Taxman 554 (Delhi)(High Court)

S. 92C : Avoidance of tax - Transfer pricing - International transaction. - Arm’s length price - Expansion of jurisdiction of TPO by insertion of sub-section (2A) to section 92CA, empowering him to determine arm’s length price of any international transaction other than an international transaction


referred to him by Assessing Officer under section (1) of section 92CA can only have prospective effect from 1-6-2011, therefore, prior to introduction of sub-section (2A) of section 92CA, jurisdiction of TPO was restricted to computation of arm’s length price only those transactions which were specifically referred to him by Assessing Officer. (A. Y. 2006-07).CIT v. Amadeus India (P) Ltd. (2011) 203 Taxman 602 / (2012) 65 DTR 85 (Delhi)(High Court)

S. 92C : Avoidance of tax - Transfer pricing – International transaction - Assessing Officer’s decision to refer to Transfer pricing Officer must be based on material and not be arbitrary -Transfer pricing officer has no jurisdiction to decide the validity of any such reference.The assessee entered into transactions with a party named Blue Gems BVBA. In the preceding year, the assessee treated the transactions as an “international transaction” for transfer pricing purposes. However, in the present year, the assessee claimed that though the said party was a “related party”, it was not an “affiliated entity” as defined in section 92CA. However, instead of deciding the issue, the Assessing Officer made a reference to the TPO to determine the ALP and the TPO asked the assessee to show-cause why the transaction with the said party was not subject to transfer pricing proceedings. The assessee filed a Writ Petition to challenge the action of the Assessing Officer / TPO. HELD by the High Court:The Assessing Officer has jurisdiction to make a reference to the TPO only if there is an “international transaction”. Though the question as to whether there is an “international transaction” may be disputed, the Assessing Officer is not obliged to grant hearing to the assessee, invite and consider the objections with respect to the question whether there was an “international transaction” before making a reference to the TPO. The Assessing Officer’s opinion has to be based on available material and would have “ad-hoc” finality. The power cannot be exercised arbitrarily or at whims or caprice. Section 92C(1) has inbuilt safeguards to ensure that the reference is made only in appropriate cases with approval of the higher authority. At the stage of framing the assessment in terms of the TPO’s report the Assessing Officer is entitled [despite the amendment to section 92CA(4)] to consider the objections of the assessee that in fact there had been no “international transaction”. If the assessee succeeds in establishing such fact, the Assessing Officer would have to drop the entire transfer pricing proceedings. Even the DRP has the power to consider whether there was an international transaction or not and it can annul the computations proposed on the basis of the TPO’s order. However, the TPO has no jurisdiction to decide the validity of any such reference and his task is only to determine the ALP. On facts, as the parties were closely related and the assessee had accepted in the preceding year that the transactions were subject to transfer pricing, the Assessing Officer’s reference could not be interfered in writ proceedings. (A. Y. 2008-09). Veer Gems v. ACIT (2012) 65 DTR 66 / 204 Taxman 16 (Guj.)(High Court)

S. 92C : Avoidance of tax - Transfer ricing – International transaction- - Determination of ALP of slump sale.For purpose of transfer pricing in order to determine the ALP in the absence of other identical transactions, the valuation by a registered valuer is the most appropriate means under CUP method. However, as the valuation report filed by the assessee is not reliable, the only option is to adopt the value of the assets sold as per the company law or income-tax WDV. In the sale of a going concern, factors like profitability of the branch office, goodwill, and various other commercial and technical aspects will have a bearing on the ALP. (A. Y. 2004-05)Inter Asia Electronics Inc. v. ADIT (2011) 140 TTJ 513 / 52 DTR 442 (Bang.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction - +/- 5% Variation only if more than one price determined.


The benefit of +/- 5% variation as per the Proviso to section 92C(2) is available only if more than one price is determined. It does not apply where only one price has been determined. CBDT Circular No.12 dated 23.8.2001 provides that “the AO shall not make any adjustment to the arm’s length price determined by the taxpayer if such price is unto 5% less or unto 5% more than the price determined by the AO”. Circular was issued considering practical difficulties. As the Circular never came into operation thus, Circular No. 12 is otiose and cannot be relied upon. ACIT v. Essar Steel Ltd. (Vizag)(Trib.) Source: www.itatonline.org

S. 92C : Avoidance of Tax - Transfer pricing - International transaction - Super normal profit co must be excluded from comparable.The assessee, engaged in providing software development services reported an OP/Cost Margin of 14.96%. The TPO worked out the average of arithmetic mean of ALP (OP/OC) of 42 comparables at 24.91% and directed that an adjustment of Rs. 10.40 crores be made. In its objections to the DRP, the assessee claimed that the comparables included three companies which were “super-normal profit making” and that these should be excluded. It was claimed that if the said companies were excluded, the arithmetic mean of OP/OC of the comparables was 17.15% which was within the +/- 5% range permitted by section 92(C)(2). The TPO rejected the contention on the ground that one company was listed and audited and showing consistent growth at the same level and there was no abnormality and that the other company’s information was not listed in the database. The third “abnormal” company was not dealt with by the TPO. The DRP dismissed the objections of the assessee by a “very cursory and laconic order”. On appeal by the assessee, HELD allowing the appeal:(i) The TPO rejected the assessee’s contention with regard to inclusion of the three super-normal profit companies without any cogent reason. It is undisputed that the three companies have shown super-normal profits as compared to other comparables. Their exclusion from the list of comparable is quite correct. After excluding the three companies the arithmetic mean of the comparables falls within the +-5% range permitted by section 92(C)(2); (ii) Despite the voluminous submissions and paper book filed, the DRP passed a very cursory & laconic order without going into the details of the submissions which is quite contrary to the mandate of section 144C. (A. Y. 2006-07)Adobe Systems India Pvt. Ltd. v. ACIT (2011) 44 SOT 49 / 138 TTJ 122 / 50 DTR 481 (Delhi)(Trib.)(UOR)

S. 92C : Avoidance of tax - Transfer pricing –International transaction Computation - Arm’s length price - Choice of Method - Choice of method of determination of ALP is not an unaffected choice on the part of the tax payer and this choice has to be exercised on the touch stone of principles governing selection of most appropriate method set out in section 92C(1), where the Assessing Officer finds that selection of most appropriate method is not correct, he has the powers as well as corresponding duty to select the most appropriate method and compute the ALP by applying that method. (A. Y. 2002-03 to 2004-05).Serdia Pharmaceuticals (India) (P) Ltd. v. ACIT (2011) 50 DTR 98 / 136 TTJ 129 / 44 SOT 391 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction - Selection of comparables. (S. 144C)Unless the functional profiles of assessee company are examined minutely and detail. It is very difficult to say that the assessee is engaged in the business of software development as decided by TPO and not in the business of rendering support in respect of engineering designs and drawings as claimed by the assessee. Further DRP has neither examined assessee’s contention nor passed speaking and reasoned order. Matter is remanded back to the file of the AO / TPO for fresh adjudication. (A. Y. 2006-07)


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Bechtel India (P) Ltd. v. Dy. CIT (2011) 136 TTJ 212 / 50 DTR 206 / 46 SOT 429 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction - Computation - Arm’s length price..Where the finding of CIT(A) is based on net profit margin of the assessee company worked out by him at 6.97% on the basis of operating profits/sales, which was within +/- 5 % range of ALP, there is no reason to interfere in the order of CIT(A). (A. Y. 2002-03 to 2004-05).Osram India (P) Ltd. v. Dy. CIT (2011) 51 DTR 297 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction - External comparables. Assessee company having provided same software related services to AE’s and unrelated parties, it was not required to make segmental reporting or disclose separate financial information in respect of transactions entered into with AE’s and non AEs as per the guidelines provided under AS-17 and therefore, ALP in respect of international transactions undertaken by the assessee with AEs was rightly determined on the basis of international comparison of profit earned from the international transactions with AEs and profit earned from international transactions with unrelated parties and not by recourse to external comparables. (A. Y. 2006-07).Birlasoft (India) Ltd. v. Dy. CIT (2011) 51 DTR 353 / 136 TTJ 505 / 46 SOT 437 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction -Computation - Arm’s length price – Jurisdiction - International taxation.Though the deputation of three employees by the assessee to its US subsidiary without consideration is covered by the definition of “international transaction” under section 92B (1), it was not necessary for the Assessing Officer to determine the ALP of the said transaction as there would be erosion of tax base of India if the assessee charges the cost of deputation of employees in as much as assessee is remunerating the subsidiary on the cost–plus basis for the services and entire revenue accrues to the assessee. Jurisdiction of TPO is restricted to the transactions referred by the Assessing Officer under section 92CA(1) and therefore, TPO cannot determine the ALP in relation to an international transaction not referred to him by the Assessing Officer under section 92CA(1), further, since the conditions laid down in section 92C(3) were not satisfied the impugned addition cannot also be sustained on the premise that the Assessing Officer as determined the ALP on the basis of material or information or document in his possession. (A. Y. 2002-03). 3i Infotech Ltd. v. Dy. CIT (2011) 51 DTR 385 / 136 TTJ 641 / 129 ITD 422 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction -Computation - Arm’s length price.Assessee company entered into international transactions with Byk which comprised of export of intermediates and clinical trial services. Assessing Officer made reference to TPO in order to find out whether international transactions were at arm’s length price or not. In regard to clinical trial services performed by assessee–company for Byk, TPO after examining various aspects, concluded that mark up of 5% over cost was not as per arm’s length price and same should be 17.4% on basis of comparable cost. On appeal Commissioner (Appeals) concluded that 5% mark up as returned by assessee was fully justified. On appeal by revenue the Tribunal noticed that in course of providing clinical trial service, major part of research activities was carried out by “Byk” itself and function of assessee was only to collect data from various hospitals and transmit same to “Byk” for which it was suitably reimbursed by mark–up of 5% over cost. It was also noted that profits of assessee were exempt under section 10B and thus, company was in no way benefited by charging 5% mark–up as against 17.4% fixed by TPO. The Tribunal held that on facts


there was no infirmity in impugned order passed by Commissioner (Appeals) and the same was upheld. (A. Y. 2002-03 to 2003-04)ITO v. Zydus Altanta Health Care (P) Ltd. (2011) 44 SOT 132 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction-. Bad debts written off - International transactions. (S. 10B)Bad debts written off cannot be factor to determine the arm’s length price of any international transaction. The Transfer Pricing Officer had exceeded his limits in following a method not authorized under the Act or Rules. (A. Y. 2002-03-04).C. A. Computer Associates P. Ltd. v. Dy. CIT (2011) 8 ITR 142 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction- - Arm’s length price - Report of the TPO is not binding on the Assessing Officer - Proviso substituted w.e.f. 1st October 2009, operate only form Asst. Year 2009-10.The report of the TPO is not binding on the Assessing Officer. Assessing Officer can refer the matter to the TPO for determination ALP of an International taxation transaction or he may determine it on his own. Assessing Officer can determine the price of imports of his own. New proviso to section 92C(2) came in to operation from Asst. Year 2009-10 and therefore, did not apply to Asst. Year 2003-04, further, where only one price is determined in the matter of ALP, the option of five percent under proviso to section 92C(2) is not available to the assessee. (A. Y. 2003-04)ACIT v. UE Trade Corporation (India) Ltd. (2011) 136 TTJ 297 / 50 DTR 379 / 45 SOT 197 / 9 ITR 400 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction- - Arm’s length price. [Rule 10B(1)(e)]Under Chapter X of the Income Tax Act, 1961, the determination of the arm’s length price of an international transaction has to be only at the transaction level or at a class of transactions. The law does not permit determination of the arm’s length price of international transactions, by comparing margins at entry level or by taking overall industry level averages. The matter was set aside. (A. Y. 2002-03). Dy. CIT v. Ankit Diamonds (2011) 8 ITR 487 / 43 SOT 523 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction - If ALP determined by arithmetical mean, 5% deduction allowable.In determining the arms’ length price for transfer pricing purposes in respect of international transactions relating to ‘procurement Support Services’, it was held that pursuant to the First proviso to section 92C(2) (pre-amendment by Finance (No. 2) Act, 2009 w.e.f. 1.10.09) which provides that “where more than one price is determined by the most appropriate method, the arms length price shall be taken to be the arithmetical mean of such prices or at the option of the assessee, a price which may vary from the arithmetical mean of an amount not exceeding five per cent of such arithmetical mean” it is clear that the assessee has an option when there is arithmetical mean involved while computing the ‘arm’s length price’ and it happens only if more than one price is determined by the most appropriate method. The First Proviso becomes operational where more than one comparable price is determined. The assessee at his option can make claim of deduction out of the arithmetic mean not exceeding 5%. All the judicial pronouncements (SAP Labs India Pvt. Ltd. v. ACIT (2010) 6 ITR 81 (Bang.)(Trib.), Sony India P. Ltd. v. Dy. CIT (2009) 315 ITR (AT) 150 (Delhi), UE Trade Corp (Delhi), Essar Steel (Vizag) & Perot Systems TSI (India) Ltd. v. Dy. CIT (2010) 130 TTJ 685 (Delhi) are uniform in making the proposition that where arithmetic mean is involved, the assessee obtains the eligibility for claim of deduction out of such arithmetic mean. Cummins India Limited v. Dy. CIT (Pune)(Trib.) www.itatonline.org


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S. 92C : Avoidance of tax - Transfer pricing - International transaction-- Prior Years’ data cannot ordinarily be relied upon to justify ALP. Non-operating income & expenditure should be excluded while comparing.It was held that the assessee has to adopt the data available for the TP study at the time of filing of the return. The OECD guidelines are not of binding nature and even the Proviso to Rule 10B(4) provides that any subsequent year data cannot be considered. The contemporaneous data of relevant financial year is to be used for making the comparable analysis for arriving at the ALP unless it is proved otherwise. For arriving at the net margin of operating income, only operating income and operating expenses for the relevant business activity of the assessee has to be taken into consideration. Other income, such as dividend income, profit on sale of assets, donations as well as non-operating expenses which are included in the operating incomes of other comparable companies should be excluded as it effects the net margin of the operating profits of the comparables. Working capital adjustments also have to be considered while arriving at the operating net margins. Also the assessee is entitled to a standard deduction of 5% as provided under proviso to section 92C(2) before making adjustments of the transfer price. (Schefenacker Motherson Ltd. v. ITO & Others (2009) 123 TTJ 509 (Delhi) and SAP Labs India Pvt. Ltd. v. ACIT (2010) 6 ITR 81 (Bang.)(Trib.) followed). (A. Y. 2002-03)TNT India Limited v. ACIT (2011) 45 SOT 471 / 61 DTR 81 (Bang.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction- - For TNMM, interest on surplus and abnormal costs to be excluded.Where interest on surplus funds is assessed as “business income”, it has to be excluded in computing the ‘operating profits’ because if it is included, one is computing the “return on investment” which is an inappropriate profit level indicator for a service provider. As the PLI is the Operating Margin on Cost, neither the interest income nor interest expenses is a relevant factor. The essential element is the cost incurred for the operating activity which has to be taken into account. In computing the ALP, abnormal expenses which are not of a routine nature as well as those of a personal nature have to be excluded. The assessee has to demonstrate “exact details, exhibiting the risk born by the comparable vis-à-vis the risk in running the assessee’s business” (Sony India (P) Ltd. v. Dy. CIT (2008) 114 ITD 448 (Delhi) where a 20% adjustment was permitted distinguished). The benefit of +/- 5% adjustment is not a ‘standard universal deduction’. This option is available only when assessee is computing the ALP and not when the AO/TPO is computing the ALP. Marubeni India Private Ltd. v. ACIT (Delhi)(Trib.) www.itatonline.org

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Method - CUP method – TNMMThe assessee sold automobile wipers to its associated enterprise and claimed that as per the “Comparable Uncontrolled Price” (CUP) method, the transactions were at arms’ length basis. The TPO rejected the CUP method on the basis that the comparability of controlled and uncontrolled transactions was not established with certain degree of reasonableness and accuracy and that the conditions prevailing in the market were not established to be identical. The TPO adopted the TNMM and directed that an adjustment be made by adopting the mean profit of comparables. This was confirmed by the DRP. On appeal, HELD:(i) Under section 92C read with Rule 10B, the most appropriate method has to be applied for

determination of arm’s length price. In principle, the CUP method (the traditional transaction method) is preferable to the other methods because all other things being equal, the CUP and traditional transactional methods lead to more reliable results vis-à-vis the results obtained by applying transaction profit method (UCB India (P) Ltd. (2009) 121 ITD 131 and Serdia Pharmaceuticals (2011) 136 TTJ 129 followed);


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(ii) For the CUP method, the focus is on the market in which the products are sold by the assessee and any unique feature of the market in which assessee is situated is of no importance in relative terms. As the goods were sold by the assessee as well as the competitive Chinese manufacturers in the USA market, the market conditions in the territory of sale were the same. The buyer in the USA market will be more concerned with quality and price rather than economic conditions prevailing in China and India (SNF (Australia) Pty. Ltd. v COT (2010) FCA 635 referred to);

(iii) As regards the comparability of the products the assessee has to provide the sale data of the AE in terms of sale price of Chinese and assessee’s goods in the USA market and quantitative data of purchase of Chinese and Indian wipers by the AE and the terms of payment and the Assessing Officer shall compute the arm’s length price using this data on CUP method.

Clear Plus India Pvt. Ltd. v. Dy. CIT (Delhi)(Trib.) Source: www.itatonline.org

S. 92C : Avoidance of tax - Transfer pricing – Internatioanl transaction-Loss - Making and super-profit companies are not comparable.When loss making companies have been taken out from the list of comparables by the TPO, Zenith Infotech Ltd. which showed super profits should also be excluded. The fact that assessee has himself included in the list of comparables initially, cannot act as estoppel, particularly in light of the fact that the Assessing Officer had only chosen the companies which are showing profits and had rejected the other companies which showed loss (Dy. CIT v. Quark System (P) Ltd. (2010) 38 SOT 307 (SB) followed). (A. Y. 2006-07)Sapient Corporation Pvt. Ltd. v. Dy. CIT (Delhi)(Trib.) Source: www.itatonline.org

S. 92C : Avoidance of tax - Transfer pricing - International transaction - Operational profits - Low turnover. (i) The assessee’s argument that comparables with a turnover less than 20% of the assessee’s turnover should be considered is not acceptable because it is a universal fact that there are lot of differences between large businesses and small businesses operating in the same field. In the case of small business, economies of scale are not available and they are generally less profitable. The fact that such companies were considered comparable in an earlier year is not conclusive for want of facts of that year and also because there is no res judicata;(ii) The argument that segmental results of a company engaged in diverse activities should be considered is also not acceptable because it is a common experience that in many such results certain expenditures, particularly relating to interest and head office, are generally not allocated. When direct comparables are available, there is no need to consider segmented results;(iii) In principle, should be only the operating profit of the comparables considered. Items like interest income, rent, dividend, penalty collected, rent deposits returned back, foreign exchange fluctuations and profit on sale of assets do not form part of the operational income because these items have nothing to do with the main operations of the assessee. Insurance charges would depend on the nature of insurance charges. If the insurance charges were on account of loss of some parcel or courier against which courier has made a payment of compensation then such charges would constitute operational income. (A. Y. 2006-07).DHL Express (India) Pvt. Ltd. v. ACIT (2011) 46 SOT 379 / 12 ITR 658 / 140 TTJ 38 (Mum.)(Trib.)Editorial: See Also Adobe Systems India (ITAT Delhi) (super-normal profit companies to be excluded) & Marubeni India (ITAT Delhi) (interest on surplus & abnormal costs to be excluded)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Principles on use of multi-year data, turnover filter, risk adjustment & +/- 5% adjustment.


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(i) If the Transactional Net Margin Method (“TNMM”) is adopted, the comparison has to be made between the net margin realised from the operation of the uncontrolled parties’ transaction and net margin derived by the assessee on similar international transactions. The comparison should be between the net margins on transaction basis and not at enterprise level;(ii) Under section 92CA(3), the TPO is entitled to consider material in public domain which, though not available to the assessee at the time of the TP study, is relevant for the financial year;(iii) Ordinarily only the data pertaining to the financial year of the transaction can be considered. The proviso to Rule 10B(4) which permits the use of data relating to other than the financial year in which the international transaction has been entered into; being not more than two years prior to such financial year does not mean that one can insist on the use of multi-year data but it has a limited role only when the data of earlier years reveal facts which could have influenced on determination of the TP in relation to the transaction being compared. As the assessee has not made out a case that taking the data for only the current financial year will not present the correct and fair financial result of the comparables, the claim for multi-year data cannot be entertained;(iv) While in principle, comparables having an abnormal difference of turnover and distorted operating profits have to be excluded for determining the ALP, the claim that as the assessee revenue is about Rs. 20 crores, comparables having more than 50 crores and less than 5 crores of turnover should be excluded is not acceptable because no specific fact has been brought on record to show that due to the difference in turnover the comparables become non-comparables. It is accepted economic principle and commercial practice that in highly competitive market condition, one can survive and sustain only by keeping low margin but high turnover. Thus, high turnover and low margin are necessity of the highly competitive market to survive. Similarly, low turnover does not necessarily mean high margin in competitive market condition. Therefore, unless and until it is brought on record that the turnover of such comparables has undue influence on the margins, it is not the general rule to exclude the same that too when the comparables are selected by the assessee itself;(v) The argument that an adjustment should be made for difference in function and risk level is not acceptable because the assessee has not brought on record how such functional difference and risk has influenced the result of the comparables with quantified data. Further, the +/-5% adjustment as the 2nd Proviso to section 92C is intended to adjust for such differences;(vi) The department’s argument that the amendment by FA 2009 w.e.f. 1.10.2009 to the 2nd Proviso to section 92C with regard to the +/-5% variation from the arithmetic mean of the ALP is clarificatory and procedural and so retrospective is not correct.Symantec Software Solutions Pvt. Ltd. v. ACIT (Mum.)(Trib.) www.itatonline.org

S. 92C : Avoidance of tax-Transfer pricing –Interantional transaction-Principles on use of multi-year data, adjustment to operating profits & +/- 5% adjustment.(i) The rejection of comparables on the ground of non-availability of current year’s financial data is proper because under Rule 10B(4), only the current year’s financial data is relevant for determination of ALP except where it is shown that the data of the earlier two years reveals facts which could have an influence on the determination of the transfer price; (ii) A selected comparable should be functionally comparable. A company which is majorly dealing in other segments cannot be accepted as functionally comparable;(iii) There is no principle of law that if only one comparable remains, the entire exercise would fail;(iv) The argument that expenses incurred prior to the commencement of manufacturing activity hence should be excluded from operating expenses under Rule 10B(1)(e)(i) is not acceptable because operational expenses is that which is incurred to earn that income. Expenses with nexus with revenue have to be


considered as operational expenses and cannot be excluded only on the ground that the date of occurrence of the revenue is later and expenses have been incurred prior to that; (v) The assessee’s argument that the margins have to be recomputed after claiming adjustment of capacity utilization is not acceptable. Under the TNMM, the net profit margin actually realized has to be considered and there is no room for any assumption for taking the profit margin. It is not permissible to deviate from the book results on the ground of capacity utilization. Under Rule 10B(3)(ii), there cannot be any deviation in the net profit shown in the books of account and the adjustment, if any, can be made to the same to eliminate the material affects to such differences to the extent of these adjustments are reasonably accurate. As no credible and accurate information with regard to capacity utilization was furnished, adjustment was not allowable;(vi) The Proviso to s. 92C which gives the assessee the option to adjust the ALP by +/- 5% is applicable only where more than one price is determined by the most appropriate method. In a case where only one price is determined by the most appropriate method, the benefit of +/- 5% is not available to the assessee. ( Asst year 2006-07).Haworth (India) Pvt. Ltd. v. Dy. CIT (2011) 131 ITD 215 / 58 DTR 36 / 11 ITR 757 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Loss / High – Profit cost need not per se be excluded.The assessee rendered three services to its AE and while it received a mark-up for “application of technical development services” and “promoting the licensing of technology”, it did not receive any mark-up for “application research”. The argument that the three activities should be aggregated to determine the ALP is not acceptable because the entire benefit of the “application research” was retained by the AE and not shared with the assessee and so there was no justification for not compensating the assessee; While in principle, it is correct that if loss making units are excluded, abnormal profit making units should also be excluded, on facts, the TPO had rightly rejected the loss making companies as not being comparable. In principle, neither loss making units nor high profit making units can be eliminated from the comparables unless, there are specific reasons for eliminating the same which is other than the general reason that a comparable has incurred loss or has made abnormal profits. Exxon Mobil Company India Pvt. Ltd. v. Dy. CIT (Mum.)(Trib.) www.itatonline.org

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Comparison - Quality - Size.Without ascertaining the quality and size of precious stones as sold to Associated Enterprise as compared to other enterprises, the Assessing Officer could not have made any adjustment on account of quality, and therefore, the addition made by Assessing officer on account of ALP was liable to be deleted. (A. Y. 2005-56).ITO v. Kanchan Tara Exports (2011) 138 TTJ 592 / 47 DTR 420 (Jp.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Net margin - Adjusted book profits.While determining arm’s length price, it is profit as per books of account that has to be considered for computing net margin of assessee and not adjusted book profits. (A. Y. 2006-07).Geodis Overseas (P) Ltd. v. Dy. CIT (2011) 45 SOT 375 / 57 DTR 191 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Selection of comparable. [S.10B(1)(e)]The Assessing Officer had accepted the license fees for the month of February and March, 2003 to be at arm’s length . However, the steep increase given from the beginning of the year with retrospective effect


has not been accepted. CIT(A) has accepted the computation made by the assessee, based on the comparable as well as department has accepted the method of computation for the Asst. Year 2004-05. The Tribunal restored the matter to the file of Assessing Officer for re working of the transfer pricing adjustments using TNMM on the basis of facts and figures available for Asst. Year 2003-04 in respect of the comparable selected by the assessee. (A. Y. 2003-04).ACIT v. NCG Network (India) (P) Ltd. (2011) 56 DTR 1 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Computation of arm’s length price - Provision for import duty.Provision for import duty made by the assessee which has been reversed in the immediately succeeding year being merely a book entry, is to be excluded for working out the operating profit ratio for computation of ALP (A. Ys. 2005-06 & 2006-07).Sony India (P) Ltd. v. Addl. CIT (2011) 56 DTR 156 / 141 TTJ 432 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Computation - Expenses of personal nature - Compensation – Interest income on investment - Benefit of 5%.In computing ALP, expenses in the nature of abnormal items or personal nature are to be excluded from operating cost. Where the assessee had failed to bring any evidence on record to show that there exists any difference in the risk profile of the comparable companies vis-à-vis the assessee, no benefit of adjustment to be given to assessee in determination of ALP. Benefit of 5 percent provided in the proviso to section 92C(2) is available only when assessee is computing the ALP and not when the Assessing Officer / TPO is computing the ALP. Interest income on investment should be excluded from operating income while working out ALP. When, by virtue of closing down certain branches, assessee has reduced the cost of AE and if such a closure has a direct link with the international transaction and compensation received for such a closure cannot be excluded from operating expenses.(A. Ys. 2002-03, 2003-04).Marubeni India (P) Ltd. v. Addl. CIT (2011) 56 DTR 252 (Delhi)(Trib.)

S. 92C : Avoidance of Tax - Transfer pricing –International transaction- Computation – Comparable – Adjustment.Transfer Pricing Officer having excluded the loss making companies from the list of comparables in the transfer pricing analysis, one company which showed the super profits is also to be excluded as it is engaged in software product company. Where as the assessee is engaged in rendering soft ware development services in OP/TC of the assessee is with the safe harbour range of +5 percent, no adjustment is warranted on account of difference in ALP of the international transaction. (A. Y. 2006-07).Sapient Corporation (P) Ltd. v. Dy. CIT (2011) 56 DTR 465 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Computation - Selection of comparables and maintenance of documents. (Rule 10D)Each transaction of sale made by the assessee to its AE in UK being a separate transaction and there being no subsisting agreement between the assessee and the AE from beginning in 1996, proviso to Rule 10(4) is not applicable to the facts of the case and therefore, assessee was required to maintain documents as per Rule 10D. Cases relied upon by the TPO not being comparable cases, matter is restored to the Assessing Officer to obtain data of comparable cases so as to come to an informed decision as to whether the price charged by the assessee from its AE is arm’s length or not. (A.Y. 2006-07).Airtech (P) Ltd. v. Dy. CIT (2011) 57 DTR 169 / 139 TTJ 318 / 45 SOT 100 (DelhI)(Trib.)


S. 92C : Avoidance of tax – Transfer pricing –Internatioanl transaction- Comparables – Domestic - ExternalAssessee having cited six comparables, TPO / Assessing Officer was not justified in rejecting the same and applying domestic transactions of the assessee when the Assessing Officer / TPO has accepted said six external comparables in the subsequent assessment year and there is similarity of facts in both the years, further the assessee is entitled to economic adjustments in the circumstances of under capacity utilization of the company, matter is set a side for examining the issue de novo. (A. Y. 2006-07).Bringtons Carpets Asia (P) Ltd. v. Dy. CIT (2011) 57 DTR 121 / 139 TTJ 177 (Pune)(Trib.)

S. 92C : Avoidance of tax – Transfer pricing – International transaction-Computation - Arm’s Length Price - One price determined - Concession prescribed in proviso.The Hon’ble Tribunal held that, where there was shortage of price in respect of transactions entered with AE vis-à-vis NAE the Assessing Officer was right in rejecting the contention that price need not be disturbed as one declared by assessee was less than 5% variation in transaction with AE and NAE relying on CBDT circular No.12 dated 23/8/2011. The Tribunal further observed that Proviso, for which Circular No. 12 was issued had never come into operation and hence, question of administration of said proviso to section 92C(2) did not arise at all. Subsequent amendment brought in Finance Act, 2002, said circular had became otiose therefore the assessee could not place reliance on circular No. 12 and for relevant year under consideration only proviso to section 92C(2) as amended by Finance Act, 2002 was applicable. Since in the instant case, only one price had been determined under “most appropriate method” assessee was not entitled to concession, as prescribed in proviso to section 92C(2), hence, the order of Assessing Officer was confirmed. (A. Y. 2004-05).ACIT v. Essar Steel Ltd. (2011) 131 ITD 22 / 136 TTJ 470 / 51 DTR 177 (Vizag)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction – Comparable - Financial information - Bad debt. [S. 36(1)(vii)]TPO can use financial information available at the time of assessment, though it was not available at the time of study. It is impossible to have a perfect comparable without any difference or variation regarding turnover, risk profile and functional differences and therefore, legislature has provided a margin of +5% while determining the ALP; therefore, when assessee is having such benefit of choice / option provided by second proviso to section 92(C)(2), no separate adjustment is required on account of risk and functional differences. Further, amendment in second proviso to section 92C(2) is not retrospective but is prospective from day from which this amendment is effected. i.e. 1-10-2009. There is no difference between first and second limb of proviso to section 92C(2) as far as right of assessee to challenge determined price concerned: Second limb only allows marginal relief to an assessee at his option to take ALP not exceeding 5 percent of arithmetic mean and therefore, benefit of second limb of proviso to section 92C(2) is available to all assessees irrespective of fact that price of international transaction disclosed by them exceeds margin provided in said proviso. During the year assessee had written off certain amount as bad debt, which represented excess commission charged by it from its foreign associated enterprise and claimed deduction of same, the Tribunal held that it is irrelevant for purpose of determining arm’s length price for international transaction whether actual price charged by an assessee in relation to international transaction is less or excessive and therefore, deduction of bad debt was not allowable. (A. Y. 2004-05).Symantec Software Solutions (P) Ltd. v. ACIT (2011) 46 SOT 48 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Arm’s length price - Selection of comparables.


Exact nature of the business needs to be taken in to consideration vis-à-vis the nature of business activity carried on by other parties so as to ascertain whether the said parties can be selected as comparable cases for transfer pricing analysis; Four companies included by the assessee company, there was no justifiable reason to select the same as comparables; however, exclusion of companies showing supernormal profits as compared to other comparable is fully justified. (A. Y. 2004-05). Teva India (P) Ltd. v. Dy. CIT (2011) 57 DTR 212 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation of arm’s length price - Adjustment of 5% to single price determined by the assessee.Adjustment of 5% is not applicable if a single price is determined by the assessee. Circular No. 12 dated 23-8-2001 does not apply to the case under consideration as the price variation is more than 5%. (A. Y. 2004-05).ADP (P) Ltd. v. Dy. CIT (2011) 57 DTR 310 (Hyd.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Comparable.In view of the fact that annual reports / data base extracts of three companies which were selected as comparable cases were not available earlier in the public domain and having regard to the fact that these documents are essential for determining ALP, these additional evidences are admitted for consideration: TPO is directed to make a fresh transfer pricing order by taking in to account database of said companies now submitted and also to decide as to whether all the comparables selected by the assessee are proper comparables for the purpose of determining ALP after considering the relevant parameters. (A. Y. 2005-06).ACIT v. NIT Ltd. (2011) 57 DTR 334 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation – Arm’s length price - 5% variation in ALP.When assessee showed the price charged was with in 5% variation of ALP, no addition was required to be made. (A. Y. 2006-07).Capgemini India (P) Ltd. v. Addl. CIT (2011) 46 SOT 195 / 139 TTJ 211 / 57 DTR 55 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Important principles on comparability & +/-5% adjustment stated.(i) The expression “shall” in Rule 10B(4) makes it clear that it is mandatory to use the current year data first and if any circumstances reveal an influence on the determination of ALP in relation to the transaction being compared than other data for period not more than two years prior to such financial year may be used. If the current year’s data of comparables is not available at the time of filing the ROI a fresh search of comparables during the transfer pricing proceedings is permissible;(ii) The +/-5% tolerance band in section 92C is not a standard deduction. If the arithmetic mean falls within the tolerance band, then there should not be any ALP adjustment. If it exceeds the said tolerance band, ALP adjustment is not required to be computed after allowing the deduction at 5%. That means, actual working is to be taken for determining the ALP without giving deduction of 5%;(iii) The transfer pricing rules apply when one of the parties to the transaction is a non-resident, even if the transaction takes place within India. There is no need to find out the legislative intent behind the transfer pricing provision when the provisions were unambiguous. The existence of actual cross border transactions or motive to shift profits outside India or to evade taxes is not a pre-condition for transfer pricing provisions to apply. (A. Y. 2004-05)Dy. CIT v. Deloitte Consulting India Pvt. Ltd. (2011) 61 DTR 101 (Hyd.)(Trib.)


S. 92C : Avoidance of tax - Transfer pricing –International transaction- Disallowance of costs on ground that AE also benefited not permissible.(i) A continuing debit balance per se, in the account of the associated enterprises, does not amount to an international transaction under section 92B in respect of which ALP adjustments can be made. It is a result of international transaction. The factum of payment has to be considered vis-à-vis terms of payment set out in the transaction arrangement, and not in isolation with the commercial terms on which transaction in respect of which payment is delayed. (Nimbus Communications followed);(ii) Under section 92B(1), the apportionment of cost is permissible only where there exists a “mutual agreement or arrangement” between two or more Associated Enterprises for apportionment of cost incurred in connection with a benefit, service or facility provided to any one or more of such Enterprises. In the absence of such an agreement to share the costs incurred on the McKinsey study, the costs cannot be apportioned. The bare allegation that the AE’s had received “specific and identifiable benefits” is not sufficient to justify apportionment. Further, even assuming that the AEs were liable to compensate the assessee, the TPO ought to have determined the ALP of such “international transaction” after taking into consideration all the rights obtained and obligations incurred by the two entities, including the advantages obtained by the AEs. He ought to have identified comparables and recorded a finding that the consultancy charges were higher than what a similarly situated and comparable independent domestic entity would have incurred. (A. Y. 2002-03 & 2003-04)Patni Computer Systems Ltd. V. Dy. CIT (2011) 60 DTR 113 / 141 TTJ 190 (Pune)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- CBDT’s view that +/-5% variation amendment applies to pending proceedings incorrect.In respect of A.Y. 2006-07, the assessee entered into international transaction with its associate enterprises for a sum of Rs.14.33 crores. The TPO applied the TNMM and determined the ALP at Rs. 15.08 crores and made an adjustment of Rs. 75 lakhs. The assessee claimed that as the said adjustment was within +/-5% of the ALP, no adjustment could be made under the proviso to section 92C(2) as it stood pre-amendment by the F (No. 2) Act, 2009. The Department relied on Circular No. F. 142/13/2010-SO (TPL) dated 30.9.2010 (Corrigendum) where the view was expressed that as the amendment came into effect from 1.10.2009, it would apply in relation to all cases in which proceedings are pending before the Transfer Pricing Officer on or after such date. HELD disagreeing with the Department’s contention:While the Finance (No.2) Act, 2009 provides that the substituted Proviso shall come into effect on 1.10.2009 and applies in respect of A. Y. 2009-10 & subsequent years, the Explanatory Notes to the Finance (No.2) Act, 2009 issued vide Circular No.5/2010 dated 3.6.2010 incorrectly states that the amendment comes into effect on 1.4.2009. In the Corrigendum, it is stated that the amendment shall apply to proceedings pending before the TPO on or after 1.10.2009. It is difficult to accept the argument of the Department that retrospective or prospective applicability of a provision should be decided in the manner explained by the CBDT. A procedural provision resulting in creating a new disability or which imposes a new duty in respect of transactions already completed cannot be applied retrospectively. As the amended Proviso brings about a substantial change in the relief available to an assessee, it cannot be treated as being retrospective in nature. Kuber Tobacco Products (P) Ltd. v. Dy. CIT (2009) 117 ITD 273 (Delhi)(SB) & ITO v. Ekta Promoters (P) Ltd. (2008) 113 ITD 719 (Delhi)(SB) followed. (A. Y. 2006-07)iPolicy Network Pvt. Ltd. v. ITO (2011) 59 DTR 209 (Delhi)(Trib).

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Despite FAR matching, Loss Co. to be excluded.


From the list of comparables provided by the assessee (after excluding persistent loss-making companies), the TPO rejected some other loss-making companies & determined the ALP applying the TNMM and made an adjustment of Rs. 2.28 crores. The Tribunal dismissing the appeal held that :Merely because a company is showing losses, it does not lose its status of comparable if the other criteria depict its status as a comparable because the declaration of loss is an incident of business which is at par with profit. The FAR Analysis of a company indicated the avowed objective of the company and the tools that it sought to employ to achieve that objective but it was the financial result which decided whether that company has been successfully in achieving the objective or not. The TPO held that if the assessee’s contention based on FAR analysis only is accepted then the process of choosing comparable will not proceed beyond the matching of FAR. All types of other tests i.e. data base screening, quality and quantitative screening or use of diagnostic with ratios will be rendered meaningless and unnecessary. Comparablity has been taken into consideration by the assessee on the basis of FAR analysis and “other aspects” have not been considered. TPO had looked into “other aspects” also. Yum Restaurants (India) Pvt. Ltd. (Delhi)(Trib) www.itatonline.org

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation - CUP method - TNMM.TPO having computed the ALP by applying CUP method as against TNMM adopted by the assessee and rejecting the objections raised by the assessee on the ground that all those objections were considered by the TPO in earlier years. The assessee having raised various submissions before the Tribunal which need verification at the level of the Assessing Officer / TPO matter restored for fresh verification as per law. (A. Y. 2006-07).Fulford (India ) Ltd. v. Dy. CIT ( 2011) 59 DTR 106 / 140 TTJ 183 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation - Cup method.Where no data was available in respect of uncontrolled transactions which were similar to transactions of assessee with its foreign associated enterprise, CUP method could not be considered as most appropriate method to determine arm’s length price of royalty by assessee to its AE for technology collaboration. Tribunal set a side matter to the file of Assessing Officer with direction to do the exercise of determining the arm’s length price by applying the most appropriate method. (A. Y. 2005-06). Cabot India Ltd. v. Dy. CIT (2011) 46 SOT 402 / 61 DTR 408 (Mum)(Trib)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Interest on loan granted by assessee to AE.In case of grant of loan by assessee to its foreign subsidiary in foreign currency out of its own funds. For determining ALP, it is the international LIBOR rate that would apply and not the domestic prime lending rate and assessee charging interest at a rate higher than the labor rate, no addition can be made on this count. (A. Y. 2006-07). Siva Industries & Holdings Ltd. v. ACIT (2011) 59 DTR 182 (Chennai)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing- International transaction-“Cost Contribution Agreements” - Law Explained – Commercial wisdom not to be questioned.The assessee entered into a ‘cost contribution agreement’ with its parent company pursuant to which it paid a sum of Rs. 10.55 crores as its share of the costs. The TPO, Assessing Officer & DRP disallowed the expenditure. On appeal by the assessee, the Tribunal held that (i) The TPO was not entitled to determine the ALP under the cost contribution agreement at “Nil” on the basis that the assessee did not need the


services at all. How an assessee conducts his business is entirely his prerogative and it is not for the revenue authorities to decide what is necessary for an assessee and what is not. The TPO went beyond his powers in questioning the commercial wisdom of the assessee’s decision to take benefit of its parent company’s expertise. Further, the TPO’s argument that the assessee did not benefit from the services is irrelevant because whether there is benefit or not has no bearing on the ALP of the services. The fact that similar services may have been granted in the past on gratuitous basis is also irrelevant in determining the ALP. The argument that no evidence of services having been rendered was produced is not acceptable because the assessee did produce voluminous evidence before the DRP which was not dealt with. The DRP ought to have dealt with the material and given reasons. Matter remanded to the Assessing Officer to determine actual rendering of services (Vodafone Essar Ltd. v DRP 240 CTR 263 (Delhi) followed);(ii) A cost contribution arrangement has to be consistent with the arm’s length principle. The assessee’s share of overall contribution to costs must be consistent with the benefits expected to be received, as an independent enterprise would have assigned to the contribution in hypothetically similar situation. (iii) The disallowance of payment under the ‘cost contribution agreement’ under section 37(1) & 40A(2) is not justified because the payment did not involve mark-up and was at arms length price. The services were for furtherance of the assessee’s business interests; (iv) The disallowance of payment under section 40(a)(i) for want of TDS is not justified because the payment was not taxable in the AE’s hands under Article 5 & 12 of the India-USA DTAA as the AE did not have a PE and the services did not constitute “fees for included services”. (GE India Technology Centre 327 ITR 456 (SC) followed);(v) The TPO’s argument that in charging for the services rendered to the AE, a 10% discount could not be given is not acceptable. Discount is a normal occurrence even in independent business situations. The material factor is whether the 10% discount is an arm’s length discount and there is nothing on record to suggest that it is not so. (A. Y. 2006-07)Dresser-Rand India Pvt. Ltd. v. ACIT (2011) 141 TTJ 385 / 61 DTR 265 / 47 SOT 423 / (2012) 13 ITR 422 (Mum.)(Trib.)

S. 92C : Avoidance of Tax - Transfer pricing –Internatioanl transaction- Sale of IPRs - Important Principles of Law Explained.There is nothing in section 92CA that requires the Assessing Officer to first form a “considered opinion” before making a reference to the TPO. It is sufficient if he forms a prima facie opinion that it is necessary and expedient to make such a reference. The making of the reference is a step in the collection of material for making the assessment and does not visit the assessee with civil consequences. There is a safeguard of seeking prior approval of the CIT. Moreover, by virtue of CBDT’s Instruction No.3 of 2003 dated 20.5.2003 it is mandatory for the Assessing Officer to refer cases with aggregate value of international transactions more than Rs.5 crores to the TPO. The argument that the “Excess Earning Method” adopted by the TPO is not a prescribed method is not acceptable. A sale of IPR is not a routine transaction involving regular purchase and sale. There are no comparables available. The “Excess Earning Method” is an established method of valuation which is upheld by the U.S. Courts in the context of software products. The “Excess Earning Method” method supplements the CUP method and is used to arrive at the CUP price i.e. the price at which the assessee would have sold in an uncontrolled condition. (A. Y. 2004-05) Tally Solutions Pvt. Ltd. v. Dy. CIT (2011) 130 TTJ 234 / 8 ITR 434 (Bang.)(Trib.)

S. 92C : Avoidance of Tax - Transfer pricing – International transaction - Principles of “Comparable Uncontrolled Transaction” explained.


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Under Rule 10B(1)(e)(ii), “the net profit margin realized by the enterprise or by an unrelated enterprise from a comparable uncontrolled transaction or a number of such transaction is computed having regard to the same base. The term “uncontrolled transaction” is defined in Rule 10A(a) to mean “a transaction between enterprises other than associate enterprises, whether resident or non-resident”. The result is that in applying the TNMM, the net profit margin realized from a comparable uncontrolled transaction is to be taken into consideration. The conditions require that a case should not only be comparable but also have uncontrolled transactions. These twin conditions need to be cumulatively satisfied. If a case is only comparable but has controlled transactions or vice-versa, it falls outside the ambit of the list of comparable cases; The fact whether the comparable has a higher or lower profit rate has not been prescribed as a determinative factor to make a case incomparable. This is because profit is not a factor in itself, but a consequence of the effect of various factors. Only if the higher or lower profit rate results on account of the effect of factors given in Rule 10B (2) read with sub-rule (3), that such case shall merit omission. If however such extreme profit rate is achieved because of factors other than those given in the rule, then such case would continue to find its place in the list of comparables. (A. Y. 2004-05)Dy. CIT v. BP India Service Pvt. Ltd. (2011) 133 ITD 255 / 63 DTR 178 / 48 SOT 253 (Mum.)(Trib.)

S. 92C : Avoidance of Tax - Transfer pricing –International transaction- Methods of computing ALP - Important Principles of Cost Plus, CUP & TNMM Explained.The assessee, engaged in the business of manufacture and export of studded diamond and gold jewellery, imported & exported diamonds and exported jewellery to associated enterprises. For transfer pricing purposes, the ALP of the imported & exported diamonds was evaluated using the “Comparable Uncontrolled Price” (CUP) method while the exports of jewellery was evaluated using the “Cost Plus Method” (CPM). The TPO & Assessing Officer rejected both methods on the ground that adequate material to support it was not available and instead adopted the TNMM and made an adjustment. On appeal, the CIT(A) upheld the adoption of CPM on the imports & exports of diamonds on the ground that total cost details were maintained and the average margin earned from AE transactions was higher than that earned from non AE transactions. However, he did not deal with the ALV on export of jewellery. On appeal by the department, HELD reversing the CIT(A):(i) As regards the CPM, it had not been correctly applied. The application of CPM provides for (a) ascertaining the direct and indirect costs of property transferred, or services rendered, to the AE; (b) ascertaining the normal mark up of profit over aggregate of costs in respect of similar property or services to unrelated enterprises and (c) adjusting the normal mark up for differences, if any, in the material factors such as risk profile, credit period etc. While the benchmark gross profit can be set by taking into account several transactions with unrelated enterprise on a ‘global basis’, the benchmark cannot be applied on a global basis but has to be on a transaction basis. Eg. if the benchmark GP is 20% and the assessee charges a mark-up of 2% in one transaction with AE and 38% in another transaction with the AE, both transactions, will meet the ALP test resulting in an incongruity. On facts, while the normal mark up has been computed at 16.31%, and the average of mark up on sales to AEs has been taken at 17.08% and all AE transactions taken to be at ALP, there are individual instances which are less than the benchmark. This is not the correct way to apply the CPM. Also, the costs of inputs have not been verified and it is not shown that the terms of sale to the AEs and all other relevant factors are materially similar to the transactions with independent enterprises. Also, the CPM has been applied by comparing gross profit on sales, whereas the method requires comparison of mark up on costs on transactions with AEs vis-à-vis mark up on costs on transactions with non AEs (matter remanded to CIT (A) for de novo consideration);


(ii) As regards the CUP for import & export of diamonds (which was not decided by the CIT (A)), the assessee ought to have produced evidence to show that the transactions are at prevailing market prices;(iii) As regards the TNMM, International transactions with AEs have three significant areas of impact on the overall profitability i.e. sales of finished goods to AEs, sales of raw materials to AEs and purchase of raw materials of AEs), and if the ALP cannot be reasonably determined by CUP or any other direct method (i.e. CPM and RPM) in respect of even one of these areas, the application of TNMM or other indirect method ( i.e. profit split method) is inevitable. On a conceptual note, when ALP of the transactions with AEs cannot be reasonably ascertained, the profit earned by the assessee entering into these transactions is to be estimated, and that is precisely what TNMM does. When TNMM is applied in the context of sales of finished goods to AEs, it is this figure which is taken as variable figure and it bears the impact of higher margins, and when TNMM is applied in the context of purchases of raw materials from AEs, it is the figure of purchases of raw material from AEs which is taken as variable figure and it bears the impact of higher margins. Beyond that, the cause of invoking TNMM does not make much material difference (point whether TNMM has to be applied to the transactions and not on overall profits left open);(iv) The argument, relying on Indo American Jewellery Ltd 41 SOT 1, that no ALP adjustment can be made as the assessee enjoys s. 10A tax benefits and has no “motive” to avoid tax is not acceptable because those observations are “obiter dicta” without binding force and in view of Aztech Software 107 ITD SB 141 where it was held that tax avoidance motives need not be shown before invoking transfer pricing provisions. ACIT v. Tara Ultimo Private Limited (2011) 63 DTR 333 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Computation – Data - Selection of comparable - 5% Adjustments.The expression “shall” has been used in Rule 10B(4) which makes it abundantly clear that only current year data of an uncontrolled transaction is to be used for the purpose of comparability while examining the international transactions with AEs, unless the case is covered by the proviso i.e. if the data of preceding two years reveals facts which could have an influence on the determination of transfer price. Assessee company being engaged in producing semiconductor integrated circuits is a complex product requiring skilled workforce. TPO was justified in treating it as high end service provider for the purpose of selection of comparables. The fact that the assessee’s role is only 2 to 3 percent of the overall operations performed by the group is not at all relevant for deciding whether it is high end performer or low end performer. Assessee having submitted a TP report every year by using different filters for selecting comparables are commensurate to the result declared by it . TPO was justified in rejecting the same and selecting new comparables by applying quantitative as well as qualitative filters. Tolerance band provided in the proviso to section 92C(2) is not to be construed as a standard deduction. If the arithmetic mean of comparables falls with in range of said tolerance band , no adjustment is required , if it exceeds then the ultimate adjustment is not required to be computed after reducing the arithmetic mean by 5 percent. (A.Ys. 2003-04, 2004-05, 2006-07).ST Microelectronics (P) Ltd. v. CIT (2011) 61 DTR 1 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation - Arm’s length - Designing, developing and maintenance of web sites.As per agreement between assessee and “Kll” assessee was to receive service charges as per specified direct cost plus mark up of 80 percent. Assessing Officer took the view that said method of determining ALP was not reliable and thus he proposed to determine ALP under section 92C(3) .Assessing Officer issued the notice to assessee asking to explain as to why net margin of 20 percent should not be taken which was prevalent profit in said line of business. However subsequent to issue of notice, the Assessing Officer


himself gathered data in respect of profitability of some companies engaged in providing software services and determined ALP on basis of cost plus mark up of 80 percent. In appeal CIT(A) called for remand report in which Assessing Officer admitted that business of three companies was different. CIT(A) deleted the addition. The Tribunal held that the Assessing Officer had relied upon uncomparable the CIT(A) was justified in deleting the addition. (A. Ys. 2002-03 to 2003-04).ITO v. Kawin Interactive (P) Ltd. (2011) 133 ITD 29 / 64 DTR 33 / 142 TTJ 665 / (2012) 13 ITR 290 (Ahd.)(TM)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation - Arm’s length - Most appropriate method – CUP -TNMM.Simply because the comparable transactions are available only in respect of 9 products, it does not mean that the CUP method is to be rejected. TPO was not justified in adopting CPM and in comparing the gross margin in export segment vis-à-vis gross margins in domestic segment of assessee without appreciating that the CUP or TNMM was the most proper method for determining the ALP. TPO is directed to accept claim of the assessee regarding the ALP based on TNMM which method has been accepted in the succeeding year. (A. Y.2006-07). Drilbits International (P) Ltd. v. Dy. CIT (2011) 62 DTR 171 / 142 TTJ 86 (Pune)(Trib.) S. 92C : Avoidance of tax - Transfer pricing – International transaction-Computation - Arm’s length - Cost plus method - Gross profit mark up - 5% adjustments.Assessee is selling the manufactured products both in the domestic as well as in the foreign market. Assessee is exporting completely finished products in the same manufacturing unit with the same raw material with mostly unrelated cost base, therefore, the cost plus method is most appropriate method to determine the ALP. In respect of assessee’s international transactions, internal cost plus method taking profit / direct cost of production as PLI was justified, giving due weightage to the relevant factors including small market and credit risk, Assessing Officer is directed to adopt 60 percent as profit margin mark-up on the direct cost. Regarding applicability of proviso to section 92(C)(2), when variation exceeds 5 percent of the ALP the assessee shall not get benefit. (A.. Y. 2006-07).Wrigley India (P) Ltd. v. Addl. CIT (2011) 62 DTR 201 / 142 TTJ 23 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Computation - Arm’s length - Net margin – TNMM – Segmental financials - Bad debts – Foreign exchange fluctuations - Interest on foreign exchange loan - Corporate guaranteeFor computing the net margin of assessee only the cost related to the transactions with AEs has to be considered and accordingly, segmental financials are to be used for arriving at the net margin on international transactions. Bad debts which are not being relatable to the transactions with AEs have to be excluded. Foreign exchange loss should be considered while computing the net margin for the international transactions. Rate of interest in respect of foreign currency loan in the international market is to be on LIBOR , matter was remitted to the Assessing Officer to verify the actual average LIBOR which prevailed in the financial year under consideration and adopt the same. Corporate guarantee provided by the assessee does not fall within the definition of international transaction, hence no adjustment is required in respect of corporate guarantee transaction, because corporate guarantee is incidental to assesses business and there is no guidelines provided. (A. Y. 2006-07).Four Soft Ltd. v. Dy. CIT (2011) 62 DTR 308 / 142 TTJ 358 (Hyd.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction-Computation - Arm’s length - Processing charges.


The Tribunal held that the personnel cost of processing has gone up the same cannot be the basis for assuming that the processing income of the assessee also should go up, accordingly the Tribunal deleted the substantial adjustment made by the TPO in the computation of ALP on the basis of labour cost to revenue ratio of the previous year without citing any comparable case. (A. Y. 2005-06).Dy. CIT v. Hope (India) Polishing Works (P) Ltd. (2011) 62 DTR 449 / (2012) 49 SOT 138 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing –International transaction- Comparables - If TPO does not give cogent reasons to reject a comparable, it must be presumed to be comparable & DR cannot argue to the contrary.The assessee, a captive service provider rendering back office support services to its AEs, earned an adjusted Net Cost plus Margin of 7.90%. The assessee adopted TNMM and computed the mean of margins earned by the comparables at 7.62%. The TPO held that “No companies were identified as comparables” by the assessee and after selecting 12 companies as comparables, determined an arithmetic mean of 27.80% and made an adjustment of Rs. 10.49 crores. The CIT(A) deleted the addition. On appeal by the department, HELD dismissing the appeal:(i) The TPO was wrong in stating that the assessee has not provided any comparables. The initial prerogative of choosing comparable cases is always that of the assessee because it is the best judge to know the exact services rendered by it and finding the comparable cases from the data base. If the TPO wants to exclude any of such comparables, he has to justify the exclusion by adducing cogent reasons and cannot act on whims and fancies. If the TPO fails to show expressly as to how the cases are not comparable, a presumption has to be drawn that those cases are comparable;(ii) The department’s argument that even if the TPO had not given reasons to exclude the assessee’s comparables, the CIT(A) ought to have done so is not acceptable. Going by the presumption of acceptability of such cases, the appellate authority is under no duty to check whether the work was properly done by the Assessing Officer / TPO to the prejudice of the assessee. The fact that the CIT(A) has the power to enhance does not mean that he has a duty to do so;(iii) The Dept. Representative, while arguing the appeal, cannot improve the order of the Assessing Offficer / TPO by contending that the TPO was wrong in accepting a particular claim of the assessee. While the DR has the duty to defend the order of the TPO, he cannot find flaws in the order of the TPO in an attempt to show that the TPO failed to do what was required to be done by him. If the DR is allowed to fill in the gaps left by the TPO it would amount to conferring the jurisdiction of the CIT under section 263 to the DR. The DR cannot be allowed to take a stand contrary to the one taken by the TPO. Accordingly, the DR cannot be allowed to argue that certain cases included by the assessee in the list of comparables, were in fact not comparable, when the TPO failed to point out as to how such cases were distinguishable (Mahindra & Mahindra 122 TTJ 577 (Mum)(SB) followed, Quark Systems 38 SOT 307 (Chd)(SB) distinguished). ACIT v. Maersk Global Service Center India (P) Ltd. (2011) 133 ITD 543 (Mum.)(Trib.)

S. 92C : Avoidance of tax -Transfer pricing – International transaction-Computation - Arm’s length - Import of coal - Not furnishing any comparable Data. Assessee has imported Coal from its Associate Enterprise, which according to the Assessing Officer were over invoiced. The assessee has not furnished any comparable data. The Transfer Pricing Officer has worked out the adjustment amount exactly on the basis of price variation between the companies. The Tribunal held that this was most simple and acceptable method. The Tribunal up held the addition. (A. Y. 2006-07).Coastal Energy P. Ltd. v. ACIT (2011) 12 ITR 347 (Chennai)(Trib.)


S. 92C : Avoidance of tax - Transfer pricing - International transaction – Computation - Arms length - Cost plus - Mark up – Resjudicata - Each assessment is a separate unit.When the Associated Enterprise is receiving the compensation at FOB value and the assessee which is providing critical functions with the help of tangible and unique intangibles developed over the years and with the help of tangible and management which are important to achieve the strategic and pricing advantages, cost plus 5 percentage mark up is definitely not on arm’s length while working out the compensation for the services rendered by the assessee to the Associated enterprise; in such a situation, mark up on the FOB value of the goods sourced through the assessee shall be the most appropriate method to work out the correct compensation at ALP; distribution of compensation received by Associated Enterprise @ 5 percent of the FOB value of the exports between the assessee and Associated Enterprise should be in the ratio of 80:20. (A. Y. 2006-07).Li & Fung (India)(P) Ltd. v. Dy. CIT (2011) 64 DTR 73 / (2012) 143 TTJ 201 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction - Motive to shift the profits out side India or to evade taxes in India is irrelevant.Where a transaction is entered in to by Associated enterprise being resident and a non resident, the transaction shall amount to an international transaction falling under section 92B(1) and Chapter X is applicable; once the transactions fall under the category of international transactions the transfer pricing mechanism dies get activated and the fact that there is no motive to shift the profits outside India or to evade taxes in India, is irrelevant. (A. Y. 2006-07).ITO v. Tianjin Tianshi India (P) Ltd. (2011) 64 DTR 98 / 133 ITD 123 (Delhi)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction – Computation - Arm’s length price - Selection of comparables - Rule 10D.The TPO has rejected the companies which are making losses as comparables. This shows that there is a limit for the lower end identifying the comparables. Similarly a big company would also be in a position to bargain the price and also attract more customers. It would also have a broad base of skilled employees who are able to give better out put. When companies which are loss making are excluded from comparables, then the super profit making companies should also be excluded; for the purpose of classification of companies on the basis of net sales or turnover, a reasonable classification has to be made, matter remanded for reconsideration, after providing an opportunity. (A. Y. 2006-07).Genisys Integrating Systems (India) (P) Ltd. v. Dy. CIT (2011) 64 DTR 225 (Bang.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction – Computation - Arm’s length price - CUP method - TNM method. (Rule 10B)Assessee was engaged in manufacturing and supply of additives. Raw materials and finished goods were purchased from foreign Associated Enterprise. Assessee computed arm’s length value of purchase of raw materials by adopting CUP method. No proper reason could be found as to why TPO rejected method adopted by assessee and applied TNM method based on financial of a company IIP, however, from financial of IIP it was found that its sales were of Rs. 14 lakhs against sales of Rs. 120 Crores of assessee. Said IIP had not paid any excise duty and indirect taxes, but incurred only packaging cost in addition to cost of materials. IIP was not engaged in any major manufacturing activity nor had it a comparable turnover. As there were substantial differences in financial data of two companies which eroded degree of comparability between two. Tribunal held that TPO had not only wrongly adopted TNM method without rejecting CUP method followed by assessee, but also made improper addition based on financial results of an uncomparable entity. As regards purchases from Associated enterprises the Tribunal held that assessee


had committed fundamental mistakes in working out arm’s length price based on resale price method and, therefore matter was set back to file of Assessing Officer. Since 70 percent of assessee’s sales were out of purchases sourced from associate enterprises, working out gross profit margin internally, after excluding such transactions would be inappropriate due to negligible quantities of balance purchases and sales, hence, in such cases gross profit margin should be taken from comparable uncontrolled transactions entered in to by similarly placed concerns. (A. Y. 2004-05)Indian Additives Ltd. v. ACIT (2011) 48 SOT 164 (Chennai)(Trib.)

S. 92C : Avoidance of tax – Transfer pricing - International transaction – Computation - Arm’s length price - Ship management - Foreign principals - Comparables.TPO after examining set of comparables given by assessee held that assessee had erred in including loss making entities in its comparables hence, rejected the comparables and made adjustments to ALP. In appeal Commissioner (Appeals) deleted the addition. On Appeal Tribunal held that assessee in its transfer pricing study analysis had given set of comparables relating to financial years 2000-01 and 2001-02 contending that data for financial year 2002-03 was not available at time TP report was compiled. Tribunal set aside the matter to the Assessing Officer for fresh adjudication with a direction to give sufficient opportunity to assessee to file fresh comparables of financial year 2002-03 so that proper ALP could be determined in accordance with law. (A. Y. 2003-04).Dy. CIT v. Mitsui O. S. K. Lines Maritime (India) (P) Ltd. (2011) 48 SOT 155 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction – Computation - Arm’s length price – Royalty.Assessee was engaged in business of manufacture of polystyrene and expandable polystyrene. It was wholly owned subsidiary of LG Chemicals India (P) Ltd. (Holding Company). Said holding company was 100 percent subsidiary of another company namely LG Chemicals Ltd. Korea. Assessee entered in to an “Trade mark sub-licence agreement’ with its associated enterprise LG chemicals Ltd Korea as per which assessee was given non exclusive sub-licence for use “LG” trade marks for its business. The assessee had paid royalty for use of trade mark. On reference the TPO held that the transaction was a sham one and motive behind same was to shift profits of assessee company out of country. He determined the royalty as nil. Accordingly the assessing Officer disallowed entire payment of royalty. Dispute Resolution panel up held the view of TPO. The Tribunal held that company may use foreign brand / logo for not only increasing its market share, but also for maintaining its existing market share, it was to be held that there was a business necessity for assessee to make impugned royalty payment to its associated enterprise and, TPO/DRP wrongly concluded that impugned royalty payment to its associated enterprise was a sham transaction. Accordingly the Tribunal set aside the order and directed the Assessing Officer to examine a fresh. (A. Y. 2006-07).LG Polymers India (P) Ltd. v. Additional CIT (2011) 48 SOT 269 (Visakhpatnam)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - International transaction – Computation - Arm’s length price - Tax haven - Comparison with domestic market.Assessee was a manufacturer of fabrics. It exported fabrics to its Associated enterprise at Panama at rate of US$ 1.16 per meter and same fabric was also sold in domestic market at rate of Rs. 72 (US $ equivalent 1.515). Transfer pricing Officer adopted domestic price as ALP for export sale to Associated Enterprise. The assessee contended that while comparing the domestic price adjustments were required to be made like incentives on export, discount on sales promotion, advertisement expenses etc. The Tribunal held that the Transfer pricing Officer was error in not taking into consideration the above factor hence the method


adopted by the Assessee has to be accepted. The Tribunal further held that the fact that the associated enterprise is located in tax heaven has no bearing in so far as method of application of ALP determination is concerned. (A. Y. 2002-03).Arvia Industries Ltd. v. ACIT (2011) 48 SOT 418 (Mum.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing – International transaction – Computation - Arm’s length price - TNMM method - Profit split method.The assessee is doing business of manufacturing and trading of jewellery and precious and semi precious stones. The assessee applied TNMM to international transactions, where as Assessing Officer held that split method is applicable. While applying profit split method the Assessing Officer has taken value of one dollar at Rs. 78.44. He has not explained how he adopted the said value. The Tribunal held that TNMM is the most appropriate method and the Assessing Officer was not justified in making addition on profit split method. (A. Y. 2004-05).ACIT v. Shankar Exports (2011) 64 DTR 409 (Jp.)(Trib.)

S. 92C : Avoidance of tax - Transfer pricing - Computation –International transaction- Arm’s length price - International transaction – Information - Important Principles on scope, data and comparability. [S. 133 (6), Rule 19D(4)]In a transfer pricing matter, the Tribunal had to consider the following issues (i) whether transfer pricing adjustments have to be restricted to AE transactions only, (ii) whether a turnover filter can be applied and only companies with turnover within the range can be considered for comparison; (iii) whether the TPO is entitled to collect information under section 133(6) for determining the ALP or he is confined to data available in public domain on the specified date, (iv) Whether the +/- 5% adjustment is a “standard deduction”, (v) whether an adjustment to the ALP can be made for “low capacity utilization”? HELD by the Tribunal:(i) Under Chapter X, only international transactions between AEs are required to be computed having regard to the ALP. Accordingly, the transfer pricing adjustments have to be restricted to the AE transactions by adopting the operating revenue and operating costs of only those transactions;(ii) Though the Act & Rules does not provide for a turnover filter, there has to be an upper and lower limit because size does matter in business. A big company is in a position to bargain the price and attract more customers. It also has a broad base of skilled employees who are able to give better output. A small company may not have these benefits and the turnover would come down reducing profit margin. When are loss making companies are excluded from comparables, super-profit making companies should also be excluded. A reasonable classification of companies on the basis of net sales or turnover has to be made (iii) While Rule 10D(4) requires that the information should be “contemporaneous” and exist latest by the “specified date”, there is no “cut-off date” upto which only the information available in public domain can be considered by the TPO. Even data that becomes available in the public domain after the specified date can be considered. If the TPO collects information under section 133(6), he is not required to inform the assessee about the process used by him nor is he required to furnish the entire information to the assessee. However, the assessee must be given proper hearing if any information is proposed to be used against it; (iv) The +/-5% adjustment is a “standard deduction” and not merely the range within which if the ALP falls that the ALP of the assessee is required to be accepted (v) All comparables have to be compared on similar standards and the assessee cannot be put in a disadvantageous position, when in the case of other companies adjustments for under utilization of manpower is given. The assessee should also be given adjustment for under utilization of its infrastructure. Genisys Integrating Systems v. Dy. CIT (Bang.)(Trib.) www.itatonline.org


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S. 92CA : Avoidance of tax - Transfer pricing –International transaction- Computation – Arm’s length price - Reimbursement of Expenses - International Taxation.Payment received by the assessee company from its AE / parent company was in the nature of reimbursement of incentives paid to the employees of the assessee and it did not have any element of income and therefore, no adjustment could be made in the computation of ALP by notionally imputing a mark up on that amount, more so when no such adjustment has been made in the earlier or subsequent years wherein also similar incentives were paid and the facts were identical. (A. Y. 2006-07).Aricent Technologies (Holdings) Ltd. v. Dy. CIT (2011) 51 DTR 17 / 137 TTJ 209 (Delhi)(Trib.)

S. 92CA : Avoidance of tax - Transfer pricing –International transaction- Computation - Arm’s length price - International taxation – Adjustment.On a reference under section 92CA(1), TPO can suggest adjustment only in respect of the international transactions entered in to by the assessee with AEs which are referred to him for computation of ALP by the Assessing Officer. TPO cannot suo motu take cognizance of any other international transaction for suggesting adjustment in the ALP. (A. Y. 2006-07).Amadeus India (P) Ltd. v. ACIT (2011) 52 DTR 378 / 137 TTJ 457 / 8 ITR 187 (Delhi)(Trib.)

S. 92CA : Avoidance of tax - Transfer pricing – International transaction-Computation - Arm’s Length Price –Trader - Resale Method.Assessee engaged in business of import of rough diamonds and selling same in local markets without value addition to goods, resale price method is most appropriate method for determining ALP with respect to AE transaction.If comparables cited by assessee were not found appropriate, fresh comparables could be searched, but method adopted was not to be rejected. Matter was set aside to Assessing Officer for disposal afresh after finding appropriate comparable and adopting resale price method. (A. Y. 2004-05).Star Diamond Group v. Dy. CIT (2011) 44 SOT 532 / 52 DTR 169 (Mum)(Trib.)

S. 92AC : Avoidance of tax - Transfer pricing –International transaction- CUP method will determine ALP of interest-free loan.The assessee advanced Rs. 7.39 crores to its AE on interest-free terms. For transfer pricing purposes, it claimed that no external comparable uncontrolled price was available for benchmarking the transaction and so TNMM was applicable to determine the arm’s length basis of the loan. Applying TNMM, the assessee claimed that the notional interest was factored in the software development income and no separate addition could be made. This was rejected by the TPO & CIT(A) on the ground that the giving of interest-free loans to the AE was an entirely separate transaction not in conjunction with the activity of software development and hence merited a separate analysis. On appeal by the assessee, HELD by the Tribunal: The assessee was required to comply with the transfer pricing provisions of section 92 to 92F with respect to the transaction of interest-free loan to its subsidiary. The CUP method is the most appropriate method in order to ascertain the ALP of such international transaction by taking into account prices at which similar transactions with other unrelated parties have been entered into. For that purpose, an assessment of the credit quality of the borrower and estimation of a credit rating, evaluation of the terms of the loan e.g. period of loan, amount, currency, interest rate basis, and additional inputs such as convertibility and finally estimation of arm’s length terms for the loan based upon the key comparability factors and internal and/or external comparable transactions are relevant. None of these inputs have anything to do with the costs;


they only refer to prevailing prices in similar unrelated transactions instead of adopting the prices at which the transactions have been actually entered in such cases, the hypothetical arms length prices, at which these associated enterprises, but for their relationship, would have entered into the same transaction, are taken into account. Whether the funds are advanced out of interest bearing funds or interest free advances or are commercially expedient for the assessee or not, is wholly irrelevant in this context. As the transaction is of lending money, in foreign currency, to its foreign subsidiary, the comparable transaction should also be of foreign currency lending by unrelated parties Aithent Technologies Pvt. Ltd. v. ITO (Delhi)(Trib.) www.itatonline.org

S. 92CA : Avoidance of tax – Transfer pricing –International transaction- Collaboration agreement – Capital or revenue – International taxation.TPO is not concerned, nor is he competent to decide as to whether the payment under collaboration agreement was capital or revenue and on the facts and circumstances, reference to the TPO for determining 'arm's length price' may not be necessary.Honda Siel Cars India Ltd. v. ACIT (2011) 129 ITD 200 (Delhi)(Trib.)

S. 92CA) : Avoidance of Tax - Transfer pricing –International transaction- Computation - Arm’s Length Price. Where only one price has been determined under “most appropriate method” for evaluation of ALP, the question of application of proviso to section 92C(2) does not arise, therefore, assessee was not entitled to the concession of 5 percent as prescribed in the said proviso. (A. Y. 2004-05).ACIT v. Essar Steel Ltd. (2011) 51 DTR 177 / 136 TTJ 470 / 131 ITD 22 (Visakha)(Trib.)

S. 94 : Avoidance of tax - Transaction in securities - Tax free dividend - Loss on sale of units. [S. 10(33)]Assessee had purchased certain units of UTI from P on 29-5-1989 at rate of Rs. 14.75 per unit, at the same time assessee entered in to an irrecoverable commitment to sell back those units to P at rate of Rs. 13 per unit on 31-7-1989. The assessee received dividend at the rate of 18 percent on those units. The assessee incurred loss. The assessing officer disallowed the loss holding that the same was predetermined. The High court held that even if it was assumed that transaction was a pre planned one, there was nothing to impeach genuineness of transaction and therefore, assessee was entitled to claim the loss on said transaction. (A. Y. 1990-91)Evereaday Industries Ltd v. CIT ( 2011) 201 Taxman 278 / 242 CTR 105 / 334 ITR 413 / 56 DTR 107 (Cal.)(High Court).

S. 94 : Avoidance of tax - Transaction in securities - Capital loss - Redemption of units.When units have been redeemed by assessee, same would constitute transfer for the purpose of section 94(7) and short term capital loss to the extent of dividend is not allowable. CIT(A) was justified in applying the provisions of section 94(7) and setting off dividend income of Rs. 97,90 628 of A. Y. 2002-03 against the short term capital loss of Rs. 1,06,03,428 of the A. Y. 2003-04.Administrator of Estate of Late E. F. Dinshaw v. ITO (2011) 52 DTR 23 / 128 ITD 365 / 137 TTJ 182 / 8 ITR 771 (Mum.)(Trib.)

S. 94 : Avoidance of tax - Transaction insecurities - Conditions.Entries and treatment in the assessee’s books of account is not relevant. Loss on valuation has no place in section 94(7). Amendment in section 94(7), brought by the Finance Act, 2004 should be applied prospectively is not sustainable. (A. Y. 2005-06).Ashok Kumar Damani v. Addl. CIT (2011) 138 TTJ 45 / 130 ITD 287 / 9 ITR 304 / 53 DTR 435 (Mum.)(Trib.)


S. 112 : Capital gains – Tax on long term capital gains-Income arising from transfer of shares – Security Transaction Tax (STT) not paid - Listed Security. (S. 10(38), 45)Assessee was a promoter-director of a company “PLL”. PLL issued shares for public subscription through initial public offer (IPO) as per SEBI guidelines, which permitted existing shareholders also to sell their shares in IPO for diluting their equity holding. Assessee sold certain share of “PLL” and received certain amount as sale consideration. Assessee claimed that said gains were not includible in his total income. Assessee has not paid Securities Transaction Tax (STT) on said shares. Assessing Officer has not allowed the exemption on the ground that the assessee has not paid STT on said shares and the Shares of PLL were not listed on any stock exchange on the date of sale. The Tribunal confirmed the order of assessing officer and held that the assessee was liable to be taxed at 20 percent. (A. Y. 2006-07).Uday Punj v. Dy. CIT (2011) 133 ITD 354 (Delhi)(Trib.)

S. 112 : Capital gains –Tax on long term capital gains – Non-resident – Investment – Stock-in-trade. [S. 10(38), 45]Assessee a non-resident had converted shares purchased earlier years which were held as investment in to stock in trade and out of such shares had sold some shares during the year through recognized stock exchange on which STT was paid, long term capital gain on sale of such shares would be taxed at a rate of 20 percent in terms of section 112(1)(c). (A. Y. 2006-07).Alka Agarwal (Smt) v. ADIT (2011) 48 SOT 493 (Delhi)(Trib.)

S. 112 : Capital gains –Tax on long term capital gains- Computation – Non-resident - Sale of shares - Proviso. (S. 48)Operation of the proviso to section 112(1), is confined to assets not covered by the first proviso to section 48 and the assets specified in the proviso to section 112(1) itself, therefore, a non-resident is not eligible to avail the benefit of lower rate of tax of 10 percent on the capital gains on the sale of shares. (S. 48)Cairn U. K. Holdings Ltd. In Re (2011) 59 DTR 121 / 242 CTR 449 / 337 ITR 131 / 337 ITR 13 (AAR)

S. 112 : Capital gains – Tax on long term capital gains-Non-residents - Sale of shares by Mauritian subsidiary of UK company - Tax residency certificate - Not taxable - Income deemed to accrue or arise in India - DTAA – India-Mauritius. [Article 13.4 (S. 9)]The applicant held 50% shares in the capital of Ardex Endura (India) Pvt. Ltd. Indian Company is engaged in manufacturing of flooring adhesives. The applicant is proposing to sell its entire stake to another non-resident group company known as Ardex Beteiligungs – GmbH Germany at fair market value. The applicant seeks ruling mainly on following questions as to whether

a) the capital gains arising on the proposed sale transaction would be chargeable to Income-tax in India in the hands of the Applicant, having regard to the provisions of paragraph 4 of Article 13 of the India-Mauritius Tax Treaty or whether the applicant can receive the sale proceeds without deduction of income tax at source? b) the Applicant would be required to file a return of income in India in respect of the proposed transfer of shares?

Revenue contended that the applicant is wholly owned subsidiary of UK company and it had no income of any nature during the current year or previous year and the only asset was investment in the Indian company. The funds for purchase of the investments were received from holding company and also the decision regarding the sale of shares was taken by the holding company. Thus the veil should be pierced and India-UK treaty should be applied.


The applicant contended that the company was created in 1998 by a group other than Ardex group. Ardex group was in the business of manufacturing of construction material and it acquired Mauritian company with a view to expand its business. The applicant was a tax resident of Mauritius and the Tax Residency Certificate has to be accepted view of the decision in Azadi Bachao Andolan (263 ITR 706). The authority ruled that the arrangement has not come into existence all of a sudden. It is not clear how far the theory of beneficial ownership could be invoked. Also it was held in Azadi Bachao Andolan that treaty-shopping itself is not taboo. As the shares were held for a considerable length of time and sale is effected at Market value, it was held that the capital gains on the proposed sale of shares by the applicant is not chargeable to tax in India. However since the shares to be transferred are the shares of an Indian company, we rule that the applicant is bound to file a return of income in India. Ref: VNU International BV, AAR 871of 2010.Ardex Investments Mauritius Ltd. - A.A.R. No. 866 dt. 14.11.11 (AAR)

CHAPTER XIIDETERMINATION OF TAX IN CERTAIN SPECIAL CASES

S. 115A :Tax on dividends , royalties and technical services fees-Foreign Companies - Sale of shares in Indian company – DTAA - India-Mauritius - [S. 90, Art. 13(4)]Article 13(4) of DTAA confers the power of taxation of capital gains derived by a resident of a contracting State from the alienation of specified property only in the State of residence, therefore, the applicant, a Mauritian company, is not liable to pay tax in India on the capital gains arising on transfer of shares of an Indian company to another Mauritius based company.D. B. Zwirn Mauritius Trading No. 3 Ltd., Mauritius (2011) 333 ITR 32 / 240 CTR 1 / 198 Taxman 295 / 53 DTR 178 (AAR)

S. 115A : Tax on dividends , royalties and technical services fees- – Foreign Companies - Transfer of shares of Indian company to Swiss companies – DTAA - India-Netherland. [S. 90, 92, Art. 13(5)]Capital Gains earned by a Dutch company, on transfer of shares of an Indian company to Swiss companies are covered by Art. 13(5) of the Indo-Netherlands DTAA and therefore, it is taxable only in Netherlands and not in India hence transfer pricing provisions are not attracted as the transaction of shares is between non resident companies.VNU International B. V. In Re (2011) 240 CTR 12 / 198 Taxman 454 / 334 ITR 56 / 53 DTR 189 (AAR)

S. 115AD :Tax on income of Foreign institutional investors- Securities-Capital gains- - Business income - Short term capital loss from exchange traded derivative transactions - Investment in securities. [S. 43(5)]Foreign institutional investors (FIIs) can only make investment in securities in country’s capital market and they cannot undertake trade in them .Income arising to a FII from transfer of securities falls within ambit of section 115AD, as per which income arising from transfer of such securities is held to be falling under head ‘capital gains’, it cannot be considered as ‘business income’ whether speculative or non-speculative. Section 43(5) has no application to FIIs in respect of securities as defined in Explanation to section 115AD, income from sale of securities is to be considered as short term or long term capital gains. In the facts of the case, Income from derivative transactions resulting into loss of Rs.12.27 crores was to be considered as short term capital loss on the sale of securities which is eligible for adjustment against short term capital gains arising from the sale of shares and not speculation loss. (A. Y. 2004-05).LG Asian Plus Ltd. v. Asst. DIT (International Taxation) (2011) 46 SOT 159 / 140 TTJ 668 / 60 DTR 159 (Mum.)(Trib.)


Chapter XIIA.Special provisions relating to certain incomes of non-residents.

S. 115F : Non-residents - Capital gains - Foreign exchange assets - Bonus shares eligible for section 115F relief if original shares acquired in foreign currency.The assessee, a NRI, purchased shares in foreign currency. On the sale of bonus shares, the assessee claimed relief under section 115F. The department’s objection that the assessee has received bonus shares without investing any convertible foreign exchange is not correct because as the original shares were acquired by investing convertible foreign exchange, it cannot be said that the bonus shares were acquired without taking into consideration the original shares. In accordance with Dalmia Investment 52 ITR 567 (SC) the cost of acquisition of the original shares is closely interlinked with the bonus shares. Once bonus shares are issued, the averaging out formula has to be followed with regard to all shares. Accordingly, bonus shares are covered by section 115C(b) and eligible for benefit under section 115F. (A. Y. 2005-06)Sanjay Gala v. ITO (2011) 46 SOT 482 (Mum.)(Trib.) www.itatonline.org

S. 115H : Non-residents - Interest on investment made out of foreign funds - Concessional rate – Special assets.Where assessee received interest on investment made out of foreign funds which was chargeable to tax at concessional rate under section 115H, said special treatment could not be extended to interest on interest re-deposited with original sum. (A. Y. 1996-97).M. Manohar (Dr) v. ACIT (2011) 339 ITR 49 / 201 Taxman 106 / 62 DTR 148 / 244 CTR 642 (Mad.)(High Court)

S. 115H : Non-residents - Income from foreign exchange asset - Coverable foreign exchange – Speicla assets. (S. 115E)If the original source of the deposit is convertible foreign exchange, the transfer of such foreign exchange asset, namely from one bank to another will not affect its identity as a foreign exchange asset, assessee was entitled to concessional rate of tax on the interest earned from NRNR deposits under section 115H read with section 115E.CIT v. M. C. George (2011) 60 DTR 166 / 243 CTR 404 / 198 Taxman 466 (Ker.)(High Court)

CHAPTER XII-BSPECIAL PROVISIONS RELATING TO CERATIN COMPANIES

S. 115J : Company - Book profit - Unabsorbed depreciation - Brought forward losses. (Companies Act - S. 205)Assessee has shown loss of Rs. 16,48,74,073/- in the preceding year and claimed depreciation of Rs. 13,85,66,473/- for the said preceding year. Once the brought forward is arrived at after taking into account the depreciation, it is the amount of depreciation which is less than the loss, is to be set off in terms of clause (iv) of explanation to section 115J for computing the book profit. (A. Y. 1990-91).Peico Electronics & Electricals Ltd. v. CIT (2011) 61 DTR 401 / 339 ITR 506 (Cal.)(High Court)

S. 115J : Company - Book profit - Zero tax companies.For the Asst. Year 1988-89, there was no provision in section 115J to compute book profit as per account prepared in a particular manner and therefore, it was open to assessee to compute book profit either on basis of profit and loss account prepared under provisions of part II and part III of schedule VI of Companies


Act, or as per annual accounts placed before AGM. However, after insertion of sub-section (1A) in section 115J from assessment year 1990-91, accounts for the purpose of book profit have to be prepared as per Part II and Part III of Schedule VI of Companies Act. (A. Y. 1988-89).Dy. CIT v. Anagram Finance Ltd. (2011) 43 SOT 433 (Mum.)(Trib.)

S. 115JA : Company - Book profit - Advance Tax - Interest is payable on failure to pay advance tax in respect of tax payable under section 115JA. (S. 115JB, 234B)Section 115J / 115JA are special provisions. For purposes of advance tax the evaluation of current income and the determination of the assessed income had to be made in terms of the statutory scheme comprising section 115J/115JA. Hence, levying of interest was inescapable. The assessee was bound to pay advance tax under the scheme of the Act. Section 234B is clear that it applies to all companies. There is no exclusion of section 115J/115JA in the levy of interest under section 234B (Kwality Biscuits Ltd. v CIT 243 ITR 519 (Kar.) (SLP dismissed in 284 ITR 434) consideredJt. CIT v. Rolta India Ltd. (2011) 237 CTR 329 / 49 DTR 346 / 330 ITR 470 / 196 Taxman 594 / 2 SCC 408 / 225 Taxation 366 (SC)

S. 115JA : Compnay - Book profit - Minimum Alternative Tax - MAT Credit to be set off before computing Advance-tax shortfall and liability for section 234B, 234C – Interest. (S. 234B, 234C)The scheme of section 115JA(1) and 115JAA shows that right to set-off the tax credit follows as a matter of course once the conditions of section 115JAA are fulfilled. The grant of credit is not dependent upon determination by the Assessing Officer except that the ultimate amount of tax credit to be allowed depends upon the determination of total income for the first assessment year. Thus, the assessee is entitled to take into account the set off while estimating its liability to pay advance tax. The amendment to Explanation 1 to section 234B by FA 2006 w.e.f. 1.4.2007 to provide that MAT credit under section 115JAA shall be excluded while calculating advance-tax liability is to remove the immense hardship that would result if this was not done;The fact that the Form & Rules provided for set off of MAT credit balance after computation of interest under section 234B is irrelevant because it is directly contrary to a plain reading of section 115JAA(4). (A. Y. 1998-99 to 2000-2001).CIT v. Tulsyan NEC Ltd. (2011) 330 ITR 226 / 49 DTR 129 / 237 CTR 105 / 196 Taxman 181 (SC)

S. 115JA : Company - Book profit – Export - Set off of carried forward business loss and unabsorbed business loss - Negative income. (S. 80AB, 80AB(5), 80HHC, 115JB)The Court held that the assessee is entitled to deduction under section 80HHC computed in accordance with sub-section (3)(3A) of 80HHC because assessment under section 115JB is only an alternative scheme of assessment and what is clear from clause (iv) of the Explanation there to is that even in the alternative scheme of assessment under section 115JB, the assessee is entitled to deduction of export profit under section 80HHC. In other words, the export profit eligible for deduction under section 80HHC is allowable under both schemes of assessment. The restriction contained in section 80AB or section 80B(5) cannot be applied in as much as carried forward business loss or depreciation should not be first set off leaving the gross total income at nil, which would disentitle the assessee for deduction under other provisions of Chapter VIA-C, which includes section 80HHC also. There is no provision in section 80HHC to determine the export profit with reference the profit and loss account maintained under companies Act, Therefore, the assessee would be entitled to deduction of export profit under section 80HHC and the relief is to be granted in terms of sub-section (3) and 3(A) of that section.


CIT v. Packworth Udyog Ltd. (2011) 331 ITR 416 / 51 DTR 251 / 198 Taxman 10 / 239 CTR 24 (Ker)(FB) / Kerala Chemicals and Proteins Ltd. (2011) 331 ITR 416 / 239 CTR 24 / 51 DTR 251 / 198 Taxman 10 (Ker)(FB) / G.T.N. Industries Ltd. (2011) 331 ITR 416 / 239 CTR 24 / 198 Taxman 10 / 331 ITR 416 / 51 DTR 251 / 231 CTR 24 / 198 Taxman 10 (Ker)(FB)(High Court)

S. 115JA : Compnay - Book profit - Brought forward business loss. (S. 154)In order to allow deduction of brought forward business loss or unabsorbed depreciation in the computation of book profit under section 115JA, both should be available as per the accounts of the assessee. Since nothing is left after setting off brought forward business loss up to 1994-95 against profit, assessee was not entitled to any relief under clause (b) of Explanation (iii) of section 115JA for assessment year 1997-98. Rectification order passed under section 154 held to be valid. (A. Y.1997-98).CIT v. Carbon & Chemicals India Ltd. (2011) 59 DTR 396 / 243 CTR 399 / 196 Taxman 302 (Ker.)(High Court)

S. 115JA : Company - Book profit - Capital gains.Additions and deductions to arrive at book profit have to be made strictly in accordance with Explanation to section 115JA (2). When there is no provision in clauses (i) to (ix) of Explanation to section 115JA(2) to exclude capital gain from profit and loss account, for purpose of book profit it is immaterial whether capital gain included in profit and loss account prepared under companies Act, 1956 is otherwise assessable to income tax or not. Sale proceeds of old and unyielding rubber trees credited by assessee in profit and loss account prepared under provisions of Companies Act is an item covered by clause (ii) of explanation to section 115JA(2) to be excluded from book profit (A. Ys. 1997-98 to 2000-01).CIT v. Thiruvambadi Rubber Co. Ltd. (2011) 203 Taxman 63 (Ker.)(High Court)

S. 115JA :Company- Book profit – - Profit on sale of fixed assets - Sale of lease hold right.Under clause 2 of Part II of schedule VI of the Companies Act, where a company receives an amount of surrender of lease hold rights, it is bound to disclose in the Profit and loss account the said amount an non recurring transaction or a transaction of an exceptional nature irrespective of its nature whether it is capital or revenue. Further, Profit and loss account shall disclose every material feature including transaction or transaction of an exceptional nature, which includes profits on sale of fixed assets, therefore profit on sale of fixed assets formed part of the book profit under section 115JA. (A.Y.1997-98) GKW v. CIT (2011) 64 DTR 79 (Cal.)(High Court)

S. 115JA : Company - Book profit –- Prior period expenses - Provision for bad and doubtful debt. (S. 115JB)Prior period expenditure and any provision for bad and doubtful debt, cannot be deducted while computing book profit under sections 115JA, 115JB. (A. Ys. 1997,98 & 2000-01 to 2004-05).Singareni Colliweries Company Ltd. v. ACIT (2011) 141 TTJ 593 / 133 ITD 213 (Hyd.)(Trib.)

S. 115JA : Company - Book profit - Provision for bad debt.While working out book profit, provision for bad debt has to be added back to the net profit under section 115JA Expl. (g). (A. Ys. 1999-2000 & 2004-05)ACIT v. Chettinad Cement Corporation Ltd. (2011) 140 TTJ 100 / 58 DTR 228 (Chennai)(Trib.)

S. 115JA :Company- Book profit –- Carry forward and set off looses under the Act - More than 8 years. (S. 70 to 79)Assessee company’s total income was less than 30 percent of book profit. For purpose of MAT provision, assessee bifurcated its accumulated loss shown in books of account in to business loss and depreciation. As


depreciation was less than business loss, he deducted same from profit. Assessing officer deducted business loss from same profits earned. While doing so, applying the provisions of Income-tax Act in respect of carry forward of business loss, he also ignored losses of years which were more than 8 years old as end of year. The Tribunal held that loss incurred in a year cannot be ignored. i.e. it is not possible to omit past; loss from books of account under double entry system of accounting. The Tribunal held that principle prescribed in sections 70 to 79 is not applicable for computing accumulated losses shown in books of account following Accounting principles. There is drastic variation between Income-tax provisions and accounting provisions in respect of carry forward and set off losses. (A. Y. 2000-01).Susi Sea Foods (P) Ltd. v. ACIT (2011) 48 SOT 424 (Visakhapatnam)(Trib.)

S. 115JB : Company - Book Profit – Computation - Reduction of net profit by amount withdrawn from revaluation reserve - Amount withdrawn from revaluation reserve & credited to P&L A/c. cannot be reduced from book profit even if in year of creation of reserve, the P&L A/c was not debited.Where the assessee had revalued its fixed assets in the year and in the relevant year an amount representing differential depreciation was transferred out of the said revaluation reserve and credited to the P&L account the amount transferred from the revaluation reserve to the P&L account could not be reduced for computation of book profits in the earlier year when it was created. (A. Y. 2001-02).Indo Rama Synthetics (I) Ltd. v. CIT (2011) 330 ITR 363 / 237 CTR 217 / 49 DTR 241 / 2 SCC 1168 / 225 Taxation 373 / 196 Taxman 539 (SC)

S. 115JB : Company - Book profit - Undertaking - Special categories. (S. 80IC) Section 115JB will apply to an assessee being a company, even if it is entitled to deductions mentioned in section 80IC.Sidcul Industrial Association v. State of Uttarakhand (2011) 199 Taxman 75 / 241 CTR 156 / 331 ITR 491 / 55 DTR 66 (Uttarakhand)(High Court)

S. 115JB : Company - Book profit - Power of Assessing Officer.Once the accounts including the profit and loss account are certified by the authorities under the Companies Act, 1956, it is not open to the Assessing Officer to contend that the profit and loss account has not been prepared in accordance with the provisions of Companies Act,1956. Hence, the Tribunal was right in deleting the addition of 1.98 Crores made by the Assessing Officer while computing the book profits under section 115JB.CIT v. Adbhut Trading Co. Pvt. Ltd. (2011) 338 ITR 94 (Bom.)(High Court)

S. 115JB : Company - Book profit - Provision for diminution in value of investments - Change of law.For the assessment year 2002-03, the Assessing Officer recomputed the book profits of the assessee by making an adjustment for provision for diminution in value of investments on the ground that the provision made by the assessee fell under clause (c) of Explanation 1 to section 115JB (2). The Commissioner(Appeals) deleted the addition which was up held by the Tribunal. In appeal the court held that after amendment by Finance (No. 2) Act , 2009, made effectively from April 1, 2001, clause (i) of Explanation 1 had been inserted in section 115JB(2) of the Act where by any amount or amounts set aside as provision for diminution in the value of any asset would not reduce the book profits of an assessee. The adjustment claimed by the assessee as provision for diminution in value of investment was not tenable and it would be added in the profit which thereby would enhance the book profits under section 115JB of the Act. (A. Y. 2002-03).CIT v. Steriplate P. Ltd. (2011) 338 ITR 547 (P&H)(High Court)


S. 115JB :Company- Book profit – – Interest - Retrospective amendment of law - Impossible of performance.Provisions relating to payment of advance tax are applicable in a case where the book profit is deemed to be the total income under section 115JB. On the facts of the assessee there was no liability to make payment of the advance tax on the last day of the financial year i.e. 31st March 2001 when its book profit was nil according to section 115JB. Provision of section 115JB having been amended by the Finance Act, 2002, with retrospective effect from 1st April 2001, the assessee cannot be held defaulter of payment of advance tax, where on the last date of the financial year preceding the relevant assessment year, the assessee had no liability to pay advance tax, he cannot be asked to pay interest under section 234B and 234C for no default in making payment of tax in advance which was physically impossible therefore interests under sections 234B and 234C can not be charged. (A. Y. 2001-02).Emami Ltd. v. CIT (2011) 63 DTR 301 (Cal.)(High Court)

S.115JB :Company- Book profit – Rebate - STT. (S. 88E)Rebate under section 88E is allowable in respect of payment of STT even if total income assessed under section 115JB. (A. Y. 2005-06).CIT v. Horizon Capital Ltd. (2011) 64 DTR 306 / 245 CTR 601 (Karn.)(High Court)

S. 115JB : Company - Book profit - Minimum alternative tax - Provision for diminution in value. Reflection of amount of provision for diminution in value of investment separately on liability side of balance sheet or by way of reduction from figure of investment on asset side of balance sheet is totally alien for computing book profit and only requirement is that if any provision for diminution in value of any asset has been debited to profit and loss account same will automatically stand added to amount of net profit for working out book profit. Therefore, once provision is made for diminution in value of any asset, same has to be added for computing book profit, regardless of fact whether or not there is any balance value of asset. (A. Y. 2004-05).ITO v. TCFC Finance Ltd. (2011) 131 ITD 103 / 11 ITR 153 / 138 TTJ 439 / 54 DTR 241 (Mum.)(Trib.)

S. 115JB : Company - Book profit – Minimum alternative tax - Revaluation of assets.The amount on account of revaluation of assets sold and taken to the balance sheet as revaluation reserved cannot be added to book profits. (A. Y. 2005-06)ITO v. Galaxy Saws P. Ltd., (2011) 132 ITD 236 (Mum.)(Trib.)

S. 115JB : Company - Book profit - Minimum alternative tax - Capital gains - Exemption. (S. 54EC)Profit on sale of assets credited to profit and loss account cannot be excluded in computing book profit under section 115JB even though capital gain arising from sale of that asset is not subject to tax under normal provisions of Act by virtue of provisions of section 54EC. ( A.Y. 2005-06).Technicarts (P) Ltd. v. ITO (2011) 46 SOT 294 (Mum.)(Trib.)

S. 115JB : Company – Book profit – Provision for gratuity.Provision for approved gratuity is ascertained liability and cannot be added back while computing the book profit under section 115JB. (A. Y. 2004-05)ITO v. Jones Lang Lasalle Property Consultants (India) (P) Ltd. (2011) 135 TTJ 94 / 39 DTR 230 (Delhi)(Trib.)

Chapter XII–GSpecial provisions realting to income of shipping companies.


S. 115VA : Shipping business - Operating qualifying ships - Write back of sundry creditors - Interest on loans and advances to employees - Capital gains. (S. 41(1), 45, 56)Provisions of sections 28 to 43C cannot override computation of profits and gains of under section 115VA hence the Assessing Office cannot make separate additions in respect of write back of sundry creditors, prior period adjustments etc. under section 41(1). Loans were advanced to employees involved in core activity of assessee company hence interest income derived from such activity was taxable under the head “income from business” and therefore it cannot be brought to tax separately. Income earned by assessee from sale of ships will be taxable under the head capital gains hence, receipt in question cannot be considered as turn over as per provisions of section 115VA thus it was our of purview of Chapter XII-G. of the Act. (A. Y. 2007-08).Shipping Corporation of India Ltd. v. Addl. CIT (2011) 133 ITD 290 (Mum.)(Trib.)

CHAPTER XII-HINCOME TAX ON FRINGE BENEFITS

S. 115WB : Fringe benefits - Rent for car parking Area – Revision. (S. 263)In the present case it was held that the essential facilities attached to a rented building had to be treated as part of building itself and therefore, rent or license fee paid for such facilities should be treated as forming part of rent. It was further held that in view of the above, the rent paid for car parking area did not fall under category of ‘running, maintenance and repair expenses of car’ and thus assessee was not liable to pay fringe benefit tax on the said amount. (A. Y. 2006-07)Hewlett Packard India Sales (P.) Ltd. v. CIT (2011) 43 SOT 124 / 137 TTJ 125 / 51 DTR 173 (Bang.)(Trib.)

Chapter XIIIIncome-tax authorirties

A. Appointment and controlS. 119 : Instructions to subordinate authorities – CBDT – Circulars - Administrative relief.Benevolent circulars providing administrative relief to the assessee have to be given effect to even if they are issued subsequent to the decision of an authority under the Act. (A. Y. 1995-96 & 1996-97).Chhabil Dass Agarwal v. UOI (2011) 56 DTR 19 / 241 CTR 331 / 199 Taxman 326 (Sikkim)(High Court)

S. 119 : Instructions to subordinate authorites – CBDT – Circulars - Binding nature - Conflict in law laid down by High Court or Supreme Court.If a circular is in conflict with the law laid down by High Courts or Supreme court, the revenue authorities while acting quasi judicially, should ignore such circular in discharge of their quasi judicial functions. (A. Y.1998-99)Bhartia Industries Ltd. v. CIT (2011) 243 CTR 328 / 60 DTR 121 / 201 Taxman 180 (Cal.)(High Court)

B. JurisdictionS. 124 : Jurisdiction of Assessing Officer - Objection – Could not be raised before the Appellate Authority or Tribunal. (S. 127)Question of jurisdiction of Assessing Officer could not be raised and entertained by the Appellate Authority or Tribunal for the first time in appeal when the same was not agitated before the Assessing Officer. The


Court held that Tribunal was not justified in law in holding that the order passed by the Assessing Officer was invalid for want of Jurisdiction. (A. Y. 1974-75).CIT v. British India Corporation Ltd. (2011) 63 DTR 246 / 245 CTR 424 (All.)(High Court)

C. POWERS

S. 131 : Powers – Code of Civil Procedure Code, 1908 - Deduction at source - Notice calling for certain details regarding TDS related matters - Details of information. [S. 133(6)]The assessee challenged the notice in a writ petition saying that the said notice was treated a notice under section 133(6) and prior approval of commissioner being not obtained the notice be quashed . The High Court held that the said notice was not liable to be categorized as a notice issued under section 133(6) and under section 131 the Assessing Officer could call for the information as proceedings were pending . The writ was dismissed.Thaliparamba Municipal Vanitha Service Sahakarana Sangam Ltd v. ITO (2011) 225 Taxation 274 (Ker.)(High Court)

S. 132 : Search and seizure - Warrant of authorisation - Joint names - Block assessment. (S. 158BC)A warrant of authorization must be issued individually. If it is not issued individually, then the assessment cannot be made in individual capacity. Warrant of authorization issued in joint names of husband and wife. Individual assessment on wife alone not valid. (A. Y. 1995 to 2001)CIT v. Vandana Verma (Smt.) (2011) 330 ITR 533 / (2009) 227 CTR 388 / 31 DTR 214 / (2010) 186 Taxation 88 / 186 Taxman 88 (All.)(High Court)

S. 132 : Search and seizure – Validity – Information - Writ petition – Dismissed on ground of delay. On the facts the court upheld the validity of search on the ground that the Assessing Officer gathered the information about undisclosed income. Apart from that the Writ petition was filed after two years hence the petition was dismissed on ground of laches. Section 131(1A) ,operates in a different field than section 132, while section 131(1A), occupies field before issuing search and seizure warrant, section 132 comes into play thereafter. Assuming the power is invoked it will not any way affect the validity of search and seizure operation.V. S. Chauhan (Dr) v. Director of Income Tax (2011) 200 Taxman 413 / 62 DTR 67 / 336 ITR 533 (All.)(High Court)

S. 132 : Search and seizure - Authorisation under section 132(1) – Notice under section 131(1A) after warrant under section 132(1).Section 131(1A) is only an enabling section and it does not in any manner effect the search and seizure operation carried on under section 132. For the purpose of judging the action of the concerned authority with respect to search and seizure, Section 132 alone has to be considered. Section 132 is an independent code itself. Materials collected before search showed that officer concerned could have reason to believe that the petitioner were in possession of money, bullion etc., wholly or partly undisclosed income or asset and therefore there was reason to believe within meaning of section 132(1). Further, after search and seizure operation, the power under section 131(1A) cannot possibly be invoked in view of its plain language and if the power is invoked, it will not in any manner affect the validity of the search and seizure operation. Section 131(1A) and 132 should be interpreted harmoniously. V. S. Chaudan (Dr) & Anr. v. DIT (Inv) (2011) 62 DTR 67 / 336 ITR 533 / 200 Taxman 413 (All.)(High Court)

S. 132 : Search and seizure – Warrant of authorisation.


The opinion or the belief so recorded must clearly show whether the belief falls under clause (a) or (b) or (c) of section 132(1) of the Act. The satisfaction note should itself show the application of mind and the formation of opinion by the officer ordering the search. In order to justify the action the authority must have relevant materials on the basis of which he can form an opinion that he has reason to believe that action against a person under section 132 of the Act is needed. The belief should not be based on some suspicion or doubt.Visa Comtrade Ltd. v. UOI (2011) 338 ITR 343 / 243 CTR 348 / 201 Taxman 413 / 60 DTR 81 (Orissa)(High Court)

S. 132 : Search and seizure – Authorisation - Warrant in joint names –Validity.What is required to be stated in search warrant is precise details about the assessee and the persons to be searched which contained in the warrants issued in these cases. The warrants authorizing search of a group of concerns by a warrant issued under section 132 is valid.Jose Cyriac v. CIT (2011) 238 CTR 207 / 50 DTR 292 / 336 ITR 241 (Ker.)(High Court)

S. 132 : Search and seizure - Warrant of authorization – Validity - Satisfaction.Warrant of authorization issued based on material and satisfaction note by higher authority cannot be held to be invalid in writ petition under Article 226 of the Constitution of India.Dipin G. Patel v. DGIT (2011) 339 ITR 636 (Guj.)(High Court)

S. 132 : Search and seizure - Appellate Tribunal – Power – Validity - Authorisation. (S. 254)Validity of search and seizure operation could not be gone in to by the Tribunal in appeal proceedings.Brij Mohan Bhatia v. Income Tax Appellate Tribunal (2011) 64 DTR 212 (P&H)(High Court)

S. 132 : Search and seizure – Authorisation - Recording of satisfaction – Notice. [S. 131(IA), 133(6)]If there is sufficient and intangible material available on record, prior to search, based on which the concerned officer has formed the requisite belief under section 132(1), merely because certain other information has been sought for by authorized officer or any other officers mentioned in section 131(IA) the same would not render the search proceedings invalid. It may be possible that notice under section 131(IA) issued after search might itself be invalid but it cannot invalidate search conducted under a valid authorization under section 132(1). In the absence of any specific allegation against any particular officer, notice under section 133(6) cannot be challenged as suffering from malafides. Neesa Liesure Ltd. v. UOI (2011) 64 DTR 312 / 245 CTR 634 (Guj.)(High Court)

S. 132 : Search and seizure - Warrant of authorisation - Common search warrant – Validity.Common search warrant specifying names and addresses of persons residing at different places, held to be valid. (A. Y. 2005-06)Embassy Classic P. Ltd & Another v. ACIT (2011) 7 ITR 287 (Bang.)(Trib.)

S. 132 : Search and seizure - If search and seizure action violates “human rights”, officers personally liable to pay compensation.The income-tax department conducted search and seizure operations under section 132 at the premises of the assessee when interrogation & recording of statement was conducted for more than 30 hours and till the odd hours of the night without any break or interval. The assessee filed a complaint alleging violation of human rights. HELD upholding the plea:The Commission is of the view that the members of the raiding party may take their own time to conclude the search & seizure operations but such operations must be carried out keeping in view the basic human


rights of the Individual. They have no right to cause physical and mental torture to him. If the officer-in-charge of the Interrogation/recording of statements wanted to continue with the process he should have stopped the same at the proper time and resumed it next morning. But continuing the process without any break or interval at odd hours up to 3:30 AM, forcing the applicant and/ or his family members to remain awake when it is time to sleep was torturous act which and cannot be countenanced in a civilised society. It was violative of their rights relating to dignity of the individual and therefore violative of human rights. Even die-hard criminal offenders have certain human rights which cannot be taken away. The applicant’s position was not worse than that. In the opinion of the Commission, the Income Tax Department should ensure that the search & seizure operations at large in future are carried out without violating one’s basic human rights.Rajendra Singh (Bihar Human Rights Commission) www.itatonline.org

S. 132(3) : Search and seizure - Prohibitory order - Bank accounts.Prohibitory order under section 132(3), cannot be issued indiscriminately and it is not automatic in a search and seizure proceedings ; prohibitory order under section 132(3) issued in respect of bank accounts without forming any belief or without any material on record to conclude that the amount deposited in such bank accounts is either wholly or partly undisclosed income of the petitioner is not sustainable in law.Maa Vaishnavi Sponge Ltd. v. DIT (2011) 62 DTR 209 / 244 CTR 603 / 339 ITR 413 (Orissa)(High Court)

S. 132(4) : Search and seizure - Income from undisclosed sources - Statement on oath - Stamp duty valuation. (S. 69)Price of the plots paid by the assessee being consistent with the circle rate which the stamp duty has been paid and the department having not found any document or evidence to establish that the assessee has made more payment than that found recorded in his accounts, the statement made by the assessee under section 132(4) surrendering the amount could not have been taken as basis for making addition as unexplained investments in plots. Affidavit which was filed alleging the coercion and pressure upon him by the authorized officer in proceedings under section 132(4) was rejected and not considered. (A. Y. 06-07).ACIT v. Raj Dhaiwala (Dr) (2011) 63 DTR 113 (Jodh.)(Trib.)

S. 132(4) : Search and seizure – Statement on oath – Addition - Capitation fee.The Assessing Officer made addition towards capitation fees alleged collected from the students was solely based on the sworn statement recorded under section 132(4) of a special Officer of engineering College. There was no incriminating evidence regarding the receipt of capitation fee either found or seized. What was found the number of students who were admitted under different quotas in various courses. The Tribunal held the additions cannot be made in the hands of assessee on the basis of such evidence. The Tribunal held that the Central Board of Direct taxes had issued instructions by Circular no 286/2/ 2003 –IT, wherein it had directed that the search party should not obtain confession. So the admission made under section 132(4) by the Special Officer of the college could not be treated even as a valid piece of evidence. Accordingly the order of Commissioner (Appeals) deleting the addition was confirmed. ( A.Y 2008-09).ACIT v. Saveetha Medical and Educational Trust (2011) 12 ITR 376 (Chennai)(Trib.)

S. 132B : Application of seized or requisites assets - Delay in payment of refund - Interest.Delay in paying refund interest payable under section 132B. (A. Y. 1995-96).Vishwanath Khanna v. UOI (2011) 335 ITR 548 / 244 CTR 208 / 61 DTR 318 (Delhi)(High Court)

S. 133A : Survey – Statement – Disclosure – Retraction – Addition.


Addition cannot be made solely on the basis of statement recorded during survey in absence of any corroborative evidence and supporting material in case wherein it has been retracted. (A. Y. 2007-08)ACIT v. Prabhu Dayal Kanojia (2011) 8 ITR 45 / 137 TTJ 4 / (2011) Tax World Vol. XLV Part-1. Page 23. (January, 11)(Trib.)

S. 133A : Survey - Unexplained investment - Reports of facts - Explanation and reconciliation. (S. 69)The reports of facts collected at time of survey are always subject to explanation and reconciliation by assessee which can be explained either at the time of survey or after survey before Assessing Officer at the time of assessment, therefore, merely on the basis of that some differences were found at the time of survey in stock addition cannot be made automatic. (A. Y. 2005-06) Chawala Brothers (P) Ltd. v. ACIT (2011) 43 SOT 651 (Mum.)(Trib.)

S.133A : Survey – Depreciation - Genuineness of purchase of purchase of assets – Disclosure - Revised return - Retraction. (S. 32)During survey assessee admitted that computer software and hardware were not purchased by it, and it filed a revised return with drawing the claim of depreciation and offered to tax. Thereafter the assessee filed an affidavit retracting the statement during the course of survey. The Tribunal recorded the finding of fact that during the course of survey neither the assets were found nor the assessee could establish names of the parties form whom computer software and computer hardware were purchased. High Court confirmed the order of Tribunal. (A. Y. 2001-02).B.D.P.S.Software Ltd. v. Dy. CIT (2011) 62 DTR 361 / 245 CTR 19 / (2012) 340 ITR 375(Bom.)(High Court)

CHAPTER XIVPROCEDURE FOR ASSESSMENT

S. 139 :Assessment- Return - Revised return - Amalgamation of companies – BIFR - Unabsorbed business loss - Sick company - The Sick Industrial Companies (Special Provisions) Act, 1985 - (S. 72A, 80)BIFR can specify date from which its scheme becomes effective. Amalgamation in January 1994, Scheme sanctioned by BIFR with effect from February 1, 1992. The assessee filed revised return on 31-3-1994, claiming unabsorbed business loss of sick company. Return held to be valid. Special provisions of the Act has overriding effect over Income Tax Act. (A. Y. 1992-93)CIT v. J. K. Corporation Ltd. (2011) 331 ITR 303 / 239 CTR 196 / 52 DTR 172 (Cal.)(High Court)

S. 139 :Assessment- Return - Revised return – Intimation - Revision. (S. 143(1), 264)Assessee filed the original return of income showing the capital gain on full value of consideration of deemed transfer. The assessing Officer passed the order of intimation under section 143(1), accepting the return. Assessee filed the revised return within one year of end of assessment year. Assessing Officer has not passed the order on the basis of revised return. Assessee filed the revision petition under section 264 before the Commissioner. Commissioner rejected the petition. On a writ petition, the Court held that, once the revised return is filed within the period of limitation, it is incumbent on the Assessing Officer to process and decide the same with in statutory period of limitation and by not doing so the department cannot be permitted to gain benefit thereof. Accordingly the petition was allowed. (A. Y.1998-99).Saiyad Umarmiya Usmanmiya v. ITO (2011) Tax. L. R. 971 ( Guj.)(High Court)

S. 139 :Assessment- Return - Foreign company – DTAA - India-Netherland.


A foreign company, which is liable to be taxed in India by virtue of section 5(2) is required to file its return under section 139 notwithstanding that it is not liable to pay tax in India due to provisions of DTAA.Vnu International B. V. In Re (2011) 240 CTR 12 (AAR)

S. 139(5) :Assessment- Return - Revised return - Intimation. [S. 143(1)(a)]An intimation under section 143(1)(a) of the Act cannot be equated with an assessment framed under section 143(3) of the Act and the Assessing Officer cannot refuse to process the revised return and modify the intimation in accordance with section 143(1B) of the Act. (A. Y. 1995-96).CIT v. Himagiri Foods Limited (2011) 333 ITR 508 / 231 CTR 470 / 38 DTR 201 (Delhi)(High Court)

S. 140 :Assessment- Return - Not signed by managing director - Curable defects. (S. 292B)Return of Company not signed by Managing Director but by person authorized by Board resolution, defects curable under section 292B. (A. Ys. 2001-02 and 2002-03).Hind Samachar Ltd. v. UOI (2011) 330 ITR 266 / (2008) 217 CTR 637 / 169 Taxation 302 / 5 DTR 88 (P&H)(High Court)

S. 142(2A) : Assessment – Special audit – No evidence that Assessing Officer had found accounts complex – Order for special audit not valid.No record that the Assessing Officer had considered the accounts and found them to be complex, and in the absence of recording with regards to the complexities of accounts on which he had formed an opinion with regards to the complexities of accounts order passed under section 142(2A) for special audit was held to be not valid. (A. Y. 2005-06)Farmsons Fashion Pvt. Ltd. v. Dy. CIT (2011) 332 ITR 115 / 55 DTR 364 / 241 CTR 568 (Guj.)(High Court)

S. 142A : Assessment - Estimate by valuation officer in certain cases - Reference to district valuation officer. Where the assessment is framed by the assessing officer and the appeal is decided by the CIT(A) prior to 30.09.2004 it is not open to the assessing officer to order valuation of property by District Valuation Officer (DVO) as the provision of section 142A are not retrospective.CIT v. Naveen Gera (2011) 56 DTR 170 / 328 ITR 576 (Delhi)(High Court) S. 143(2) : Assessment - Notice.Where notice under section 143(2) was served upon the assessee after a period of 12 months from the end of the month in which the return was filed, it was held that the proceedings in pursuance of such notice was invalid and liable to be quashed.Dy. CIT v. Maxima Systems Ltd. (2011) 198 Taxman 192 (Guj.)(Mag.)(High Court)

S. 143(2) : Assessment - Service of notice.The assessee having participated in proceedings before the Assessing Officer, the assessment cannot be held to be invalid for non-service of notice under section 143(2). (A. Y. 2002-03)CIT v. Ram Narain Bansal (2011) 202 Taxman 213 (P&H)(High Court)Editorial: This view departs from the ratio of the Apex Court in ‘Hotel Bluemoon’. This view is also contrary to the one taken by the Special Bench of the Tribunal in Kuber Tobacco & that of the Bombay High Court in Salman Khan’s case which are in favour of the assessee and which hold that section 292BB shall apply only from A.Y. 2008-09 onwards.


S. 143(2) : Assessment – Validity – Service of notice.In the absence of service of notice under section 143(2) or if the notice is served after the statutory time limit under section 143(2) then the assessment in such circumstances is invalid. (A. Y. 2004-05 to 2006-07)CIT v. Mayawati (Ms.) (2011) 135 TTJ 167 / 42 SOT 59 / 48 DTR 283 (Delhi)(Trib.)Kiran Bansal (Mrs.) v. ACIT (2011) 135 TTJ 676 / 139 ITD 575 / 10 ITR 180 / 131 ITD 575 (Delhi)(Trib.)

S. 143(2) : Assessment - Validity of notice - Not pressed before CIT(A) - Cannot press the ground after gap of five years.Assessee contended that it did not receive notice issued under section 143(2), Assessee’s representative attended and assessee has not raised the issue of service of notice before the Assessing Officer. The ground was taken before the CIT(A) and the same was not pressed. The Tribunal held that the assessee cannot press the ground after gap of five years. (A. Y. 2003-04).Thistle Properties (P) Ltd. v. ACIT (2011) 55 DTR 81 / 138 TTJ 538 / (2012) 134 ITD 6 (Mum.)(Trib.)

S. 143(2) : Assessment - Search and seizure - Notice. (S. 153A)While making an assessment under section 153A service of notice under section 143(2), within the prescribed time is mandatory. In the absence of service of such notice, the Assessing Officer cannot make the addition in the income of the assessee and the Assessing Officer is bound to accept the income as returned by the assessee. (A. Y. 2001-02).Narendra Singh v. ITO (2011) 138 TTJ 615 / 130 ITD 509 / 54 DTR 209 (Agra)(Trib.)

S. 143(3) : Assessment - Opportunity for cross examination - Entire order cannot be set aside.Where an order had been passed by the Assessing officer without granting the assessee an opportunity to cross examine and the assessee preferred a writ petition. The Apex court held that the High Court ought not to have set a side the order of assessment but to have only granted the assessee an opportunity to cross examine the witness. (A. Y. 2004-05).ITO v. M. Pirai Choodi (2011) 334 ITR 262 (SC)Editorial- Decision of madras High Court in M.Pirai Choodi v ITO ( 2008) 302 ITR 40 (Mad), set aside. S. 143(3) : Assessment - Opportunity to cross-examine.The Assessing Officer passed the order without granting an opportunity to cross-examine. The High Court set aside the assessment order in the writ petition. Held, the High Court ought not to have set aside the assessment order but should have granted the assessee an opportunity to cross-examine the witness. (A. Y. 2004-05).ITO v. M. Pirai Choodi (2011) 334 ITR 262 (SC)

S. 143(3) : Assessment - Ad hoc disallowance - Business expenditure.Ad hoc disallowance without any basis out of carriage, labour and sealing expenses cannot be sustained particularly when the Tribunal has allowed similar expenses in totality in an earlier year. (A. Y. 1992-93)Friends Clearing Agency (P) Ltd. v. CIT (2011) 237 CTR 464 / 49 DTR 297 / 332 ITR 269 (Delhi)(High Court)

S. 143(3) : Assessment - Additions - Opportunity of cross examination - Natural justice. Where addition had been made on the basis of a statement of party, behind the assessee’s back and without providing any opportunity to cross-examine the party despite being asked for by the assessee, it was held that the matter was to be remanded back to the Assessing Officer for disposal afresh. (A. Y. 1998-99)


Ashok Lalwani v. ITO (2011) 196 Taxman 82 (Delhi)(Mag.)(High Court)

S. 143(3) : Assessment – Notice by affixture – Assessment held to be invalid.Where notice for assessment had been given only a week prior to the expiry of the limitation period by way of affixture and neither was any other mode of service adopted nor was it shown that the assessee had refused to accept service, it was held that the notice was invalid and consequently the assessment was struck down. (A. Y. 1969-70)CIT v. Kishan Chand (2011) 196 Taxman 88 (P&H)(Mag.)(High Court)

S. 143(3) : Assessment - Additions.Where the assessee himself offered Rs. 20 Lacs as income purportedly on account of deficit in stocks but apart from the assessee’s offer, there was no other material pointing towards such deficit, it was held that addition was not justified.CIT v. C. Jayantilal (2011) 199 Taxman 34 (Mad.)(Mag.)(High Court)

S. 143(3) : Assessment - Order giving effect to order of Tribunal – Scope - Binding nature of order of Tribunal. [S. 237, 254(1)]While giving effect to the appellate order, the Assessing Officer cannot travel beyond the order of Tribunal. Assessing Officer being a quasi judicial authority and subordinate to the Tribunal is bound by the decision of the Tribunal. (A. Y. 2001-02).Lopmudra Mishra v. ACIT (2011) 59 DTR 257 / 243 CTR 66 / 202 Taxman 437 / 237 ITR 92 (Orissa)(High Court)

S. 143(3) : Assessment – Addition - Adhoc addition - Self made vouchers.Adhoc disallowance cannot be made simply holding that self made vouchers cannot be taken as correct and proved, unless some of such vouchers are proved as bogus or fake.ITO v. Bajrang Trading Company (2011) Tax World Vol. XLV Part-1 Page 33 (January, 11)(Trib.)

S. 144 : Assessment - Best judgment – - Liquor trade - General principles - Rejection of books of account - Percentage of 40% could not be adopted. (S. 145)The Assessing Officer rejected the book results and estimated the gross profit at 40% of purchases. This was confirmed by CIT(A). The Tribunal held that the estimation of turnover at eight times the purchase price and 1% there on as profit would be reasonable. The Court held the estimating the net profit at 2% of the estimated sales or 16% of the purchase price would be reasonable. The Court laid down the following general principles (1) The power to levy assessment on the basis of best assessment is not an arbitrary power; it is an assessment on the basis of best judgment of the officer; (2) When best judgment assessment is undertaken it cannot be as per the whims and fancies of the Assessing Officer but should be based on some material either produced by the assessee or gathered by the taxing officer. If for any reason material like books of account produced by the assessee is rejected as unreliable or unsatisfactory, there should be valid reasons for doing so; and (3) whenever best judgment assessment is made, the Court would not call for proof from the officer if there is some nexus between the amount arrived at after some guess work and the facts of the case. (A. Ys. 1993-94 and 1995-96).CIT v. R. Narayana Rao and Others (2011) 338 ITR 625 (AP)(High Court)

S. 144C : Assessment - Dispute resolution panel - Act to expectations & not have perfunctory approach.The DRP, is an authority created under a statute and conferred with the powers, which has the obligation to act as a body living to the expectations which the law mandates. It was held that section 144C empowers


the Dispute Resolution Panel (DRP) to issue directions to the Assessing Officer and cannot be treated as totally redundant or absolutely inefficacious remedy to the assessee. Thus, no assessee can have any kind of apprehension that the approach to the DRP is perfunctory. DIT v. Ericsson AB (2012) 66 DTR 1 / 204 Taxman 192 (Delhi)(High Court)

S. 144C : Assessment - Dispute resolution panel - Transfer pricing - Order cannot be passed if no transfer pricing adjustments made by TPO. (S. 92CA)Where no transfer pricing adjustments had been made by the TPO, the assessee was not an “eligible assessee” and the Assessing Officer had no jurisdiction to pass the draft assessment order. (A. Y. 2006-07).Pankaj Extraction Ltd. v. ACIT (2011) 198 Taxman 6 / 56 DTR 32 / 241 CTR 390 (Guj.)(High Court)

S. 144C : Assessment - Dispute resolution panel - Transfer pricing - Jurisdictional commissioner should not be part of DRP to avoid likelihood of bias – Reassessment. (S.147)Where DIT-II was exercising supervisory functions over the Assessing Officer, the real likelihood of “official bias” cannot be ruled out. Even if the officer is impartial and there is no personal bias or malice, nonetheless, a right minded person would think that in the circumstances, there could be a likelihood of bias on his part. In that event, the officer should not sit and adjudicate upon the matter. He should recuse himself. This follows from the principle that justice must not only be done but seen to be done. In order to ensure that no person should think that there is a real likelihood of bias on the part of the officer concerned, the CBDT is directed to ensure that a jurisdictional Commissioner is not nominated as a member of the DRP under Rule 3(2) of the Rules. By doing this, the principle that justice must not only be done but seen to be done would be ensured. Nonetheless the constitutional validity of section 144C and Rule 3(2) of the Rules was upheld. (A. Y. 2002-03 to 2007-08)Hyundai Heavy Industries Ltd. v. UOI (2011) 60 DTR 145 / 243 CTR 313 / 201 Taxman 237 / 2011 Tax L.R.744 (Uttarakhand)(High Court)

S. 144C : Assessment - Disputes resolution panel – Transfer pricing - Direction.Direction given by the Dispute Resolution Panel to the Assessing Officer to reconsider petitioner’s claim for deduction under section 10A after verifying the income from engineering and design services and examining whether the same qualified for deduction or not giving liberty to Assessing Officer to decide the issue, after hearing the petitioner, is not violative of sub section (5) and (8) of section 144C. (A. Y.2006-07).GE India Technology Centre (P) Ltd. v. Dy. CIT (2011) 243 CTR 451 / 60 DTR 322 / 338 ITR 416 / 201 Taxman 191 (Karn.)(High Court)

S. 144 : Assessment - Rejection of book results - Estimation of Income In the absence of no books of accounts maintained, presumptive taxation does not become the sole criteria to make addition. There must be something more than suspicion to support the assessment.(A. Y. 1994-95) Sajda Parveen (Smt) v. ACIT (2011) 245 CTR 346 (Chhattisgarh)(High Court)

S. 144C : Assessment - Dispute resolution panel - Transfer pricing - Speaking order.Where the Dispute Resolution Panel has brushed a side assessee’s submissions without even a whisper of the assessee’s objections against draft assessment order, and passed a laconic non-speaking order, the matter is remitted to the files of Dispute Resolution Panel for speaking order. (A. Y. 2006-07).GAP International Sourcing India (P) Ltd. v. Dy. CIT (2011) 49 DTR 313 / 8 ITR 177 / 135 TTJ 627 / 44 SOT 56 (Delhi)(Trib.)


S. 144C : Assessment - Dispute resolution panel – Transfer pricing - Speaking order. (S. 92C)Where order of DRP is a non speaking order, same cannot withstand test of law. (A. Y. 2006-07).Geodis Ovearseas (P) Ltd. v. Dy. CIT (2011) 45 SOT 375 / 57 DTR 191 (Delhi)(Trib.)

S. 144C : Assessment - Dispute resolution panel – Transfer pricing - Power to “enhance”- Confined to issues raised in draft assessment order - “Future losses” allowable as deduction.Under section 144C(5), the DRP can issue directions only in respect of the objections raised by the assessee and the objections are to be in terms of the variation proposed in the draft order. Section 144C(8) restricts the powers of the DRP to “confirm, reduce or enhance the variations proposed in the draft assessment order“. Hence, the DRP’s directions have to be with reference to the objections to the variations proposed in the draft order. (GE India Technology Centre v DRP (Kar) followed);As regards the deduction for “future losses“, Accounting Standard AS-7 requires “expected loss” (difference between probable contract costs and contract revenues) to be “recognised as an expense immediately” irrespective of whether work has commenced and the stage of completion of activity. Accordingly, estimated or foreseeable losses are allowable as a deduction. (Jacobs Engineering Private Ltd. (ITAT Mumbai) & Mazagaon Dock 29 SOT 356 followed). Dredging International NV v. ADIT (2011) 64 DTR 1 / 48 SOT 430 (Mum.)(Trib.)

S. 145 : Assessment - Method of accounting – Accounting standard – Advance received in current year for service to be rendered is subsequent year – Income accrued in subsequent year.Accounting standard provides that income accrues only if the corresponding service has to be rendered during the same relevant year. In an event where amount received in advance for a service is to be performed in subsequent year, the advance could not be taken as income in the year of receipt. (A. Y. 1992-98)CIT v. Dinesh Kumar Goel (2011) 331 ITR 10 / 239 CTR 46 / 197 Taxman 375 / 50 DTR 254 (Delhi)(High Court)

S. 145 : Assessment - Method of accounting - Accounts - Valuation of unquoted Govt. securities - Basis of RBI guidelines - Sustainable method of valuation. In case where the securities are not quoted in market, market price is not known under these circumstances Valuation done by assessee of the unquoted Government securities on the basis of Reserve Bank of India guidelines was held to be a sustainable method of valuation. (A. Y. 1994-95)CIT v. The Lord Krishna Bank Ltd. (2011) 55 DTR 277 / 195 Taxman 57 (Ker.)(High Court)

S. 145 : Assessment - Method of accounting - Assessment - Account - Rejection of books.Where discrepancy in stock found during the survey was negligible and no other incriminating documents or material was found. The Hon’ble High Court confirmed the order of the Tribunal, that merely on because the assessee had not maintained stock register book of accounts maintained by the assessee in the ordinary course of business cannot be rejected. (A. Y. 1999-2000)CIT v. Bindals Apparels (2011) 56 DTR 202 / 332 ITR 410 (Delhi)(High Court)

S. 145 : Assessment - Method of accounting - Hybrid system - Change in system to mercantile to comply with company law - Not relevant – Assessee could continue hybrid system for Income-tax purposes.The assessee was in the business of publishing and was showing income received from subscription of magazines and advertisements on cash basis, while income from sale of magazines, research and software development were shown on mercantile basis and the same was accepted by the department in the earlier


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years. But the relevant year under consideration, to comply with the Companies Act, the assessee had to follow mercantile system of accounting. The assessee showed the income arising from subscription of magazines and advertisements on mercantile basis, however the assessee claimed a deduction of the income from subscription of magazines and advertisements which had been accounted for, and the same being not received was claimed as a deduction. The Assessing Officer disallowed the deduction, and the same was upheld by the CIT(A) and Tribunal. On appeal to the High Court by the assessee, the High Court while allowing the appeal held that once the Tribunal had accepted that the assessee was following the hybrid system of accounting for income tax purposes and it was only to comply with the Companies Act, that it changed its system of accounting to mercantile system, the Tribunal erred in holding that the assessee's income for the purposes of income tax proceedings could not hark back to the hybrid system, and therefore held that the Tribunal was not justified in disallowing the claim of deduction by the assessee being income from advertisements accrued but not received. (A. Y. 1989-90)Cyber Media (India) Ltd. v. CIT (2011) 338 ITR 177 / 53 DTR 1 / 198 Taxman 185 (Delhi)(High Court)

S. 145 : Assessment - Method of accountingBefore exercising the power under section 145(3), the Assessing Officer must necessarily express his dissatisfaction about the correctness or completeness of accounts and also note that such system was not regularly followed by the assessee.CIT v. SAS Hotels & Enterprises Ltd. (2011) 334 ITR 194 / 203 Taxman 90 (Mag.)(Mad.)(High Court) S. 145 : Assessment - Method of accounting - Valuation of stock - Completion of contract method - Work in progress.Assessee having followed percentage completion method consistently which has been accepted in earlier as well as in subsequent years valuation of closing work in progress made by it at historical cost cannot be disturbed particularly when the categorical findings of the CIT(A) highlighting that the assessee has not deviated from the guidelines issued by the ICICI under AS-7 has not been challenged by the revenue. Addition made by the Assessing Officer by reworking the closing work in progress at current rates rightly deleted. (A. Y. 1998-1999, 1999-2000).ACIT v. Dharti Estate (2011) 51 DTR 28 / 129 ITD 1 / 136 TTJ 263 (Mum.)(Trib.)(TM)

S. 145 : Assessment - Method of accounting - Estimation of profits – Survey - Rejection of books of accounts. For the relevant assessment year the assessee filed the nil income. In the course of survey the Assessing Officer found that there was certain unaccounted stock. The Assessing Officer rejected the books of account under section 145(3) and estimated the net profit and also sales. He also made separate addition were made in respect of unaccounted stock under section 69 as well as disallowances and additions in respect of excess wastages etc. The direction given to the Commissioner (Appeals) to work out the net profit by applying a rate as had been in the immediately preceding assessment year .(A. Y. 2001-02).ACIT v. Ratan Industries (P) Ltd. (2011) 131 ITD 195 / 64 DTR 355 / (2012) 143 TTJ 24(Agra)(TM)(Trib.)

S. 145 : Assessment - Method of accounting - Despite section 209(3) of the Company’s Act, company can follow cash system for tax purposes.As per section 209(3) of the Company’s Act, a company is obliged to follow the mercantile system and that is its’ “regular method” for purposes of section 145. It was held that the assessee has regularly employed the cash system of accounting in recording its day to day business transactions. It is not a case where the assessee has been maintaining its accounts of day to day business under the mercantile system of


accounting and thereafter prepares accounts in accordance with cash system of accounting for income tax purposes. Section 209(3) of the Companies Act, 1956 does not override section 145 of the Income-tax Act. There was also no valid basis for the Assessing Officer’s action in rejecting the books of account and system of accounting followed by the assessee. Further, since the department has accepted the assessee’s system for the past several years, the principles of consistency apply and there should be finality and certainty in litigation in the absence of fresh facts to show that the assessee’s system of accounting is arbitrary or perverse. Dy. CIT v. Stup Consultants Pvt. Ltd. (2012) 13 ITR 468 (Mum.)(Trib.)

S. 145 : Assessment - Method of accounting - Project completion method - Housing project – Enhancement - Power of Commissioner(Appeals). [S. 251(2)]Assessee having regularly followed project completion method which is an accepted method of accounting and the Assessing Officer having accepted the same in the preceding as well as in the subsequent assessment years, there was no justification to reject the said method and apply the percentage completion method when the assessee has offered the income in the year of completion of the project. As the Commissioner of (Appeals) has not issued the enhancement notice as required under section 252(2), while enhancing the income, the Commissioner of (Appeals) was not justified in enhancing the income by rejecting the project completion method followed by the assessee. ( A.Ys 2005-06 to 2007-08).Haware Constructions (P) Ltd. v. ITO (2011) 64 DTR 251 (Mum.)(Trib.)

S. 145 : Assessment - Method of accounting - Project completion method - Income - Accrual – Builder - Slum rehabilitation project - Sale of TDR - Income. (S. 5)Assessee is in the business of builder, had taken a slum rehabilitation project. Assessee had been allotted TDR in lieu of handing over possession of constructed transit building. Assessee has sold the TDR in two installments. Assessing Officer taxed the receipts of TDR as independent income. Assessee contended that as they are following project completion method as per AS. 7, income from project had to be computed in year of completion. The Tribunal directed the Assessing Officer to compute the income of project after taking into consideration entire expenditure and receipt from beginning of year including TDRs. In case the project was not found complete, Assessing Officer would set off TDR receipts against work in progress and no income would be assessed on account of TDR receipts separately. (A. Y. 2007-08).ACIT v. Skylark Build (2011) 48 SOT 306 (Mum.)(Trib.)

S. 145 : Assessment - Method of accounting - Valuation of stock - Excess stock found during Survey. (S. 133A)A survey was conducted at assessee’s premises in course of which inventory of stock was prepared. There was discrepancy in value of stock as per books and as per inventory taken at the time of survey. After survey assessee filed its return wherein value of excess stock found at the time of survey was reduced by an amount of Rs. 5.18 lakhs. Assessee contended that assorted or mixed pipes valued at market price were merely scrap, and thus their scrap value was to be taken in to account while valuing the stock. The Tribunal held that burden lied on assessee for changing value drastically in respect of valuation of stock. As the assessee has not filed any credible or reliable evidence to show that cost or market price was either of items mentioned was not proper at the time of survey, the contention of the assessee was not accepted. (A. Y. 2003-04).K. G. Sharma v. Dy. CIT (2011) 133 ITD 112 (Delhi)(Trib.)

S. 145 : Assessment – Method of accounting - Estimation of income. (S. 44AE)


Where the Assessing Officer had rejected the books of account of the assessee and estimated income by making various additions, the income of the assessee should be estimated as per formula prescribed under section 44AE. (A. Y. 2006-07)Kesharbhai Ghamarbhai Choudhary v. ITO (2011) 141 TTJ 94 (Ahd.)(UO)(Trib.)

S. 145A : Assessment - Method of accounting – Accounts - Valuation of closing stock - Excise duty.Excise duty on sugar manufactured but not sold is not to be included in the value of closing stock. In respect of excisable goods manufactured and lying in stock excise duty liability would get crystallized on date of clearance of goods and not on date of manufacture and therefore, till date of clearance of excisable goods, assessee cannot be said to have incurred excise duty liability. (A. Y. 2001-02). CIT v. Loknete Balasaheb Desai S.S.K. Ltd. (2011) 200 Taxman 238 / 59 DTR 169 / 243 CTR 181 / 339 ITR 288 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Exempted income - Despite bar in Proviso to section 14A, section 147 reopening for earlier years valid. (S. 14A)For A.Y. 2000-01, the assessee filed a return on 30.11.2000. As section 14A was inserted subsequently by FA 2001 (w.r.e.f 1.4.62) and was tabled in Parliament on 28.2.2001, the assessee did not make any disallowance under section 14A. The Assessing Officer also did not make a disallowance in the section 143(3) order passed on 7.3.2003. After the expiry of 4 years, the Assessing Officer sought to reopen the assessment to make a disallowance under section 14A. The assessee challenged the reopening on the ground that (i) under the Proviso to section 14A, a reopening under section 147 for A.Y. 2001-02 & earlier years was not permissible, (ii) as section 14A was not on the statute when the ROI was filed, there was no failure to disclose & (iii) as the Assessing Officer had also sought to rectify under section 154, he could not reopen under section 147. The High Court (197 TM 415) dismissed the Writ Petition inter alia on the ground that “the Proviso to section 14A bars reassessment but not original assessment on the basis of the retrospective amendment. Though the ROI was filed before section 14A was enacted, the assessment order was passed subsequently. The Assessing Officer ought to have applied section 14A and his failure has resulted in escapement of income. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality“. On appeal by the assessee to the Supreme Court, HELD dismissing the SLP:In our view, the re-opening of assessment is fully justified on the facts and circumstances of the case. However, on the merits of the case, it would be open to the assessee to raise all contentions with regard to the amount of Rs.98.46 lakhs being offered for tax as well as it’s contention on section 14A of the Income Tax Act, 1961. Honda Siel Power Products Ltd. v. Dy. CIT (2012) 340 ITR 64 (SC)

S. 147 : Assessment - Reassessment – Scope - Items unconnected with escapement for which notice was issued. (S. 148)If in the course of reassessment, it comes to the notice of the Assessing Officer that any item or items other than the item of escaped income for which original assessment was reopened, have also escaped assessment, he is bound to assess such items of income also in the course of reassessment. (A. Y. 2001 to 2003)CIT v. Best Wood Industries & Saw Mills (2011) 237 CTR 404 / 331 ITR 63 / 50 DTR 143 (Ker.)(FB)(High Court)

S. 147 : Assessment - Reassessment - Full and true disclosure - After four years – Deduction - Captive power plant - Expansion of project. (S. 80IA, 80IB)


Assessee having claimed deduction under section 80IA, in respect of the profits made by its captive power plant disclosing the computation of profits and explaining the break up thereof and disclosed the basis on which it was claimed deduction under section 80IB, in respect of the refinery expansion project and lube unit, it cannot be said that there was a failure on the part of the assessee to disclose fully all material facts necessary for the assessment and therefore reopening of assessment beyond the period of four years from the end of the relevant year was not justified. (A. Y. 2002-2003)Hindustan Petroleum Corporation Ltd. v. Dy. CIT (2011) 238 CTR 28 / (2010) 328 ITR 534 / 192 Taxation 178 / 42 DTR 262 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Full and true disclosure - After four years - Change of opinion.Assessing Officer having reopened the assessment on the sole basis that the system of accounting adopted by the assessee which has been accepted while framing the original assessment is not appropriate, without making any allegation that there was non–disclosure of material facts by the assessee at that time of original assessment, It is a case of mere change of opinion and therefore, reopening of assessment after expiry of four years from the end of the relevant assessment years was not valid. (A. Ys. 1995-96 and 1997-98)CIT v. Manish Ajmera (2011) 51 DTR 117 / 238 CTR 469 (Raj.)(High Court)

S. 147 : Assessment - Reassessment - Reopening for A.Y. 2000-01 valid despite proviso to section 14A - Material facts must be disclosed during assessment proceedings. The Proviso to section 14A bars reassessment but not original assessment on the basis of the retrospective amendment. The object and purpose of the Proviso is to ensure that the retrospective amendment is not made as a tool to reopen past cases which have attained finality.It is the duty of the assessee to bring to the notice of the Assessing Officer particular items in the books of account or portions of documents which are relevant. Material facts are those facts which if taken into accounts they would have an adverse affect on assessee by the higher assessment of income than the one actually made. (Consolidated Photo and Finvest Ltd. v. ACIT (2006) 281 ITR 394 / 200 CTR 433 / 151 Taxman 41 (Delhi) followed);Accordingly, the fact that there were section 154 proceedings is not a bar to the section 147 proceedings. It was further held that the scope of section 154 & 147 / 148 are different and it cannot be said as a general principle that if notice under section 154 is issued, then notice under section 147 / 148 is barred or prohibited (Hindustan Unilever Ltd. v. Dy. CIT (2010) 325 ITR 102 (Bom) distinguished).(A. Y. 2000-2001)Honda Siel Power Products Ltd. v. Dy. CIT (2011) 197 Taxman 415 / 52 DTR 353 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Reason to believe - Subsequent Supreme Court decision. [S. 10(29)]Judgment of the Supreme Court holding that exemption under section 10(29) is available only to that part of income which is derived from letting of godowns or warehouses and not the income derived from other sources constituted a valid basis for reopening the assessments. The Tribunal having not touched upon the question as to whether or not this very issue was discussed in the original assessment to the assessee that it was a case of change of opinion, order of Tribunal is set aside and the matter is remitted back to the Tribunal for fresh consideration only on this aspect. (A. Y. 1995-96 and 1997-98).Central Warehousing Corporation v. ACIT (2011) 51 DTR 198 / 239 CTR 460 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Beyond four years - No failure on the part of assessee - Bad Debts.


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Allowance of bad debt was specifically raised in the original assessment proceedings and on receiving explanation from assessee the claim of assessee was allowed, reassessment held to be invalid. (A. Y. 2004-05)Yash Raj Films P. Ltd. v. ACIT (2011) 332 ITR 428 / (2012) 65 DTR 363 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Compensation on acquisition of Land – Enhancement by Supreme Court.Initiation of the reassessment proceedings in respect of escaped income due to acquisition of petitioner’s land was not vitiated as Assessing Officer had reasons to believe that the income chargeable to tax had escaped assessment. (A. Ys. 1989-90 to 1994-1995 and 1998-99).Maya Rastogi (Smt) v. CIT (2011) 52 DTR 237 / 241 CTR 67 / 196 Taxman 283 (All)(High Court)

S. 147 : Assessment - Reassessment - Change of opinion - Income subject matter of block assessment. (S. 158BC)Once the Assessing Officer proceeds to make block assessment under section 158BC based on materials gathered during search under section 132, he cannot proceed to make reassessment under section 147 on the basis of the same material, after block assessment is cancelled by the first appellate authority. Assessing Officer has no jurisdiction to assess the very same amount, which was considered and given up while making block assessment. (A. Y. 1992-93)CIT v. C. Sivanandan (2011) 52 DTR 428 (Ker.)(High Court)

S. 147 : Assessment - Reassessment – Change of opinion – Investment – Business income.Where assessment was completed holding that the income from conversion of equity share from stock-in-trade to investment was business income. Reassessment proceedings initiated merely by taking view that income should taxed under the head short term capital gain amounted to a mere change of opinion as such liable to be quashed. (A. Y. 2005-06)Ritu Investment P. Ltd. v. CIT (2011) 51 DTR 162 (Delhi)(High Court)

S. 147 : Assessment - Reassessment – Search and seizure – Same material – Block assessment held to be invalid. (S. 158BC)Once materials are gathered during the search proceedings under section 132 of the Act it is up to the Assessing Officer to make either block assessment under sections 158BC or assessment under section 147 of the Act whichever he finds appropriate. However, once the assessing officer proceeds to make assessment under section 158BC which is cancelled by the appellate authority. The Assessing Officer cannot proceed to make assessment under section 147 of the Act on the basis of the same material. (A. Y. 1992-93)CIT v. C. Sivanandan (2011) 52 DTR 428 (Ker.)(High Court)

S. 147 : Assessment - Reassessment – Change of opinion.Change of opinion leading to ‘reason to believe’ – opinion formed on a claim at the time of framing original assessment cannot be changed subsequently on the same set of materials available in record. In the absence of any substantive additional materials, it will amount to change of opinion; therefore, re-opening of assessment is bad-in-law. (A. Y. 1995-96).Gujarat Power Corporation Ltd. v. Dy. CIT (2011) 238 CTR 91 / 202 Taxman 303 / 48 DTR 226 (Guj.)(High Court)

S. 147 : Assessment - Reassessment – Compensation on acquisition of land – Enhancement by Supreme Court.


Initiation of the reassessment proceedings in respect of escaped income due to acquisition of petitioner’s land was not vitiated as Assessing Officer had reasons to believe that the income chargeable to tax had escaped assessment. (A. Ys. 1989-90 to 1994-95 & 1998-99).Maya Rastogi (Smt) v. CIT (2011) 52 DTR 237 / 291 CTR 67 / 331 ITR 116 / 196 Taxman 283 (All)(High Court)

S. 147 : Assessment - Reassessment – Change of opinion – Income subject matter of block assessment. (S. 158BC)Once the Assessing Officer proceeds to make block assessment under section 158BC based on materials gathered during search under section 132, he cannot proceed to make reassessment under section 147 on the basis of the same material, after block assessment is cancelled by the first Appellate Authority. Assessing Officer has no jurisdiction to assess the very same amount, which was considered and given up while making block assessment. (A. Y. 1992-93)CIT v. C. Sivanandan (2011) 52 DTR 428 (Ker.)(High Court)

S. 147 : Assessment - Reassessment – CBDT by notification withdrew approval for deduction to the assessee with respect to the deduction of donation under section 35(1)(ii) – Assessment re-opened – Notification quashed – Reasons for reopening does not survive. (S. 35, 148)The assessee was granted deduction for donation to an institute which was approved under section 35(1)(ii). CBDT withdrew the approval to the institution, on the basis of which the assessee assessment was reopened. Subsequently the notification was quashed by the Allahabad High Court, the High Court held that reasons for reopening the assessment under section 147/148 does not survive.Ultra Marine Air Aids (P) Ltd. v. ACIT (2011) 332 ITR 273 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Full and true disclosure - Beyond four years - EOU. (S. 10B)When there was no failure to disclose fully and truly all material facts by assessee, presumption on the part of the Assessing Officer that the assessee has failed to achieve 82 percent value addition in order to be treated as hundred percent EOU required for availing deduction under section 10B was incorrect and reopening of the assessment beyond four years was bad in law. (A. Y. 2003-04).Jayant Agro Chemicals Ltd. v. ITO (2011) 241 CTR 424 / 55 DTR 361 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - If assessee does not ask for section 147 reasons & object to reopening, ITAT cannot remand to Assessing Officer & give assessee another opportunity.While the Assessing Officer is required to record reasons, Law does not mandate the Assessing Officer to suo moto supply the reasons to the assessee. It is for the assessee to demand the reasons and raise objections to the reopening which the Assessing Officer is required to dispose of by passing a speaking order. As the assessee did not ask for the reasons and instead participated in the reassessment proceedings, the Tribunal could not have restored the matter back to the file of the Assessing Officer and give another opportunity to the assessee to raise objections to the “reasons to believe” recorded by the Assessing Officer. It is trite that what cannot be done directly, it is not allowed indirectly as well. This novel and ingenuousness method adopted by the Tribunal in setting aside the reassessment orders on merits cannot be accepted.However, also held that as the assessee had challenged the validity of reassessment before the CIT(A), it ought to have been provided with the reasons and so the matter was remitted for supply of reasons. CIT v. Safetag International India P. Ltd. (2011) 332 ITR 622 (Delhi)(High Court)


S. 147 : Assessment - Reassessment - If Assessing Officer does not assess income for which reasons were recorded under section 147, he cannot assess other income under section 147.Though Explanation 3 to section 147 inserted by the F.A. 2009 w.e.f 1.4.1989 permits the Assessing Officer to assess or reassess income which has escaped assessment even if the recorded reasons have not been recorded with regard to such items, it is essential that the items in respect of which the reasons had been recorded are assessed. If the Assessing Officer accepts that the items for which reasons are recorded have not escaped assessment, it means he had no “reasons to believe that income has escaped assessment” and the issue of the notice becomes invalid. If so, he has no jurisdiction to assess any other income. (Jet Airways 331 ITR 236 (Bom) followed).Ranbaxy Laboratories Ltd. v. CIT (2011) 242 CTR 117 / 336 ITR 136 / 200 Taxman 242 / 57 DTR 281 (Delhi)(High Court)

S. 147 : Assessment - Reassessment – Despite “Wrong Claim”, re-opening invalid if failure to disclose not alleged.It is necessary for the Assessing Officer to first state that there is a failure to disclose fully and truly all material facts. If he does not record such a failure he would not be entitled to proceed under section 147. There is a well known difference between a wrong claim made by an assessee after disclosing all the true and material facts and a wrong claim made by the assessee by withholding the material facts. Titanor Components Limited v. ACIT (2011) 60 DTR 273 / 243 CTR 520 (Bom.)(High Court)(Goa)Editorial:- Hindustan Lever (2004) 268 ITR 332 / 190 CTR 166 / 137 Taxman 479 (Bom.) followed).

S. 147 : Assessment - Reassessment - Reason to believe – Supreme Court.Decision of Supreme Court forming the law from the very beginning of the existence of provision forms the material belief on escapement and therefore, becomes a valid reason to reopen. (A. Ys. 2005-06 & 2006-07).Kartikeya International v. CIT (2011) 241 CTR 489 / 329 ITR 539 (All)(High Court)

S. 147 : Assessment - Reassessment - Change of opinion.On the claim of 80-IB, the Assessee had furnished all the informations during assessment proceeding regarding the alleged manufacturing process involved on the basis of which the assessment was concluded by the Assessing Officer. On the same set of facts and materials, the Assessing Officer cannot take a different view by taking recourse to section 147 which will amount to change of opinion. (A. Ys. 1998-99 to 2001-02) Amrit Fees Ltd. v. CIT (2011) 239 CTR 82 / 196 Taxman 244 / 51 DTR 315 (Cal.)(High Court)

S. 147 : Assessment - Reassessment - After four years - Internal auditor. Notice issued after expiry of four years from the end of the relevant assessment year merely based on the report of the internal auditors was held to be bad in law when all the particulars were duly disclosed by the Appellant during the original assessment proceedings under section 143(3) of the Act. (1997-98).CIT v. Simbhaoli Sugar Mills Ltd. (2011) 333 ITR 470 / 55 DTR 233 / 241 CTR 249 (Delhi)(High Court) S. 147 : Assessment - Reassessment - After four years - Exemption.Notice issued under section 148 of the Act to reassess the income of the assessee after expiry of four (4) years was held to be bad in law where the assessee had duly disclosed all the fact relating to sale of shares, working of capital gain and exemption claimed under section 54F of the Act in his return of income and in the course of original assessment proceedings under section 143(3) of the Act. (A. Y. 1996-97).


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Vikram Kothari (HUF) v. State of Uttar Pardesh & Ors. (2011) 56 DTR 43 / 242 CTR 179 / 200 Taxman 152 (All)(High Court)

S. 147 : Assessment - Reassessment – Merger – Deduction - With in four years. (S. 80HHC, 80I, 80IA) Where the assessing officer after due application of his mind allowed the assessee’s claim of deduction under section 80HHC, 80I and 80IA of the Act after some modification, for which assessee preferred an appeal before the appellate authority. Reopening the assessment within four (4) years on the ground that deduction under section 80HHC, 80I and 80IB of the Act was excessive was held to be bad in law for the reason that the assessment order has merged with the order of the CIT(A) and had no independent existence. (A. Y. 1996-97).United Phosphorus Ltd. v. Addl. CIT (2011) 56 DTR 193 (Guj.)(High Court)

S. 147 : Assessment - Reassessment - Full and true disclosure - Notice after expiry of four years - Change in Shareholding. (S. 79)Assessing Officer reopened the assessment only on the ground that there is a change in the share holding more than 51% in the assessment year 2001-02 in which the loss was incurred and therefore the loss incurred in the assessment year 2001-02 cannot be allowed to be set off in the assessment year 2003-04. The Court held that the effective shareholding of Ned Bank Nihilent Technologies (P) Ltd. in the assessee company has gone down below 51% having been specifically brought to the notice of the Assessing Officer by the assessee, there was no failure to disclose fully and truly all material facts necessary for the purpose of assessment and reassessment proceedings could not be initiated after four yeas. (A. Y.2003-04).Nihilent Technologies (P) Ltd. V. Dy. CIT (2011) 59 DTR 281 / 243 CTR 77 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Valuation of closing stock. (S. 145A)Assessee had not included CST and excise duty paid on closing stock ,while making its valuation thereby claimed excess loss. The Court held that the Assessing Officer had sufficient reason to form belief that income of assessee had escaped assessment, hence reassessment held to be valid. (A. Ys. 2000-2001, 2001-02).Ginni Filaments Ltd. v. CIT (2011) T ax. L. R. 538 (All)(High Court)

S. 147 : Assessment - Reassessment – Notice – Validity – Status – HUF. (S. 292B)Assessee and also his counsel through their respective letters having submitted that return which had already filed in the capacity of HUF may be treated to have been filed in pursuance to the notice issued under section 148. The said notice issued by the Assessing Officer without specifying the status of the assessee did not render the proceedings invalid, as the said defect stood cured by operation of section 292B. (A. Ys. 1976-77 to 1978-79).CIT v. Rajbir Singh (2011) 59 DTR 285 / 243 CTR 185 (P&H)(High Court)

S. 147 : Assessment - Reassessment – Notice – Validity - Service. (S. 292B, 292BB)Assessee having filed return stating that the same is filed in response to notice under section 148 and no objection was raised before the Assessing Officer regarding validity of service of notice under section 148, in view of section 292BB it cannot be contended that there was valid service of notice. Section 292BB is applicable to alI proceedings pending on 1st April, 2008. (A. Y. 1998-99)CIT v. Panchvati Motors (P) Ltd. (2011) 59 DTR 289 / 243 CTR 189 (P&H)(High Court)

S. 147 : Assessment - Reassessment - Notice under section 142(2).


There is no requirement of notice under section 143(2) in the case of reassessment under section 147. (A. Ys. 1999-2000 & 2000-01) CIT v. Madhya Bharat Energy Corpn. Ltd. (2011) 62 DTR 37 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Beyond four years - Retrospective amendment. (S. 80HHC) During the course of assessment proceedings for A. Y. 2001-02 & 2002-03, assessee’s claim for deduction under section 80HHC was allowed. After the expiry of four years from the end of relevant assessment year an amendment to section 80HHC was brought with retrospective effect from 01-04-1998. It was admitted position that the conditions were not therein at the time of filing of return nor at the time of original assessments. Assessing Office issued notice under section 148. The Tribunal, on examination of material on record, concluded that all the relevant facts were available on record and that it cannot be said that assessee had failed to disclose fully and truly all material facts, and thus no reopening could be done. Held that, the Tribunal rightly concluded that proviso to section 147 could not be invoked merely because there was an amendment in future which was introduced retrospectively and covered period in question, and thus Tribunal order has to be confirmed. (A. Y. 1984-85)CIT v. Ganesh Rice Mills (2011) 202 Taxman 96 (All)(High Court)(Mag.)

S. 147 : Assessment - Reassessment - Income escaping assessment.During the search no books of account or documents or money or bullion or jewellery or any other valuable articles or things were found. It was a solitary statement of the assessee, which too was retracted immediately thereafter. Furthermore, apart from the statement there were no particulars coming forward namely who were the dummy subscribers, whether shares from the so-called dummy subscribers were transferred in the name of the assessee or assessee remained the benami owner thereof and was in the control and possessions of those shares, etc. No such questions were even put by the Assessing Officer to the assessee after recording the statement. Thus the only material for issuance of notice under section 148 was the statement recorded under section 132(4). Even if the statement was to be believed, that would have been the basis for issuing the notice for A. Y. 1995-96 and not A. Y. 1994-95. It was merely a figment of imagination on the part of the CIT(A) that statement should not be believed to the extent that that cash was paid in the current financial year i.e. 1994-95 as normally such cash is paid at the time of purchase of shares by the so called dummy subscribers. It was not even recorded in the ‘reasons to believe’ by the Assesing Officer. Therefore, the order of the CIT(A) on that aspect was clearly erroneous and justifiably set aside by the Tribunal. (A. Y. 1994-95)CIT v. Bela Jain (Smt) (2011) 202 Taxman 90 / 225 Taxation 426 (Delhi)(High Court)(Mag.)

S. 147 : Assessment - Reassessent - “Full & true disclosure of material facts” means “specific” disclosure of “each” fact.The assessee entered into an agreement in July, 2001 for sale of development rights for Rs. 39 crores. The transfer was in December, 2003. The assessee computed LTCG of Rs. 23.19 crores. The assessee invested in eligible bonds between Feb,. & June 2002 (after the agreement to sell but before the transfer) and claimed exemption under section 54EC. During the assessment proceedings, the Assessing Officer asked for a copy of the agreements with the purchaser and other details which the assessee furnished. A copy each of the section 54EC bonds (which gave the dates of investments) was also furnished. The Assessing Officer allowed the deduction as claimed. After the expiry of 4 years from the end of the assessment year, the Assessing Officer issued a notice under section 148 claiming that as the investments were made prior to the date of transfer (Dec., 2003), section 54EC deduction was not admissible. The assessee filed a Writ Petition


to challenge the reopening on the ground that there was no failure on its part to make a full and true disclosure of material facts. HELD dismissing the Petition:(i) “Full and true disclosure of material facts” means that the disclosure should not be garbled or hidden in the crevices of the documentary material which has been filed by the assessee with the Assessing Officer. The assessee must act with candor. A full disclosure is a disclosure of all material facts which does not contain any hidden material or suppression of fact. It must be truthful in all respects;(ii) On facts, though the Assessing Officer enquired into the matter and the assessee furnished a copy of the section 54EC bonds (from which the dates of allotment/ investment were evident), there was no (specific) reference by the assessee to the dates on which the amounts were invested in the section 54EC bonds. Also, it was it was evident that the Assessing Officer had not applied his mind to the issue of section 54EC exemption. Accordingly, the Assessing Officer was justified in reopening the assessment. The Indian Hume Pipe Co. Ltd. v. ACIT (Bom.)(High Court) www.itatonline.org

S. 147 : Assessment - Reassessment - Retrospective amendment does not mean failure to disclose material facts. (S. 80HHC)After the expiry of four years from the end of the assessment year, the Assessing Officer re-opened the assessment under section 147 by relying on the retrospective amendment to section 80HHC by the Taxation Laws (Amendment) Act, 2005 w.e.f. 1.4.1998. The CIT(A) and Tribunal (included in file) struck down the reopening. On appeal by the department, HELD dismissing the appeal:The assessment was sought to be reopened on account of retrospective amendment to section 80HHC introduced by the Taxation Laws Amendment Act, 2005 with effect from 1st April, 1998. If the legislature amends the provisions of the Act with retrospective effect, it cannot be said that there was failure on the part of the assessee to disclose fully and truly all material facts relevant for the purpose of assessment.CIT v. Mohan & Co. (Exports) (Bom.)(High Court) www.itatonline.org

S. 147 : Assessment - Reassessment - Non disclosing of primary facts – Exemption - Change of opinion. (Within four years)Assessee company was engaged in domain name registrations and website hosting services. For the Assessment years 2002-03 and 2004-05, it claimed deduction under section 10A. Assessing Officer disallowed the said claim. In appeal Commissioner (Appeals) allowed the claim, which had become final. On the basis of that the Assessing Officer allowed the claim for the Assessment years 2004-05 to 2006-07. For the Assessment year 2007-08 the assessee did not make the claim as the returned income was loss. Subsequently the Assessing officer issued notice under section 148 on the ground that domain registration service did not fall under category of web site services. The Court held that since reasons furnished for reopening of assessment did not contain any new tangible material or a reference to any new facts which had come on record and which were not present to mind of Assessing Officer when earlier assessments were finalized, it could be said that Assessing Officer sought to reopen the assessment for assessment years 2006-07 and 2007-08 purely on basis of a change of opinion which is not sustainable in law. Accordingly notice under section 148 dated 18th March 2011 was set aside. (A Ys 2006-07 & 2007-08).Direct Information (P) Ltd. v. ITO (2011) 203 Taxman 70 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Non disclosure of primary facts - Change of opinion - Share from AOP – Survey - With in four years - S. 167B(2).Assessing Officer after considering all relevant documents passed assessment order. However, thereafter Assessing Officer issued notice for reopening assessment on ground that documents seized during survey at assessee’s premises revealed that assessee had received its share from gross sale proceeds and not from


share of profits against surrender of development rights in land. The Court held that when the revenue had evidently treated AOP as a valid entity in law and had brought it to tax in order of assessment for assessment year 2007-08 and material relied upon by Assessing Officer for reopening assessment had been submitted during original assessment proceeding, reopening of assessment was un justified. (A. Y. 2007-08).Sanand Properties (P) Ltd. v. Jt. CIT (2011) 203 Taxman 127 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Failure to disclose - Lapses by Assessing Officer – Assessing Officer must specify what facts are failed to be disclosed - Lapse by Assessing Officer no ground for reopening if primary facts disclosed.In A.Y. 2001-02, the Assessing Officer assessed advances of Rs.1.56 crores received from a group concern as “deemed dividend” under section 2(22)(e). In appeal, the CIT(A) held that the advances received in earlier years could not be assessed. The Assessing Officer thereafter reopened the assessment for A.Y. 1999-00 (after 4 years from the end of the A. Y.). Though the Assessing Officer alleged that there was a failure on the part of the assessee to disclose full and true material facts, he did not specify what that failure was. The reopening was upheld by the CIT(A) & the Tribunal. On appeal to the High Court, HELD allowing the appeal:(i) In A. Y. 1999-00, the Assessing Officer inquired into the details of advances received but did not make any addition under section 2(22)(e). If the Assessing Officer fails to apply legal provisions, no fault can be attributed to the assessee. The assessee is merely required to make a full and true disclosure of material facts but is not required to disclose, state or explain the law. A lapse or error on the part of the Assessing Officer cannot be regarded as a failure on the part of the assessee to make a full and true disclosure of material facts;(ii) Though the recorded reasons state that the assessee had failed to fully and truly disclose the facts, they do not indicate why and how there was this failure. Mere repetition or quoting the language of the proviso is not sufficient. The basis of the averment should be either stated or be apparent from the record;(iii) Explanation (1) to section 147 which states that mere production of books is not sufficient does not apply a case where the Assessing Officer failed to apply the law to admitted facts on record. (iv) The allegation that the assessee did not disclose the true and correct nature of payment received from the sister concern nor disclosed the extent of holding of the sister concern so as to enable the Assessing Officer to apply his mind regarding section 2(22)(e) is not acceptable. The assessee had filed statement of accounts of each creditor and indicated them to be sister concerns. The primary facts were furnished. The law does not impose any further obligation of disclosure on the assessee (CIT v Burlop Dealers Ltd. 79 ITR 609 (SC) followed). (A. Ys. 1999-2000 & 2000-01)Atma Ram Properties Pvt. Ltd. v. Dy. CIT (2011) 203 Taxman 408 (Delhi)(High Court)

S. 147 : Assessment - Reassessment – Non-resident - Long term capital gains – Proviso - Rate of tax. (S. 48, 112)Assessing Officer taxed long term capital gains at the rate of ten percent in the hands of the non resident assessee by invoking proviso to section 112, reopening of assessment on the ground that the long term capital gain was erroneously taxed at the rate of ten percent under the proviso to section 112(1) instead of twenty percent is not valid in the absence of any reason recorded to the effect that proviso to section 112 is not applicable to the case of the assessee, or that the long term capital gains earned by the assessee do not fall in any of the categories specified in the proviso to section 112. ( A. Y. 2001-02).DIT v. May & Baker Ltd. (2011) 62 DTR 257 / 244 CTR 569 (Bom.)(High Court)


S. 147 : Assessment - Reassessment - Non disclosure of primary facts - Share of profit from AOP. [S. 167B(2)]Assessee in its return of income computed its business income after deducting certain amount which was its share of profit from an AOP doing business of real estate developers and was exempt under section 167B(2). Assessing Officer after considering all the relevant documents passed the order. The Assessing Officer issued the notice for reopening facts of assessment on ground that documents seized during survey at assessee’s business revealed that assessee had received its share from gross sale proceeds and not from share of profits against surrender of development rights in land. The Court held that when the Department had evidently, treated AOP as a valid entity in law and brought it to tax in order of assessment year 2007-08 and material relied upon by Assessing Officer for reopening assessment had been submitted during original assessment proceeding, reopening of assessment was unjustified. (A. Y. 2007-08).Sanand Properties (P) Ltd. v. Jt. CIT (2011) 203 Taxman 127 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Change of opinion - Revenue audit - Registration. (S. 11, 12AA)Assessing Officer allowed the exemption after taking into consideration the registration granted under section 12AA, by the CIT and after considering the explanation of assessee, reopening of assessment on the basis of audit objection by revenue audit was not justified. (A. Y. 2006-07).Agricultural Produce Market committee v. ITO (2011) 63 DTR 7 (Guj.)(High Court)

S. 147 : Assessment - Reassessment - Reasons held to be not valid - Additions of other items not part of reasons recorded - Cannot be made. Once the reasons recorded by the Assessing Officer to reopen the assessment were not found valid and no additions were ultimately sustained on that, the additions in respect of other items which were not part of reasons to believe cannot be made. (A. Y. 1999-2000).CIT v. Adhunik Niryat Ispat Ltd. (2011) 63 DTR 212 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Change of opinion - Revised statement beyond the statutory period under section 139(5). (S. 139(5), 148)On receipt of notice under section 142(1), the assessee filed a revised statement of total income at Rs. 99,45,288, which included capital gains of Rs. 95,14,653 as against the originally declared income of Rs.1,34,47,493 and capital gain of Rs.1,30,21,230/-. The assessment was completed accepting the revised statement. The assessment was reopened on the ground that the assessee was not entitled to file revised statement beyond the statutory period under section 139(5). The Court held that an opinion having been formed on the very issue on which the assessment is sought to be reopened and that too only issue, it can only be viewed as a change of opinion on the part of the successor Assessing Officer, hence reopening is valid. (A. Y. 2006-07).Rotary Club of Ahmedabad v. ACIT (2011) 63 DTR 388 (Guj.)(High Court)

S. 147 : Assessment - Reassessment - Reason to believe - Absence of new material - Assessment under section 143(3).Assessing Officer reopened the assessment on the ground that business expenses claimed by the assessee could not be allowed as no business was carried on in the relevant assessment year. It was found that earlier years the expenses were allowed under section 143(3), therefore in the absence of any fresh material before the Assessing Officer, reopening of assessment on the basis of material which was already taken in to consideration by the Assessing Officer at the time of original assessment was not valid. (A. Y. 2001-02).


CIT v. Trimurti Builders (2011) 64 DTR 91 / (2012) 246 CTR 308 (MP)(High Court)

S. 147 : Assessment - Reassessment - Failure to disclose material facts - After four years – Limitation - Effect of section 149(1)(b). [S. 149(1)(b)]Section 149 of the income-tax Act 1961, merely prescribes the maximum time limit for issuance of notice under section 148 of the Act based upon the amount involved. The provision does not in any manner override the proviso to section 147 of the Act, after the expiry of four years from the end of the relevant assessment year unless the conditions stipulated there under are satisfied, therefore even in those cases falling under clause (b) of sub-section (1) of section 149 of the Act, if the notice under section 148 is issued beyond a period of four years but with in a period of six years from the end of the relevant assessment year, for the purpose of invoking section 147 of Act, the requirements of the proviso, namely, that there should be failure on the part of the assessee to disclose fully and truly all material facts necessary for his assessment still requires to be satisfied. (A. Y. 2003-04).Sayaji Hotels Ltd. v. ITO (2011) 339 ITR 498 (Guj.)(High Court)

S. 147 : Assessment - Reassessment - Audit objection - If Assessing Officer disputes Audit objection, she cannot use that as “reason to believe”.The Revenue Audit raised an objection that the assessee had made remittances to foreign parties without deduction of TDS under section 195 and that the expenditure ought to have been disallowed under section 40(a)(i). In reply, the Assessing Officer wrote back stating that as the amounts remitted to the foreign parties were not chargeable to tax in India, the assessee was under no obligation to deduct tax under section 195 and that the expenditure was not disallowable under section 40(a)(i). However, she still issued a notice under section 147 and reopened the assessment to disallow the said expenditure. The assessee filed a Writ Petition to challenge the reopening. HELD allowing the Petition:Under section 147, it is only the Assessee Officer’s opinion with respect to the income escaping assessment which is relevant for the purpose of reopening an assessment. While it is true if the audit party brings certain aspects to the notice of the Assessing Officer and thereupon, the Assessing Officer forms his own belief, it may be a valid basis for reopening assessment, the mere opinion of the Audit Party cannot form the basis for the Assessing Officer to reopen an assessment. On facts, the Assessing Officer had categorically come to the conclusion that the objection of the audit party was not valid and that the assessee’s explanation with respect to non-requirement of collection of TDS was required to be accepted. Accordingly, the Assessing Officer could have no “reason to believe” that income had escaped assessment and so the section 148 notice was without jurisdiction.Cadila Healthcare Ltd. v. ACIT (2012) 65 DTR 385 (Guj.)(High Court) S. 147 : Assessment - Reassessment - Change of opinion - Permanent establishment.During the course of the original assessment proceedings, the assessee was called upon to give information and details regarding the nature of business activities in India, it was stated in the letter that the assessee does not have any Permanent establishment in India. Assessing Officer in original assessment accepted the contention of assessee. Reassessment on the ground that the assessee had permanent establishment in India on the same facts was not justified and liable to be quashed. (A. Y. 2002-03).Tractebel Industry Engineering v. ADIT (2011) 64 DTR 344 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Full and true disclosure - Disclosure made in notes forming accounts - Change of opinion - Beyond four years.


During the year under review assessee has entered in to financial restructuring with lenders, according to which the lenders have agreed to waive / foego accumulated finance cost to the tune of Rs.20,58,24,991. This accumulated finance cost was credited to the work in progress account to that extent the company has contingent liability the amount of which is unascertainable. The assessment was completed under section 143(3), after detailed scrutiny. Assessing Officer reopened the assessment, on challenge before the High Court, the High Court held that Assessing officer reopened the assessee’s assessment without referring to any failure on the part of the assessee to disclose material facts or making any allegation of suppression on the part of the assessee, and in fact, relying upon a disclosure made in one of the notes forming part of the accounts as stated in the reasons recorded by him, Assessing Officer clearly acted in excess of his jurisdiction in reopening the assessment beyond four years. (A. Y. 2004-05). Lok Housing & Construction Ltd. v. Dy. CIT (2011) 64 DTR 401 / (2012) 246 CTR 213 (Bom.)(High Court)

S. 147 : Assessment - Reassessment - Sanction – Commissioner - Joint Commissioner - Curable irregularity -Sanction of Commissioner instead of Joint Commissioner renders reopening invalid. (S. 148, 151(2), 292B)The Assessing Officer issued a notice under section 148 to reopen an assessment. As section 143(3) order had not been passed & 4 years had elapsed, the Assessing Officer ought to have obtained the sanction of the Joint / Additional CIT under section 151(2). Instead, he routed the file through the Additional CIT and obtained the sanction of the CIT. On appeal by the assessee, the Tribunal struck down the reopening on the ground that correct sanction had not been obtained. On appeal by the department, HELD upholding the Tribunal: (i) Section 151(2) requires the sanction to be accorded by the Joint/Additional CIT. The Assessing Officer sought the sanction of the CIT. Though the file was routed through the Addl. CIT, the latter only made an endorsement “CIT may kindly accord sanction”. This showed that the Addl. CIT did not apply his mind or gave any sanction. Instead, he requested the CIT to accord approval. This is not an irregularity curable under section 292B;(ii) The different authorities specified in section 116 have to exercise their powers in accordance with law. If powers conferred on a particular authority are arrogated by other authority without mandate of law, it will create chaos in the administration of law and hierarchy of administration will mean nothing. Satisfaction of one authority cannot be substituted by the satisfaction of the other authority. If the statute requires a thing to be done in a certain manner it has to be done in that manner alone. Also, the designated authority should apply his independent mind to record his satisfaction and it should not be at the behest of a superior authority. CIT v. SPL’s Siddhartha Ltd. (Delhi)(High Court) www.itatonline.org

S. 147 : Assessment - Reassessment - Block assessment. Block assessment framed under chapter XIV-B of the Act can be reopened under section 147 of the Act. (A. Y. 1995-96).CIT & Anr. V. Rinku Chakraborthy (2011) 56 DTR 227 / 242 CTR 425 (Karn.)(High Court)

S. 147 : Assessment - Reassessment - Reason to believe - Development agreement - Capital gains. (S. 148)Assessee entered in to development agreement on 17-9-2004, on a consideration of Rs. 4 crores. As the developer failed to pay the agreed consideration, of Rs. 30 lakhs before 31-10-1994, the assessee terminated the agreement. Thereafter issuing the cheques for Rs. 30 lakhs on 30-6-2005, the development agreement was restored. In view of further default on the part of developer, on 19-5-2010, the development agreement was once again terminated. The developer has filed the suit before Bombay High Court, which was ultimately settled on 2-5-2011, where in the consideration was enhanced from 4 crore to 7.5.crores. It


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was ordered the possession of the property to the developer on 2-5-2011. In the mean while the Assessing Officer issued notice under section 148 dated 25-3-2010, proposing to tax the capital gain tax arising from development agreement in the Asst. year 2005-06. In a petition filed by the assessee the Honourable Bombay High Court allowed the petition and quashed the notice issued under section 148.Amar R. Shanbag v. ITO (W.P. No. 552 of 2011 dt 18-7-2011 (593 (2011) 43A BCAJ- August – P. 29)(Bom.)(High Court)

S. 147 : Assessment - Reassessment – Notice - Writ. Maintainability of Writ – failure of Assessee to disclose fully and truly all material facts necessary for assessment leading to escapement of income – Notice under section 148 valid – Writ Petition to quash the notice under section 148 not maintainable. (A. Ys. 2003-04 to 2007-08) Little Angels Education Society v. ITO (2011) 245 CTR 445 / 336 ITR 413 (AP)(All)(High Court)

S. 147 : Assessment - Reassessment - Non issue of notice. [S. 143(2)]It is mandatory not merely procedural for the Assessing Officer to issue notice under section 143(2). If the notice is not served within the prescribed period, the assessment order is invalid (Pawan Gupta 318 ITR 322 (Delhi), Hotel Blue Moon 321 ITR 362 (SC) & C. Palaniappan 284 ITR 257 (Mad) followed).UKT Software Technologies v. ITO (Delhi)(Trib.) www.itatonline.org

S. 147 : Assessment - Reassessment - Reason to believe - Finding of subsequent year. (S. 148)Information obtained in the assessment of a subsequent assessment year can be a good to initiate proceedings under section 147/148. Disallowance of interest expenditure made in assessment of subsequent assessment year on the basis that the interest free advances constituted prima facie material for the Assessing Officer to form a reasonable belief that certain income had escaped assessment in the present year. (A. Y. 1999 -2000).Maruti Civil Works v. ITO (2011) 51 DTR 257 / 136 TTJ 448 (Pune)(Trib.)

S. 147 : Assessment - Reassessment - Beyond four years - Revaluation of assets. (S. 45, 50)Assessee firm having duly disclosed the fact of revaluation of assets, creation of self generated asset. viz., goodwill and also that the difference between the cost and revalued amount of the assets has been transferred to partners’ capital accounts and the same was followed by dissolution of firm, all primary facts stood disclosed by the assessee in the original assessment proceedings itself and therefore, assessment could not be reopened after expiry of four years from the end of the relevant assessment year on the ground that difference between WDV of the assets and the value thereof after revaluation is taxable under the provisions of section 45 read with section 50 which has escaped assessment. (A. Y. 1986-87).Industrial Lining v. Dy. CIT (2011) 52 DTR 233 / 45 SOT 60 / 137 TTJ 129 (Ahd.)(TM)(Trib.)

S. 147 : Assessment - Reassessment - Assessment under section 143(1) – Within four years – Reasons to believe – Not valid. [S. 143(1)]Original assessment order was made under section 143(1) and the re opening of the assessment was initiated within a period of 4 years, it was still necessary that there should be reasons to believe that income had escaped assessment and such reasons are subject to judicial scrutiny. There essentially have to be valid reasons to believe that income has escaped assessment and these reasons on standalone basis must be considered appropriate for arriving at the conclusion arrived at by the officer recording the reasons. In view of the above the initiation of reassessment proceedings in the instant case by the Assessing Officer was held bad in law and the proceedings were quashed. (A. Y. 2001-02)


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Pirojsha Godrej Foundation v. ADIT (2011) 44 SOT 24 (Mum.)(URO)(Trib.)

S. 147 : Assessment - Reassessment - Settlement commission. [S. 254D(4)]Settlement Commission having already accepted the undisclosed income as shown by the assessee which covered all the issues arising out of the seized papers including rental income, order under section 245(D)(4) was passed. In the absence of any new document or material to come to a different conclusion than that was accepted by the Department, assessments of the relevant period could not be reopened by the Assessing Officer by taking a different view regarding assessability of rental income. (A. Ys. 2004-05 to 2006-07).Jamula Shyam Sundar Rao (HUF) v. ACIT (2011) 138 TTJ 602 / 54 DTR 294 (Ctk.)(Trib.)

S. 147 : Assessment - Reassessment - Rectification pending. (S. 154)When proceedings under section 154 were pending on the same issue and not concluded, parallel proceedings under section 147 initiated by the Assessing Officer are invalid ab inito, especially when except the return and its enclosures, no other material or information was in the possession of the assessing Officer. (A. Y. 2004-05).Mahinder Freight Carriers v. Dy. CIT (2011) 56 DTR 247 / 139 TTJ 422 / 129 ITD 278 (Mum.)(Trib.)

S. 147 : Assessment - Reassessment - Double taxation avoidance – India-Malaysia. (S. 90)Assessee having permanent establishment in Malaysia. Income earned in Malaysia is taxable there under the provisions of Double taxation Avoidance Agreement between India and Malaysia. No Tax actually levied because amount had not been brought in to Malaysia. The Amount not taxable in India. Reassessment proceedings to tax amount in India not valid. There is no Rule that assessee should pay tax in at least one jurisdiction to be eligible for relief. (A. Ys. 2001-01 to 2002-03 and 2005-06).Sivagami Holdings P. Ltd. v. ACIT (2011) 10 ITR 48 (Chennai)(Trib.)

S. 147 : Assessment - Reassessment - Reason to believe - Change of opinion - With in period of four years.Once an assessment has been completed under section 143(3) after raising a query on a particular issue and accepting assessee’s reply to the query. Assessing Officer has no jurisdiction to reopen the assessment merely because the issue in question is not specifically adverted in the assessment order, unless there tangible material before the Assessing Officer to come to the conclusion that there is escapement of income. (A. Y. 1998-99).ACIT v. Rolta India Ltd. (2011) 57 DTR 370 / 139 TTJ 385 / 132 ITD 98 (Mum.)(TM)(Trib.)

S. 147 : Assessment - Reassessment - Income from house property - Co-owner - Assessment. (S. 22)Scheme of the Act does not envisage that annual value of co owned property, upon being determined in assessment of AOP, is to be divided amongst co-owners in pre determined ratio. In hands of AOP was wholly academic infructuous. Quantification of annual value of co-owned property in course of assessment of AOP consisting of co-owners is not a condition precedent for taxability of individual share of such income in hands of co-owners. The very initiation of reassessment proceedings in hands of AOP of co-owners was unsustainable by law. (A. Y. 2002-03).Sujeer Properties (AOP) v. ITO (2011) 131 ITD 377 / 138 TTJ 684 / 55 DTR 282 (Mum.)(Trib.)

S. 147 : Assessment - Reassessment – Issue is subject matter of appeal - Tribunal. (S. 148)Once an issue is subject matter of appeal before Tribunal, issuance of notice of reassessment on said ground has to be considered bad in law. (A. Y. 2000-01).


Chika Overseas (P) Ltd. v. ITO (2011) 131 ITD 471 / 50 DTR 426 (Mum.)(Trib.)

S. 147 : Assessment - Reassessment - Additions not made on the basis of reopening - Reassessment bad in law. (S. 148)If no addition is made on the basis of recording of reasons, the reassessment is bad in law. (A. Y. 2000-01).ITO v. Bidbhanjan Investment & Trading Co. (P) Ltd. (2011) 59 DTR 345 / 132 ITD 51 (Mum.)(Trib.)

S. 147 : Assessment - Reassessment - Valuation of property - Inspectors report.Merely because the stamp valuation authority has adopted certain valuation for payment of stamp duty on the property purchased by the assessee, the same cannot be the basis to conclude that assessee’s income has escaped assessment ,particularly when no tangible material has been brought on record to suggest escapement of income except the inspector’s report which could not be relied upon to ascertain the market value of property, hence, reassessment quashed by the CIT(A) was up held. (A. Y. 2005-06).ITO v. Shiv Shakti Build Home (P) Ltd. (2011) 141 TTJ 123 / 61 DTR 37 (Jodh.)(Trib.)

S. 147 : Assessment - Reassessment : Assessing Officer raised specific and pointed queries in section 143(3) assessment – Assessing Officer cannot be said to have formed any opinion if explicit opinion not recorded.The question of change of opinion arises when the Assessing Officer forms an opinion and decides not to make an addition and holds that the assessee is correct. Here, though the Assessing Officer had asked specific and pointed queries there was no discussion, ground or reason why addition was not made in-spite of the assessee’s failure to furnish conformation and details to that extent. The argument that when the assessment order does not record any explicit opinion on the aspects now sought to be examined, it must be presumed that those aspects were present to the mind of the Assessing Officer and had been held in favour of the assessee is too far-fetched a proposition to merit acceptance. The term “failure” on the part of the assessee is not restricted only to the income-tax return but extends also to the assessment proceedings. If the assessee does not disclose or furnish to the Assessing Officer complete and correct information and details it is required and under an obligation to disclose, there is a failure on its part. Dalmia Pvt. Ltd. v. CIT (2011) 64 DTR 417 (Delhi)(High Court)

S. 147 : Assessment - Reassessment - Housing project. [S. 80IB(10)]As the reassessment proceedings are aimed at taxing the income which has escaped assessment, these cannot be taken as a tool for putting the assessee in a better position than in which it was before such proceedings. (A. Y.2004-05)Bhumiraj Homes Ltd. v. Dy. CIT (2011) 60 DTR 65 / 11 DTR 699 (Mum.)(Trib.)

S. 147 : Assessment - Reassessment – Non-disclosure of primary facts - Prima facie reason – Assessment under section 143(1). [S. 14A, 143(1)]What is necessary to reopen an assessment is not final verdict but a prima facie reason. Once reason is recorded by Assessing Officer and subject to other conditions laid down in enabling provision, Assessing Officer assumes jurisdiction to issue notice under section 148. Merely because for earlier assessment years issue in dispute has been decided by Commissioner (Appeals) in favour of assessee cannot be a fetter to Assessing Officer in exercising his jurisdiction under section 147. (A. Y. 1999-2000).ACIT v. Tube Investments of India Ltd. (2011) 133 ITD 79 (Chennai)(TM)(Trib.)


S. 147 : Assessment - Reassessment - Brought forward business loss - Unabsorbed depreciation – Deduction – Export - Manner of computation. (S. 80HHC)Assessee’s claim for deduction under section 80HHC was allowed on amount of income before reducing brought forward business loss and unabsorbed depreciation hence, the Assessing Officer was justified in reopening assessment on that issue. Once assessment is reopened under section 147 on more than one point and one such point is finally taken in to consideration while determining the total income under section, read with section 147, it cannot be held that initiation of reassessment was illegal. Similarly when no escapement of income is found to have taken place on account of reasons which led to issuance of notice under section 148, then the Assessing Officer cannot assessee or reassess any other income which comes to his knowledge during course of reassessment proceedings, however if escapement of income is found in respect of any of reasons basis of which notice under section 148 was issued, then the jurisdiction of Assessing Officer to reassess any income which earlier escaped assessment and now comes to his notice during course of reassessment proceedings cannot be held to be invalid. In order to justify initiation of reassessment it is sine qua non that there must be some income which escaped assessment. Where the manner of computation done by assessee is incorrect but does not reduce total income or ultimate tax liability, it cannot be a case of escaping assessment covered under section 147. (A. Ys. 1999-2000 and 2000-2001).Priya Ltd. v. ITO (2011) 133 ITD 38 / 58 DTR 166 (Mum.)(Trib.)

S. 147 : Assessment – Reassessment – First time before TribunalAssessee’s appeal allowed by the CIT(A) on merits. Held that the assessee can challenge the validity of reassessment proceedings in the appellate proceedings DCIT vs. Duratex Exports, ITA No. 3088/M/10, dated 15-6-11, BCAJ, December – 2011, Pg. 34, Vol 43-B, Part 3 (Mum.)(Trib.)

S. 148 : Assessment - Reassessment - Transfer pricing – Jurisdiction - Writ petition. (S. 92C, Art. 226 of the Constitution)Hon’ble Court observed that as fundamental facts have to established ,the assessee ought not to have filed the writ petition. Accordingly the assessee relegated to proceedings pending before Authorities. (Judgment of High Court (Coca Coala India Inc. v. ACIT (2009) 309 ITR 194 / 221 CTR 225 / 177 Taxman 103 / 17 DTR 66 (P&H). (A. Ys. 1998-99 to 2006-07)Coca Cola India Inc. v. Addl. CIT (2011) 336 ITR 1 / 236 CTR 561 / 48 DTR 249 (SC)

S. 148 : Assessment - Reassessment - Sanction of commissioner - Application of mind. (S. 151)A material fact which is not in existence right up to the time of assessment cannot possibly be disclosed. Therefore, a fact which comes into existence subsequent to the making of the assessment cannot be a material fact within the purview of section 147. The duty to disclose material facts necessarily postulates existence of a thing or material. If a material is not in existence or if a material is such of which the assessee had no knowledge there would be no duty to disclose such material (CIT v. Tirath Ram Ahuja (HUF) 306 ITR 173 (Delhi) followed);The Central India Electric Supply Co. Ltd. v. ITO (2011) 333 ITR 237 / 51 DTR 51 (Delhi)(High Court)

S. 148 : Assessment - Reassessment – Validity – Notice – Amendment - Finance Act, 2006. [S. 143(2), 153(2)]As per Finance Act , 2006 , with retrospective effect from 1st Oct. 1991, all such notices which have been served under sub (2) of section 143 , after expiry of 12 months, have been saved. Thus, notices under sub section (2) of section 143 , in respect of return furnished during the period commencing from 1st day of


October, 1991 and ending on 30th Sept , 2005 , have been saved provided such a notice is issued before the expiry of time – limit for making the assessment or reassessment as specified in sub section 2 (of section 153, hence reassessment held to be valid. (Asst years 2000 -01 to 2002-03)Dy. CIT v. Gopal Ramnarayan Kasat (2011) 240 CTR 266 / 54 DTR 228 (Bom.)(High Court)

S. 148 : Assessment - Reassessment – Notice – Limitation - Meaning of “issue”. (S. 149)Notice for the assessment year 2003-04 was signed on 31-3-2010 and sent to speed post centre on 7-4-2010. The Court held that date of issue would be date on which notice was handed over for service to proper officer, hence notice was barred by limitation. (A. Y. 2003-04)Kanubhai M. Patel (HUF) v. Hiren Bhatt or his successors to Office and others (2011) 334 ITR 25 / 237 CTR 544 / 43 DTR 329 (Guj.)(High Court)

S. 148 : Assessment - Reassessment – Notice - Old address - Participates in assessment proceedings. (S. 149, 292BB)When assessee does not raise objection regarding non issue of notice and appears before the Assessing officer and assessing officer gives copy of notice under section 148, Assessee participates in the assessment proceedings. The service of notice even at the old address of the assessee constitutes service of notice with in ambit of section 148. What is contemplated under section 149 is the issue of notice under section 148 and not the service thereof on the assessee and the service of notice under section 148 is only required before assessment, reassessment or recomputation. (A. Y. 1999-2000).CIT v. Three Dee Exim (P) Ltd. (2011) 55 DTR 147 (Delhi)(High Court)

S. 148 : Assessment - Reassessment - Notice – Assessee Officer entitled to drop notice issued under section 154 & issue notice under section 148. (S. 154) Though the principle of constructive res judicata was made applicable by the Madras High Court in EID Parry 216 ITR 489 (Mad.) that the Assessing Officer having initiated rectification proceedings under section 154 should stick to the same only and cannot drop that and proceed under section 147 is not acceptable. But the fact that the Assessing Officer invoked section 154 and dropped it does not affect the validity of re-assessment under section 147.CIT v. India Sea Foods (2011) 332 ITR 424 / 54 DTR 223 / 242 CTR 550 (Ker.)(High Court)

S. 148 : Assessment - Reassessment – Notice - “issued” in time, date of handing over by Assessing Officer to post office to be seen. (S. 148)For purposes of section 149, the expression “notice shall be issued” means that the notice should go out of the hands of the Assessing Officer. Merely signing the notices on a particular date cannot be equated with “issuance of notice” as contemplated under section 149. The date of issue would be the date on which the same was handed over for service to the proper officer, which in the present case would be the date on which the notices was actually handed over to the post office for the purpose of booking for the purpose of effecting service on the assessee. Till the point of time the envelopes are properly stamped with adequate value of postal stamps, it cannot be stated that the process of issue is complete. Kanubhai M. Patel HUF v. Hiren Bhatt (Guj.)(High Court) www.itatonline.org

S. 148 : Assessment - Reassessment – Non-supply of ‘Reasons for Reopening’ within the limitation period time - Reopening void.Where the notice has been issued within the said period of six years but the reasons have not been furnished within that period is hit by the bar of limitation because the issuance of the notice and the


communication and furnishing of reasons go hand-in-hand. A notice under section 148 without the communication of the reasons therefore is meaningless inasmuch as the Assessing Officer is bound to furnish the reasons within a reasonable time. The expression ‘within a reasonable period of time’ as used in GKN Driveshafts 259 ITR 19 (SC) cannot be stretched to such an extent that it extends even beyond the six years stipulated in section 149. Balwant Rai Wadhwa v. ITO (Delhi)(Trib.) www.itatonline.org

S. 148 : Assessment - Reassessment - Service of notice - Second notice - Validity of assessment - Limitation from first notice.It was held that first notice sent by speed post as permitted by section 282 is presumed to have been duly served upon the assessee and was valid. As the first section 148 notice was valid and reassessment proceedings were pending, the second section 148 notice is not an irregularity but a nullity. (Ranchhodas Karsandas v. COT (1954) 26 ITR 105 (SC) and CIT v. Jaidev Jain (1997) 227 ITR 302 (Raj.) followed. Thus, the limitation period reckoned with reference to the first notice. (A. Y. 1945-46) Sanjay Kumar Garg v. ACIT (2012) 134 ITD 82 (Delhi)(Trib.)

S. 148 : Assessment - Reassessment - Service of notice - Service of notice on Chartered Accountant. (S. 282)Service of notice under section 148 on a chartered accountant who was not empowered to receive such notice on behalf of the assessee company or any other person who was not authorised to receive was not a valid service of notice on the assessee, more so when it was not shown that the assessee was keeping out of way for the purpose of avoiding service of notice or that there was any other reason that the notice could not be served on the assessee in the ordinary way and therefore, assessment completed pursuant to said notice was bad in law. (A. Y. 1999-2000).Harsingar Gutkha (P) Ltd. v. Dy. CIT (2011) 138 TTJ 318 / 129 ITD 315 / 54 DTR 122 (Luck.)(Trib.)

S. 148 : Assessment - Reassessment - Sanction to issue notice - Chief Commissioner – Commissioner - After four years. (S. 151)Original assessment was completed under section 143(3) on 29-1-2001. Subsequently, Assessing Officer who of rank of Assistant Commissioner (ACIT) initiated proceedings under section 147 vide notice dated 24-3-2005 issued under section 148, after obtaining approval from Joint Commissioner (Jt. CIT). As proceedings under section 147 were initiated after 4 years from relevant assessment year, assessee objected to jurisdiction of Assessing Officer in issuing notice under section 148 on ground that Assessing Officer had not obtained sanction of Chief Commissioner (CCIT) or Commissioner (CCIT). In view of Shashi Kant Garg (Dr.) v. CIT (2006) 285 ITR 158 (All), objection raised by assessee was to be up held and consequently, impugned notice was quashed. (A. Y. 1998-99).ITO v. Bhavesh Kumar (2011) 131 ITD 1 / 59 DTR 145 / 140 TTJ 257 (Agra)(TM)(Trib.)

S. 148 : Assessment - Reassessment – Notice - Reasons recorded.When notice under section 148 is issued, Assessing Officer is bound to furnish reasons recorded with in a reasonable time after return has been filed so that assessee could file the objections if any. When so such reasons are furnished to assessee either along with notice under section 148 or at time when hearing are conducted but furnished only before assessment order is passed, such assessment is to be set aside and remanded back for re-adjudication after supplying copy of reasons recorded. (A. Y. 2005-06).Kaushalendra Pratap Singh v. ITO (2011) 133 ITD 111 (Kol.)(Trib.)

S. 149 : Assessment - Reassessment - Time limit - Issuance of notice. (S. 148)


Section 149 only requires issuance of notice under section 148, within limitation period and it can be served on proper person subsequently, i.e. after expiry of limitation period. (A. Y. 1998-99).ITO v. Sikandar Lal Jain (2011) 45 SOT 113 (Agra)(TM)(Trib.)

S. 150 : Assessment - Reassessment – Limitation - Finding or Direction. (S. 149)Assessment having not been reopened to give effect to the order of the CIT(A). According to the Assessing Officer because of giving effect to the order made by the CIT(A), will result in to escapement of income. The Court held that section 150 did not apply. As there was no failure on the part of assessee to disclose fully and truly all material facts, reassessment is clearly time barred. (A. Y. 1988-89).Harsiddh Specific Family Trust v. Jt. CIT (2011) 58 DTR 149 (Guj.)(High Court)

S. 150 : Assessment - Reassessment – Finding – Direction - Limitation. (S. 149)Since no findings or directions had been given in assessment year 1992-93 to tax the receipt in question in assessment year 1994-95 under appeal which is also inherently impossible in view of the findings that it is capital receipt, provisions of section 150 would apply in the case of the assessee and reopening of the assessment made after a period of six years from the end of the assessment year was clearly time barred. (A. Y. 1994-95).Vadilal Dairy International Ltd. v. ACIT (2011) 140 TTJ 371 / 58 DTR 323 (Ahd.)(Trib.)

S. 150 : Assessment - Reassessment - Power of Appellate Authority.Section 150 does not enable or require an appellate authority to give any directions for reopening of assessment, but it deals with a situation in which a reassessment is to be initiated to give effect to finding or direction of appellate authority or Court. (A. Y. 2002-03).Sujeer Properties (AOP) v. ITO (2011) 131 ITD 377 / 138 TTJ 684 / 55 DTR 282 (Mum.)(Trib.)

S. 151 : Assessment - Reassessment – Sanction – Limitation.In cases covered under section 151, the notice is to be issued by the Assessing Officer and the only requirement is that the Jt. CIT should be satisfied on the reasons recorded by the Assessing Officer. There was no satisfaction of the Jt. CIT for the Asst. Year 1989-90 to 1994-95, hence, notices for these years are invalid. (A. Y. 1989-90 to 1994-95 and 1998-99).Maya Rastogi (Smt.) v. CIT (2011) 52 DTR 237 / 241 CTR 67 / 331 ITR 116 / 196 Taxman 283 (All)(High Court)

S. 151 : Assessment - Reassessment – Sanction for issue of notice – Application of Mind. (S. 148)Merely affixing a ‘yes’ stamp and signing underneath suggested that the decision was taken by the Board in a mechanical manner as such, the same was not a sufficient compliance under section 151 of the Act. (A. Ys. 1965-66 & 1979-80)Central India Electric Supply Co. Ltd. v. ITO (2011) 51 DTR 51 / 333 ITR 237 (Delhi)(High Court)

S. 153 : Assessment – Limitation – Interpretation - Proviso. [S. 142(2A), 142(2B), 142 (2C)]Amendment of proviso to section 142(2C) inserting the words “suo motu” by Finance Act, 2008, w.e.f. 1st

April 2008, is purely clarificatory and suo motu power extended the period for submitting the audit report is also to be read in sub section (2C) and therefore, the entire period from the date on which the Assessing Officer directs the assessee to get its accounts audited under section 142(2A) and ending with the last date on which the assessee is required to furnish the report of such audit including the period suo motu extended by the Assessing Officer (Not exceeding 180 days), is to be excluded in computing the period of limitation to make assessment as per clause (iii) of Explanation 1 to section 153.


Function of a proviso is to qualify the generality of the main enactment by providing an exception and taking out from the main enactment a potion which, but for the proviso, would fall with in the main enactment. (A. Y. 2003-04).Ghaziabad Development Authority v. CIT (2011) 244 CTR 397 / 201 Tax 252 / 61 DTR 270 (All)(High Court)

S. 153 : Assessment - Limitation – Some of the additions set aside - Fresh assessment. [S. 153(3)(ii)]When several additions have been made by the Assessing Officer and the appellate authority sets a side one or more of the issues to the file of the Assessing Officer, that situation would not give rise to a “fresh assessment” and in that cases section 153(3)(ii) would apply and not section 153(2A). (A. Ys. 1989-90 to 1999-2000)S. M. Dalvi v. ACIT (2011) 53 DTR 105 / 137 TTJ 581 / 44 SOT 11 (Mum.)(Trib.) S. 153A : Assessment - Search and seizure – Special procedure for assessment -Validity - Search warrant - Assessment. (S. 132)Person, in respect of whom search under section 132 is initiated, is the same person against whom notice under section 153A is to be issued for making assessment; if there is any illegality in the search warrant, the same will invalidate the search assessment proceedings initiated under section 153A, the matter was remanded to the Tribunal. (A. Ys. 2000-01 to 2006-07).Siksha “O” Anussandahn v. CIT (2011) 244 CTR 515 / 62 DTR 161 / 336 ITR 112 (Orissa)(High Court)

S. 153A : Assessment - Search and seizure - Special procedure for assessment - On money payment – Company – Director.Merely on the basis of entry in seized material not supported by corroborative evidence, and contradictions in statement of purchaser of property, additions made in the hands of company on substantive basis and addition in the hands of Director on protective basis was deleted. (A. Y. 2005-06).Embassy Classic P. Ltd. & Another v. ACIT (2011) 7 ITR 287 (Bang.)(Trib.)

S. 153A : Assessment - Search and seizure - Special procedure for assessment - Validity - Absence of notice under section 143(2) – Service of notice prior to issue of notice for filing of return. [S. 143(2)]Compliance of the provisions of section 143(2) can happen only after the receipt of return or documents as specified under section 142(1)(ii), hence, issue of notice under section 143(2) prior to such stage does not serve any purpose, hence, redundant; as no notice under section 143(2) was served on the assessee after the filing of return, the assessment proceedings are quashed as null and void. (A. Ys. 2003-04 & 2005-06)ACIT v. G. M. Infrastructure (2011) 49 DTR 151 / 135 TTJ 469 (Ind.)(Trib.)

S. 153A : Assessment - Search and seizure – Special procedure for assessment – On money payment – Company – Director.Merely on the basis of entry in seized material not supported by corroborative evidence, and contradictions in statement of purchaser of property, additions made in the hands of company on substantive basis and addition in the hands of Director on protective basis was deleted. (A. Y. 2005-06)Embassy Classic P. Ltd. & Another v. ACIT (2011) 7 ITR 287 (Bang.)(Trib.)

S. 153A : Assessment - Search and seizure - Special procedure for assessment -Requisition.Once the warrant of authorization or requisition is issued and search is conducted, Panchanama is drawn, all the relevant six assessment years would get reopened irrespective of any incriminating material is found


or not in respect of any particular assessment year falling within the relevant six assessment years. (A. Y. 2002-03 to 2005-06).Mansukh Kanjibhai Shah (Dr.) v. ACIT (2011) 129 ITD 376 / 41 DTR 353 (Ahd.)(Trib.)

S. 153A : Assessment - Search and seizure – Special procedure for assessment - Abatement - Assessment pending.Only the assessments pending before the Assessing Officer for completion shall abate and under section 153A the issues decided in the assessment can not be reconsidered and readjudicated unless there is some fresh material found during the course of search in relation to such points. (A. Y. 2003-04 to 2005-06 & 2007-08). Guruprerana Enterprises v. ACIT (2011) 57 DTR 465 (Mum.)(Trib.)

S. 153C : Assessment - Search and seizure - Assessment in case of any other person - Assessment sans “speaking” & “incriminating” documents void. (S. 132)For purpose of attracting section 153C, the document seized must not only be a ‘speaking one’, but also prima facie ‘incriminating one’. The documents cannot be said “incriminating one”, merely because it contains the notings of entries which are already recorded in books of accounts or is subjected to scrutiny of Assessing officer in the past in regular assessment under section 143(3) of the Act. Sinhgad Technical Education Society v. ACIT (2011) 57 DTR 241 / 140 TTJ 233 (Pune)(Trib.)

S. 153C : Assessment - Search and seizure – Assessment in case of any other person - Computation of undisclosed income - Cash credit.Where the assessee has proved identity of the person the genuineness of the transaction as well as the capacity of the lenders and departmental authorities have not found any falsity in the evidences no addition could be made under section 68. (A. Ys. 2003-04 to 2005-06 & 2007-08). Guruprerana Enterprises v. ACIT (2011) 57 DTR 465 (Mum.)(Trib.)

S. 153C : Assessment - Search and seizure -computation – Assessment in case of any other person Undisclosed income – Presumption - Project completion method - On money. (S. 292C)Assessee suo motto offered the entire alleged receipts of on money of Rs. 9.02 crores in its return of income filed under section 153C. The additions made by the revenue on estimate made for the A. Ys. 2002-03 to 2005-06 was deleted. (A. Ys. 2006-07 to 2008-09). Fort Projects (P) Ltd. v. Dy. CIT (2011) 63 DTR 145 (Kol.)(Trib.)

S. 154 : Assessment - Rectification of mistake – Intimation u/s 143(1)(a) cannot be rectified after order passed under section 143(3). Rectification order under section 154 cannot be passed to rectify an intimation given under section 143(1)(a) after final assessment order under section 143(3) is passed. (A. Y. 1994-95).Tamil Nadu Magnesite Ltd. v. CIT (2011) 196 Taxman 271 (Mad.)(High Court)

S. 154 : Assessment - Rectification of mistake – Setting aside of assessment.Where assessment order passed under section 143(3) / 147 has been set aside, consequential order under section 154 has also to be set aside. (A. Y. 1997-98).CIT v. DCM Financial Services Ltd. (2011) 196 Taxman 439 (Delhi)(High Court)

S. 154 : Assessment - Rectification of mistakes - Apparent from records - Overlooking statutory provision.


Overlooking of statutory provision is clearly a mistake on record and on that basis, rectification under section 154 is clearly admissible. (A. Y. 1985-86).CIT v. Steel Strips Ltd. (2011) 200 Taxman 368 (P&H)(High Court)

S. 154 : Assessment - Rectification of mistakes - Apparent from records – Salaries – Perquisites - Tax paid by employer - Merger. (S. 15, 17)While computing assessee’s original assessment, Assessing Officer did not include tax payment by employer to exchequer on behalf of employee as part of salary for computing value of rent free accommodation perquisite under Rule 3. On appeal, Tribunal quashed of Assessing Officer for financial years 1995-96 to 1997-98, after grossing up income under section 195A and directed Assessing Officer to recomputed tax liability for said financial years. Order giving effect was also passed. However thereafter, Assessing Officer rectified assessment under section 154 by recomputing value of perquisite in rest of rent free accommodation after including tax element in gross salary. Assessee challenged the order on the ground that the issue being debatable and original order being merged with the order of Tribunal the Assessing Officer did not have jurisdiction to rectify the mistake under section 154. High Court held that when an earlier occasion, Tribunal had not at all considered aforesaid issue, doctrine of merger would not be applicable in instant case. When jurisdictional Court and other Courts had held at relevant time that income tax paid by employer on behalf of employee is part of salary, issue could not be said to be debatable and therefore, there was legal error apparent from record which was rightly corrected by Assessing Officer under section 154. (A. Ys. 1996-97 to 1998-99).Mitsubishi Corporation v. CIT (2011) 200 Taxman 372 / 337 ITR 498 / 62 DTR 265 (Delhi)(High Court)

S. 154 : Assessment - Rectification of mistake - Subsequent decision of Supreme Court. [S. 10(10C)]In view of subsequent judgment of the Supreme Court setting aside the judgment of the High Court, ,the assessees are entitled to exemption under section 10(10C), and therefore Assessing Officer is directed to rectify the assessment order to allow exemption under section 10(10C).K. R. Alagappan & Ors. v. ACIT (2011) 59 DTR 295 / 243 CTR 85 / 332 ITR 517 (Mad.)(High Court)

S. 154 : Assesment - Rectification of mistake - Book profit - Not considering the statutory provision. (S. 115JA)When original assessment is completed without reference to the statutory provision and in clear violation of the same, such assessment could be rectified under section 154. In order to allow deduction of brought forward business loss or unabsorbed depreciation in the computation of book profit under section 115JA, both should be available as per the accounts of the assessee. Since nothing is left after setting off brought forward business loss up to 1994-95 against profit, assessee was not entitled to any relief under clause (b) of Explanation (iii) of section 115JA for assessment year 1997-98. (A. Y.1997-98).CIT v. Carbon & Chemicals India Ltd. (2011) 59 DTR 396 / 243 CTR 399 / 196 Taxman 302 (Ker.)(High Court)

S. 154 : Assessment - Rectification of mistake - Prima facie adjustment - Intimation. [S. 143(1)(a)]Where the issue involved of debatable, an intimation under section 143(1)(a) disallowing claim based on such debatable issue on ground that it is prima facie in admissible, cannot be sustained. When error is pointed out it is the duty of Assessing Officer to amend under section 154(1)(b).ACIT v. Haryana Telecom Ltd. (2011) 133 ITD 99 (Delhi)(Trib.)

S. 154 : Assessment - Rectification of mistake - Notice of demand – Limitation.


Order under section 154 purported to have been passed on 24th January 2000, and the consequential calculation of tax payable in Form No. ITNS -150 having been served on the assessee on 24th May 2005 and 6th June, 2005, respectively i.e. After expiry of limitation under section 154(7), it cannot be accepted that the order was in fact passed on 24th January 2000, especially when no notice of demand was issued and no recovery proceedings were initiated. (A. Y. 1995-96).V. B. Desai Financial Services Ltd. v. Dy. CIT (2011) 51 DTR 205 / 137 TTJ 338 / 132 ITD 302 (Mum.)(Trib.)

CHAPTER XIV-BSPECIAL PROCEDURE FOR ASSESSMENT OF SEARCH CASES

S. 158B : Assessment - Block assessment - Search and seizure - Computation of undisclosed income - Belated filing of return - Disclosure of income. [S. 132(4)]If the search under section 132 takes place after the due date of filing of normal return and no return is filed by that time, and the assessee is not able to demonstrate that he had disclosed his income to the department before the date of search in the some manner or the other, filing of return thereafter under section 139(4) would be of no consequence for the applicability of Chapter XIV–B and the income of the assessee is to be treated as undisclosed. (A. Y. 1999-2000)CIT v. A. T. Invofin India (P) Ltd. (2011) 335 ITR 370 / 237 CTR 360 / 49 DTR 141 (Delhi)(High Court)

S. 158BA : Assessment - Block assessment - Search and seizure - Undisclosed income – Stock.It was noticed on verification that there was no noting or computation to show that there was deficit of physical stock at time of search when compared to book stock. It was also noted that basic variables of computing stock position themselves were estimates assumed by the Assessing Officer. Also the partner who had initially deposed before the revenue authorities against the assessee firm, did not turn up for cross examination and thus the evidentiary value built on statement of the said person collapsed. In view of the above facts, the impugned addition made by the authorities were held not sustainable. (A. Y. 1989-90 to 1998-99)Sunrise Sales Corporation v. Dy. CIT (2011) 43 SOT 16 (Bang.)(URO)(Trib.)

S. 158BB : Assessment - Block assessment - Search and seizure – Computation of undisclosed income - Belated return – Surrender of income - Gift from NRI.Income declared in a belated return after search could not be treated as disclosed income. Assessee being unable to give any valid explanation for the alleged gift received from NRI, having surrender the amount as unexplained income, Tribunal was not justified in treating the gifts as explained simply because the same were disclosed in the regular return.CIT v. Ashwani Trehan (2011) 239 CTR 10 / 47 DTR 329 (P&H)(High Court)

S. 158BB : Assessment - Block assessment - Search and seizure – Computation - Undisclosed income. (S. 69, 132)Where no evidence has been produced by the assessee to rebut the statement made at the time of search that he had invested impugned sum in different names but the shares actually belonged to him, addition made by Assessing Officer was sustainable. (Block period 1987-88 to 1997-98).Dinesh B. Parikh v. CIT (2011) 63 DTR 25/ (2012) 246 CTR 51 (Cal.)(High Court)

S. 158BB : Assessment - Block assessment - Search and seizure – Computation - Undisclosed income - Return not submitted. (S. 158BC)


Return not submitted in response to notice under section 158BC, the Court held best assessment valid.Alok Todi and Another v. CIT (2011) 339 ITR 102 (Cal.)(High Court)

S. 158BB : Assessment - Block assessment - Search and seizure - Undisclosed income - Some evidence must be found in the course of search.Block assessment can be made in respect of undisclosed income which is recovered as a result of evidence found during the course of search and not as a result of other documents or material which came to possession of Assessing Officer subsequent to conclusion of search operation unless and until such evidence recovered during course of search. It is apparent that some evidence is to be found as a result of operation and it is only thereafter that remaining part of provisions come in to play.Krishna Terine (P) Ltd. v. ACIT (2011) 130 ITD 411 / 139 TTJ 345 / 56 DTR 395 / 11 ITR 405 (Ahd.)(Trib.)

S. 158BB : Assessment - Block assessment - Search and seizure - Undisclosed income – Computation - Peak investment.Seized documents showed that the assessee has earned undisclosed income on account of unrecorded turn over in the books of account which was declared in the return for the block period, further additions towards peak investment could not be made in the absence of any document or evidence.ACIT v. Saileshkumar Nathalal Patel (2011) 63 DTR 249 / 142 TTJ 521 (Ahd.)(Trib.)

S. 158BB :Assessment- Block assessment - Search and seizure - Undisclosed income-Additiona made not based on material discovered during search - Not valid. (S. 132)

CIT v.Temletion Asset Mannagement (India) P. Ltd. (2011) 337 ITR 541 (Bom.)(High Court)

S. 158BC : Assessment - Block assessment - Search and seizure - Protective assessment be framed. (S. 158BD) The Assessing Officer in absence of any specific power under the Act, has power to make protective assessment in case of regular as well as block assessment under certain circumstances Lalji Haridas v. ITO 43 ITR 387 (SC) followed.CIT v. Mahindra Finlease Pvt. Ltd. (Delhi)(High Court) www.itatonline.org

S. 158BC : Assessment - Block assessment - Search and seizure – Depreciation. (S. 158BH)Section 158BH, makes all other provisions applicable to the assessment under. Chapter XIV-B, unless it is otherwise provided for, therefore even in block assessment, the Assessing Officer must allow the claim of the assessee for the depreciation which is legally permitted under the provisions of the Act. (A. Y. 1997-98 and 2003-04).CIT v. C. Sabira (Smt.) (2011) 237 CTR 477 / 338 ITR 226 / (2010) 40 DTR 153 (Ker.)(High Court)

S. 158BC : Assessment - Block assessment - Search and seizure - Computation of undisclosed income - Set off of excess income.Assessee is not entitled to set off of excess income disclosed in a particular year falling within the block period against the undisclosed income of subsequent year falling within the same block period.CIT v Kamala Devi Jain (2011) 51 DTR 70 / 238 CTR 328 / 330 ITR 153 (Guj.)(High Court)

S. 158BC : Assessment - Block assessment – Search and seizure – Material not found.


Where no evidence/material was found in the course of search or any information relating to any undisclosed income earned by the assessee, block assessment framed by the Assessing Officer making addition of the undisclosed income merely on the basis of third party statement was held to be bad and set aside. (A. Y. 1986-87 to 1996-97).CIT v. T. Sivaprabhaskar (2011) 50 DTR 329 / 238 CTR 457 (Mad.)(High Court)

S. 158BC : Assessment - Block assessment - Search and seizure - Undisclosed income - Remittances of foreign exchange and investment in Foreign Exchange Bonds (Immunities and Exemptions) Act, 1991. (S. 132)During the course of search it was found that the assessee has received India Development Bonds of US dollars 10,000 each by way of gift on November 14, 1994, and February 21, 1995. The amount of Rs. 5,69, 884, after maturity of India Development Bonds was credited in her savings bank account and out of this amount, fixed deposit receipts of Rs. 33, 75,000 were obtained. The Assessing Officer made the addition which was deleted by Tribunal. Hon’ble High Court held that a perusal of sections 6 and 7 of the Remittances of Foreign Exchange and Investment Bonds (Immunities and Exemptions) Act, 1991 makes it clear that no enquiry can be made from the bond holder regarding the source. The immunities are absolute. The Court held that no investigation could be allowed to be held pertaining to the India Development Bonds which were received from non-residents /overseas corporate bodies as gifts.CIT v. Usah Omer (2011) 338 ITR 448 / 64 DTR 405 (All)(High Court)

S. 158BC : Assessment - Block assessment - Search and seizure - Undisclosed income - Deducted at source - Advance tax paid by recipient - Partner - Remuneration.A search and seizure was conducted under section 132 in the premises of the assessee consequently notice under section 158BC was issued. On the date of search, due date of filing the assessment years 1999-2000 and 2000-01 stood expired. The assesses had not filed their returns. The assesses had the taxable income during relevant years. The source was remuneration from partnership firm. These firms have deducted the tax at source in respect of interest and have filed their returns before the date of search. The Income of partners cannot be held to be undisclosed in the hands of partners. (A. Ys. 1999-2000, 2000-01).CIT v. H. E. Mynuddin Pasha (2011) 338 ITR 533 (Karn.)(High Court)

S. 158BC : Assessment - Block assessment - Search and seizure – Computation - Undisclosed income.Search was conducted by the Central Excise department and unaccounted cash amounting to Rs.10,25,000 was found and recovered. The Tribunal merely relying on the order of Assessing Officer reversed the finding of Commissioner (Appeals), without giving any reason, High Court set aside the order of Tribunal and directed the Tribunal to readjudication. Further, the plausibility of the explanation submitted by the assessee on the basis of sales bills produced by him also requires to be considered by the Tribunal.Brij Mohan Bhatia v. Income-tax Appellate Tribunal (2011) 64 DTR 212 (P&H)(High Court)

S. 158BC : Assessment - Block assessment – Search and seizure - Service of notice.In the absence of any material or evidence to prima facie show that the alleged notice under section 158BC was actually sent to the assessee, it cannot be presumed, in the absence of acknowledgement of the said notice, that might have been served upon the assessee and therefore, the proceedings initiated by the Assessing Officer under section 158BC as well as block assessment are null and void initio. (A. Y. 1995 to 99 and 1989 to 2000).ACIT v. Lakshmi Industries (2011) 135 TTJ 112 / 7 ITR 495 / (2010) 48 DTR 54 (Chennai)(Trib.)


S. 158BC : Assessment - Block assessment - Search and seizure - Notice under section 158BD - Statement of persons. (S. 158BD)In the absence of any search warrant in the name of the assessee and search against him, the provisions of section 158BC in the hands of the assessee without issuing any notice under section 158BD, only on the basis of statements of three persons that the money recovered from them belonging to the assessee was held to be illegal.Anil Kumar Chadha (Guddu) v. Dy. CIT (2011) 138 TTJ 574 / 132 ITD 330 (All)(Trib.)

S. 158BC : Assessment - Block assessment - Search and seizure - Warrant of authorization - Joint names - Assessment in the name of Individual is not invalid.Warrant of authorization issued in the names of three companies including assessee, separated only by a comma without the word “and” between the names of the companies is a common warrant in the case of said three companies and not a warrant in the joint names of three companies and therefore, the block assessment order framed in the individual name of the assessee company is not in valid.Radan Multimedia Ltd. v. Dy. CIT (2011) 58 DTR 129 (Mum.)(Trib.)

S. 158BC : Assessment - Block assessment – Search and seizure - Transactions which are subject matter of regular assessment - Cannot be treated as undisclosed income – Depreciation - Finance charges.Assessee having disclosed all the transactions relating to its claim for depreciation on plant and machinery as well as payment of finance charges by filing all details in the return filed prior to the date of search which has been subject matter of enquiry in a regular assessment and all the machineries having been physically found at the time of survey as well as search at the business premises of the assessee, depreciation and finance charges could not be disallowed and treated as undisclosed income in the block assessment in the absence of detection of any material as a result of search. Radan Multimedia Ltd. v Dy. CIT (2011) 58 DTR 129 (Mum.)(Trib.)

S. 158BC : Assessment - Block assessment - Search and seizure – Computation - Post search enquiry - Materials not relating to evidence found.Additions which were made in the block assessment, on the basis of material and information available with the Assessing Officer pursuant to post search enquiry not being relatable to any alleged evidence found in the course of search are not sustainable. Additions were deleted.Shibu Soren v. ACIT (2011) 62 DTR 273 / 12 ITR 540 / 142 TTJ 714 / 47 SOT 331 (Delhi)(Trib.)

S. 158BC : Assessment - Block assessment - Search and seizure - Anonymous donations. (S. 11)Assessee society running a middle school received certain anonymous donations, The Tribunal held that such donations are liable to be taxed under section 158BC, where as in respected of other donations received receipts contains the details of name and addresses the said donations can not be assessed under section 158BC. (A. Y. 2007-08). Hans Raj Samarak Society v. ITO (2011) 133 ITD 530 (Delhi)(Trib.)

S. 158BD : Assessment - Block assessment - Search and seizure – Undisclosed income of any other person - Statement recorded.Proceedings initiated against the assessee under section 158BD on the basis of statement recorded during search are not valid as statement is neither document nor asset; further, initiation of proceedings under section 158BD by the Assessing Officer against the assessees without recording the requisite satisfaction was illegal.


CIT v. Late Raj Pal Bhatia (2011) 49 DTR 9 / 237 CTR 1 / 333 ITR 315 (Delhi)(High Court)

S. 158BD : Assessment - Block assessment - Search and seizure - Undisclosed income of any other person - Recording of satisfaction.Assessing Officer of searched person, having nowhere recorded any satisfaction that the assessees’ income of the relevant block period had escaped assessment nor forwarded the records of the case to the assessees’, Assessing Officer proceedings under section 158BD against the assessee were rightly set aside.CIT v. Sunil Bhala (2011) 238 CTR 18 / 50 DTR 238 / 336 ITR 550 (Delhi)(High Court)

S. 158BD : Assessment - Block assessment – Search and seizure - Undisclosed income of any other person - Notice –Jurisdiction.Where the assessee had not raised the plea that the Assessing Officer had no jurisdiction over him within one month from the date on which he was served notice under section 158BD of the Act, the assessment proceedings cannot be held to be invalid for want of jurisdiction in view of section 124(3) of the Act. (A. Y. 1997-98 to 2003-04).CIT v. Kapil Jain (2011) 50 DTR 342 (Delhi)(High Court)

S. 158BD : Assessment - Block assessment - Seaech and seizure - Undisclosed income of any other person - Order void if referring Assessing Officer’s “satisfaction” not recorded.Mere mention of the word ‘satisfaction’ in the order / note will not meet the requirement of the concept of satisfaction as used in section 158BD. The Assessing Officer must reach a clear conclusion that good ground exists for the Assessing Officer of the third person to initiate proceedings as material before him shows or would establish “undisclosed income” of third person. Manish Maheshwari v. ACIT (2007) 289 ITR 341 / 208 CTR 971 / 159 Taxman 258 (SC) followed. CIT v. Radhey Shyam Bansal (2011) 337 ITR 217 / 243 CTR 375 / 57 DTR 313 (Delhi)(High Court) S. 158BD : Assessment - Block assessment - Search and seizure – - Undisclosed income of any other person - Recording of satisfaction - Prior to handing over of documents.As no satisfaction has been recorded by the Assessing Officer of the person with respect to whom the search was made, prior to handing over the documents to the Assessing Officer of petitioner, the impugned notice under section 158BD is liable to be quashed.Chandrakantbhai Amratlal Thakkar v. Dy. CIT ( 2011) 55 DTR 249 / 337 ITR 258 (Guj.)(High Court)

S. 158BD : Assessment - Block assessment – Search and seizure - Undisclosed income of any other person - - Office note - Presumption. (S. 292C)If any material is found during search and seizure indicating undisclosed income of third person, further investigation is not necessary. Presumption under section 292C is applicable. Office note of Assessing Officer regarding undisclosed income of third person is valid for proceedings under section 158BD of the Income Tax Act.CIT v. Mukta Metal Works (2011) 336 ITR 555 / 244 CTR 544 / 62 DTR 167 (P&H)(High Court)

S. 158BD : Assessment - Block assessment – Search and seizure – Undisclosed income of any other person - - Cash flow statement - Balance sheet and other documents from partner. (S. 158BC)The Court held that the finding of the Tribunal that block assessment is solely on cash flow statement furnished by the assessee is factually incorrect, since the assessment is based on information collected in the form of balance sheet and other documents from partner of assessee, in the course of Search carried


out in such person’s premises, the block assessment order was held to be valid. Order of Tribunal was reversed.CIT v. K. V. Sudhakaran (2011) 63 DTR 232 / 245 CTR 596 (Ker.)(High Court)

S. 158BD : Assessment - Block assessment - Search and seizure – Undisclosed income of any other person - -- Action under section 158BD must be taken before completion of search assessment of searched person. (S. 158BC)Action under section 158BD must be taken before completion of assessment of searched person. Block assessment under section 158BC was completed on 30-3-2005. Satisfaction under section 158BD recorded on 15-7-2005. The Court held proceedings held to be not valid. (Block Period 1998 to 2003). CIT v. Mridula, Prop Dhruv Fabrics (2011) 335 ITR 266 (P&H)(High Court)Editorial:- Refer Manoj Aggarwal v. Dy. CIT (2008) 113 ITD 377 (Delhi)(SB) / 117 TTJ 145 / 11 DTR 1.

S : 158BD : Assessment - Block assessment - Search and seizure – Undisclosed income of any other person.The assessment of the person put to search was completed on 28-2-2005 and proceedings under section 158BD were initiated on 02-12-2006 by issue of notice. The satisfaction under section 158BD was recorded 31-03-2006. Since the satisfaction under section 158BD was recorded after the completion of proceedings under section 158BC, it was held that proceedings under section 158BD are time-barred. CIT v. Parveen Fabrics P. Ltd. (2011) 198 Taxman 463 (P&H)(High Court)

S. 158BD : Assessment - Block assessment - Search and seizure – Undisclosed income of any other person - Judicious satisfaction - Recorded in Block assessment of person searched. (S. 158BC)Satisfaction recorded under section 158BD before initiation of block assessment proceedings of the person searched does not satisfy the requirement of law; further, so called satisfaction recorded by the Assessing Officer in the order sheet without even stating that undisclosed income pertaining to the assessees has been detected from the seized record of the persons searched was not in accordance with the provisions of section 158BD, therefore the block assessments of the assessees under section 158BD are not valid.ACIT v. Mukta Goenka (Smt.) (2011) 53 DTR 1 / 129 ITD 201 / 137 TTJ 249 (Jab.)(TM)(Trib.)

S. 158BD : Assessment - Block assessment - Search and seizure – - Undisclosed income of any other person - Recording of satisfaction - Before completion of assessment of person searched. (S. 158BC)Recording of satisfaction for taking action against any other person under section 158BD has to be between initiation proceedings under section 158BC and before completion of block assessment under section 158BC in case of person searched. Notice issued beyond period prescribed was bad in law.CIT v. Praveen Fabrics (P) Ltd. (2011) 198 Taxman 463 (P&H)(High Court)Editorial:- View of Delhi Special Bench in Manoj Aggrawal v. Dy. CIT (2008) 113 ITD 377 (Delhi)(SB)(Trib.), affirmed.

S. 158BD : Assessment - Block assessment - Search and seizure – – Undisclosed income of any other person - Computation - Post search enquiry - Materials not relating to evidence found - Protective assessment. (S. 158BC)Income-tax department had the information regarding the existence of the bank accounts of all the individual assesses and money deposited in these bank accounts along with relevant dates of such deposits, no incriminating material can be said to have been found as a result of search carried out in respect of their bank accounts and the money lying in the said bank accounts cannot be subject matter of addition in block assessments. Once it is accepted that no incriminating documents were found in the case


of four MPs in their premises, which justified any addition under section 158BC, in their hands, protective addition in their party JMM invoking section 158BD also cannot be sustained.Shibu Soren v. ACIT (2011) 62 DTR 273 / 12 ITR 540 / 142 TTJ 714 / 47 SOT 331 (Delhi)(Trib.)

S. 158BE : Assessment - Block assessment - Search and seizure – - Limitation - Last panchanamas - Prohibitory Order. [S. 132(3)]Panchanamas drawn on 27th and 28th March 2003 in respect of residential and business premises of the petitioner being the last panchnamas the date of the same is the date of conclusion of the search for reckoning the time limit of two years for completion of the search and not 17th and 14th June 2003, on which dates prohibitory orders under section 132(3) were lifted though time period of 60 days already expired on 27th May, 2003 and therefore, the impugned assessment order passed on 30th June 2005, was barred by limitation. (A. Ys. 1997-98 to 2003-04)Rakesh Sarin v. Dy. CIT (2011) 333 ITR 451 / 240 CTR 56 / 203 Taxman 58 (Mad.)(High Court)

S. 158BE : Assessment - Block assessment - Search and seizure – Limitation - Service of non-signed copy of assessment order. (S. 292B)On the facts it was established that draft assessment was approved by the CIT under section 158BG on 23rd

May, 1997 and that the assessment was finalized by the Assessing Officer on 27th May, 1997 i.e. before expiry of limitation on 31st May, 1997. The copy of the assessment order first sent to the assessee on 30th

May, 1997 along with signed notice of demand did not contain the signature of the Assessing Officer did not invalidate the assessment which was validly completed within the period of limitation. (Block period April 1986 - May 1996)CIT v T. O. Abraham & Co. (2011) 333 ITR 182 / 54 DTR 105 / 241 CTR 561 (Ker.)(High Court)

S. 158BE : Assessment - Block assessment - Search and seizure – Limitation - Stay order in another assessee of family - Notice under section 142(2A). [S. 142(2A)]Another member MN of Assessee’s family member has filed a writ petition challenging the order under section 142(2A) in his case, and stay was granted. The Court held that it cannot be accepted that the stay order passed by the court in writ petition filed by another family member in their assessment, amounted the staying the order under section 142(2A) passed against the assessee. On the facts of the assessee against the search and seizure action carried on 26th June, 1997 block assessment was passed on 28th July 2000. The order was time barred. CIT v. Sandeep C. Dugad (2011) 63 DTR 201 / 245 CTR 324 (Bom.)(High Court)

S. 158BFA(2) : Assessment - Block assessment - Search and seizure – Penalty - Undisclosed income - Returned income.Where the income finally assessed under section 158BC(c) is the only undisclosed income returned by the assessee and the assessee has complied with all the conditions of clauses (i) to (iv) of the first proviso, no penalty under section 158BFA(2) could be levied. Penalty may be leviable in cases where undisclosed income finally assessed under clause (c) of section 158BC is in excess of the undisclosed income returned by the assessee in the return filed under section clause (a) of section 158BC. If additions made when compared with undisclosed returned income of assessee is very small penalty may not be justified. CIT v. Heera Construction Co. (P) Ltd. (2011) 63 DTR 99 / 337 ITR 359 / 245 CTR 208 (Ker.)(High Court)

S. 158BFA : Assessment - Block assessment – Search and seizure – Interest - Tax paid after due date of filing of return - Credit.


While calculating interest under section 158BFA(1), credit cannot be allowed for the tax paid by the assessee on various dates after the due date of filing of return.Kirti Foods Ltd. v. ACIT (2011) 60 DTR 96 (Pune)(Trib.)

S. 158BFA(2) : Assessment - Block assessment - Search and seizure – Penalty - Undisclosed income - Addition on estimate basis - Gross profit - Appeal admitted by High Court.The Tribunal confirmed the addition by the Assessing Officer on account of estimated gross profit merely on the basis that the entries found recorded in the ledger account found in the possession of a third party, and not on the basis of any material found in the possession of the assessee during the search, penalty under section 158BFA(2) is not leviable, more so when appeal against quantum has been admitted by the High Court.Sadhu Ram Goyal v Dy. CIT (2011) 63 DTR 296 / 128 ITD 436 (Jaipur) (Trib.)

S. 158BFA(2) : Assessment - Block assessment - Search and seizure – Penalty - Undisclosed income. (S. 158BD)The assessee did not file the return of income in response to notice under section 158BD read with section 158BC for the block assessment. The addition on account of money paid in cash was based on the seized material found during the course of search. The Tribunal held that levy of penalty was justified.Madhuben R. Barot (Smt) v. ACIT (2011) 12 ITR 465 (Ahd.)(Trib.)

S. 158BFA(2) : Assessment - Block assessment - Search and seizure – Penalty - Undisclosed income – Statement - Quantum confirmed by Tribunal.In quantum appeal the Income tax Appellate Tribunal has not accepted the retraction made by the assessee, in the absence of any contrary, material placed on record by the Assessee, the assessee was liable to penalty under section 158BFA(2).Gunanath B. Thakoor v. ACIT (2011) 64 DTR 23 / 142 TTJ 770 (Mum.)(Trib.)

S. 158BH : Assessment - Block assessment - Search and seizure - Disallowance - Rule 6DD. [S. 40(A)(3)]While computing the income of the Appellant under chapter XIV-B of the Act if the assessee fails to bring his case within the ambit of exceptional circumstance as provided in Rule 6DD of the Income tax Rules, 1962 expenditure can be disallowed invoking provisions of section 40A(3) of the Act. (Block Period 1990 to 2000)CIT v. Sai Metal Works (2011) 54 DTR 327 / 241 CTR 377 (P&H)(High Court)

CHAPTER XVLIABILITY IN SPECIAL CASES

A.- Legal Representatives

S. 159 : Legal representatives - Notice on dead person – Assessee - Reassessment. (S. 2(7), 148)Assessing Officer issued the notice under section 148 in the name of assessee who already expired. The Tribunal held that notice was not valid hence proceedings initiated under section 147 was quashed. (A. Y. 1998-99).ITO v. Sikandar Lal Jain (2011) 45 SOT 113 (Agra)(TM)(Trib.)

S. 159 : Legal representatives - Assessment - Dead person - Search and seizure.


Assessment cannot be framed on a dead person, where the assessee had already died on 2nd Feb.,1990 and the search was conducted thereafter on 13th Sept.,1990, section 159(2) was not attracted and no assessment could be framed on a dead person. Therefore addition made under section 69B was liable to be deleted. (A. Ys. 1989-90 & 1990-91)Late Smt. Laxmibai Karanpuria Through L/H Rajendra Karanapuria v. ACIT (2011) 135 TTJ 123 / 49 DTR 59/ 130 ITD 40 (Ind.)(Trib.)

S. 161 :Liability of representative assessee – No liability for unconnected income. (S. 163)The whole of the share capital of Genpact India, an Indian company, was held by a Mauritius company. The whole of the share capital of the Mauritius company was in turn held by General Electric Co, USA. The Mauritius company “gifted” the shares of Genpact India to another Mauritius company, whose shares were then ultimately sold to a Luxembourg company. The Assessing Officer claimed that the transaction of transfer of shares of Genpact India had resulted in capital gains to General Electric, USA, and so he issued a notice under section 163 proposing to treat Genpact India as an “agent” of General Electric and to assess it as a “representative assessee”. This was challenged by a Writ Petition. Upholding the challenge the court held that, the mere fact that a person is an agent or is to be treated as an agent under section 163 and is assessable as “representative assessee” does not automatically mean that he is liable to pay taxes on behalf of the non-resident. Under section 161, a representative assessee is liable only “as regards the income in respect of which he is a representative assessee“. This means that there must be some connection or concern between the representative assessee and the income. On facts, even assuming that Genpact India was the “agent” and so “representative assessee” of General Electric, there was no connection between Genpact India and the capital gains alleged to have arisen to General Electric (from the sale of shares of Genpact India). Consequently, the s. 163 proceedings seeking to assess Genpact India for the capital gains of General Electric were without jurisdiction. General Electric Co. v. DDIT (2011) 243 CTR 417 / 60 DTR 297 / 201 Taxman 341 (Delhi)( High Court)

E.-Executors.

S.168 : Executors – Income – Administrator. (S. 4)Amount received by the administrator (Assessee) on distribution out of the accumulated funds of the estate of the deceased in his capacity as a transferee of the legatee’s interest was not taxable in his hands, since the assessee had only acquired the rights to sale proceeds of the properties and the estate was continuing and was being administered by the assessee, he could not be treated as the residue legatee. (A. Y. 2004-05).Dy. CIT v. Nusli Neville Wadia (2011) 61 DTR 218 / 141 TTJ 521 (Mum.)(Trib.)

M.- Private companies.

S. 179 : Liabilities of director of private company – Tax contemplated under section 179 does not include interest and penalty.While deciding, if the nomenclature ‘tax’ would include other components such as penalty as well as interest, the High Court placed reliance on the judgement in the case of Soma Sundarams Ltd. v. CIT 116 ITR 620, which had held that the Court has decidedly stated that the component ‘income tax’ does not include payment of penalty as well as interest.H. Ebrahim and Others v. Dy. CIT (2011) 332 ITR 122 / 227 CTR 646 / 185 Taxman 11 / 32 DTR 249 (Karn.)(High Court)


CHAPTER XVISPECIAL PROVISIONS APPLICABLE TO FIRMS

A.- Assessment of firms S. 184 : Assessment –Firm- Certified copy to be filed every year - Mandatory.Section 184 provides that the assessee firms should file copy of ruling partnership deed certified by all the partners along with return of income, the requirement is mandatory, otherwise the assessee can only be treated as AOP. The fact that assessee has been treated as firm in earlier years will not be sufficient. (A. Y. 1993-94 & 95).Bhaskar and Co. v. CIT (2011) 331 ITR 90 / 230 CTR 99 / 187 Taxman 163 / 33 DTR 150 (Ker.)(High Court)

S. 184 :Assessment- Firm - Association of persons - Registration - Certified copy of partnership deed. (S. 40(b), 185)Assessee filed the return of income for the Asst. year 1993-94 on 30th August,1993 which was assessed under section 143(1). In the course of reassessment proceedings the Assessing Officer found that the assessee had not furnished certified copy of the partnership deed along with the return of income, however, during the course of assessment proceedings the assessee filed the a photo copy of a partnership deed. The Assessing Officer assessed the firm as an AOP and disallowed the salary and interest paid to the partners under section 40(b) of the income-tax Act. On appeal the CIT(A) and Tribunal held that as the assess had filed the deed of copy partnership which was signed by all the partners the assessee was liable to be assessed as partnership as the procedure requirement of the Act had been complied with. On appeal the High court held that the order of Tribunal being proper and the status of firm has been correctly assessed as partnership. (A. Y. 1993-94).CIT v. Nand Lal Lalu Ram (2011) 245 CTR 525 (P&H)(High Court).

CHAPTER XVIICOLLECTION AND RECOVERY OF TAX

B. Dedcution at sourceS. 192 : Deduction at source – Salary - Assessee in default - Honest estimate - Perquisites - Free education facilities to wards of teachers - Staff members. (S. 17(2), 201)While deducting TDS from employee’s income employer is not expected to step into shoes of Assessing Officer and determine actual income. Where employer has deducted TDS on estimated income of employee and such estimate is found to be incorrect, this fact alone would not make employer an assessee in default under section 201(1), unless an inference can reasonably raised that employer has not acted honestly and fairly. Assessee school was providing free educational facilities to Wards of teachers / staff members and cost of education was less than Rs. 1000 per month per child, assessee was entitled to benefit of proviso to rule (3)(5) and consequently, could not be treated as assessee in default.CIT v. Delhi Public School (2011) 203 Taxman 81 / 63 DTR 325 (Delhi)(High Court)

S. 192 : Deduction at source - Salary - Amounts not deductible - Income deemed to accrue or arise in India - Salary to staff at Netherland. [S. 9, 40(a)(iii)]Where salaries had been paid to non-residents for services rendered abroad, provisions of Explanation to section 9(1)(ii) were not applicable to assessee. Since salary paid to non resident’s for services rendered in Netherlands was not chargeable to tax in India, provisions of section 192 cannot be applied hence disallowance made by applying the provisions of section 40(a)(iii) were liable to be deleted. (A. Y. 2003-04).CIT v. Mother Dairy Fruits & Veg (P) Ltd. (2011) 45 SOT 186 / 141 TTK 97 / 60 DTR 220 (Delhi)(Trib.)


S. 194A : Deduction at source - Interest other than interest on securities - Compensation - Interest - Limit to be worked separately.Where the Motor Accident Claim Tribunal apportionated the compensation amount and interest payable to each claimants. The interest income of each of the claimant is to be taken into account separately for applying the limit prescribed under section 194A(3)(ix) for the purpose of deducting tax at source under section 194A of the Act.National Insurance Co. Ltd. v. Smt. Draupadibai & Ors. (2011) 50 DTR 282 / 238 CTR 201 (MP)(High Court)

S. 194A : Deduction at source - Interest other than interest on securities - Interest on compensation by Motor Accident Claims Tribunal.If the amount of interest on compensation awarded by Motor Accident Claims Tribunal payable to the claimant in particular financial year does not exceed fifty thousand rupees then the person responsible for payment is not required to deduct tax at source under section 194A. Interest Awarded has to be spread over in number of years from the date of filing of claim petition till the due of payment.United India Insurance Co. Ltd. v Ramanlal & Ors. (2011) 56 DTR 407 (MP)(High Court)

S. 194A : Deduction at source - Interest other than interest on securities – Reimbursement – Commission – Interest. (S. 28A)Assessee company utilized unspent credit limit of other company for importing goods for which bank charged interest, which was paid by said company on behalf of assessee. Assessee reimbursed such amount of interest to said company. It claimed that in reality it paid commission to that company for utilising its unspent credit limit and therefore, provisions of section 194A were not applicable. The Court held that amount paid by the assessee would clearly come with in the definition of ‘interest’ under section 2(28A) and assessee was liable to deduct TDS from the said amount in terms of section 194A. (A. Y. 2002-03) Bhura Exports Ltd. v. ITO ( 2011) 202 Taxman 88 (Cal.)(High Court)

S. 194C : Deduction at source - Payments to contractors and sub-contractors - Amounts not deductible -Payments by firm to partners – Sub-Contract. [S. 40(a)(ia)]Partners of the assessee firm having executed the transportation, contracts undertaken by the firm by using their own trucks and the assessee having acted as an agent in routing the payments to partners, it cannot be held that there was a separate contract between the firm and the partners and, therefore such payments could not be disallowed under section 40(a)(ia) on the ground that tax was not deducted at source under section 194C. (A. Y. 2006-07)CIT v. Grewal Brothers (2011) 54 DTR 99 / 240 CTR 325 (P&H)(High Court)

S. 194C : Deduction at source - Payment to contractors and sub-contractors - Contractual payment - Freight charges - Disallowance under section 40(a)(ia).In the absence of any oral or written agreement for payment of any freight charges to truck owners, it does not become a case under section 40(a)(ia) r.w.s.194C. Therefore, the disallowance made is not sustainable. (A. Y. 2006-07).CIT v. Bhagwati Steels (2011) 241 CTR 480 / 326 ITR 108 / 198 Taxman 275 / 47 DTR 75 (P&H)(High Court)

S. 194C : Deduction at source – Payment to contractors and sub-contractors - - Transportation of building material - Hiring of dumpers - Rent. (S. 194-I)


Assessee engaged in transportation of building material, hiring Dumpers and making payments to contractor for hiring dumpers. The payment was not rent for machinery or equipment but the payment was for works contract of shifting of goods from one place to another, therefore section 194C and not section 194I. (A. Y. 2007-08)CIT (TDS) v. Shree Mahalaxmi Transport Co. (2011) 339 ITR 484 (Guj.)(High Court)

S. 194C : Deduction at source – Payment to contractors and sub-contractors - - Transportation of goods – Rent. (S. 194-I)Assessee entering in to works contracts for transport of goods belonging to assessee to clients through their vehicles. Payment was not rent for machinery or equipment but payment for works contract, tax deducted under section 194C and provision of section 194I cannot be applied. (A.Y. 2007-08).CIT (TDS) v. Swayam Shipping services P. Ltd. (2011) 339 ITR 647 (Guj.)(High Court)

S. 194C : Deduction at source - Payment to contractors and sub-contractors --- Union of Truck operators.The assessee was a truck operators’ union and procured contracts for its members. During the assessment of its income, the Assessing Officer made an addition after disallowance under section 40(a)(ia) of the income-tax Act, on the ground that it failed to deduct tax at source as required under section 194C(2) of the Act. The Court held that there being no sub contract the tax was not deductible at source under section 194C.CIT v. Truck Operators Union (2011) 339 ITR 532 (Mad.)(High Court)

S. 194C : Deduction at source - Payments to contractors and sub-contractors - Printing material - Payments to contractor.Payment made for purchase of printed packing material to suppliers, no work involving skill or secrecy, it being sale, section 194C is not attracted. (A. Y. 2004-05 and 2005-06).ITO v. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 / 40 SOT 9 (Delhi)(Trib.)

S. 194C : Deduction at source - Payments to contractors and sub-contractors - Shipping agent - Carriage of Goods - Technical services - Payments to contractors. (S. 194J)Payment made for carriage of goods from the customer’s trailers to the vessel in the case of export and vice versa in the case of import of goods are covered by section 194C rather than section 194J which cannot be applied. (A. Y. 2004-05).ACIT v. Merchant Shipping Services (P) Ltd. (2011) 49 DTR 97 / 129 ITD 109 / 8 ITR 1 / 135 TTJ 589 (Mum.)(Trib.)

S. 194C : Deduction at source - Payments to contractors and sub-contractors - Contractor and Sub-contractor. [S. 40(a)(ia)]Where the transporters are hired by the vendors of the goods, who directly made supplies to the factory of the assessee and charged the amount of transportation separately in their bill to the assessee, provisions of section 194C are not applicable, hence, amount paid cannot be disallowed by applying the provisions of section 40(a)(ia).Chang Hing Tannery v. Dy. CIT (2011) 42-B-BCAJ March P. 32 (Kol.)(Trib.)

S. 194C : Deduction at source - Payments to contractors and sub-contractors – Society engaged in Charitable activities. (S. 40(a)(ia), 194J)For non-deduction of tax at source from paying the payments made towards advertisement expenses, the Assessing Officer disallowed the sum of ` 5.10 lacs and taxed the same as business income. Before the


Tribunal the assessee contended that since its income is not chargeable under section 26 to section 44AD under the head “Business income” the provisions of section 40(a)(ia) were not applicable. The Tribunal relying on the decision in the case of ITO v. Sangat Bhai Pheru Sikh Education Society. (ITA Nos. 201 to 203/ASR/2004 dt. 31-3-2006 and CIT v. India Magnum Fund (2002) 74 TTJ 620 (Mum.) accepted the contention and allowed the appeal of assessee. (A. Y. 2006-07).Baba Farid Vidyak Society v. ACIT, ITA No. 180/ASR/2010 dt. 31-1-2011 (2011) 43 A BCAJ April P. 34 (Trib.)

S. 194C : Deduction at source - Payments to contractors and sub-contractors - Payment to truck operators without deduction TDS - Deduction at source - Second and third proviso to section 194C(3) w.e.f. 1st June 2005 is not retrospective. [S. 40(a)(ia)]Assessee operating trailer lorries disbursing freight charges amounting to Rs. 46,70,365 to 16 parties without deducting TDS as specified in section 194C. Assessee was liable to deduct tax at source. Amendment to sub-section (3) of section 194C made through Finance Act 2005, where by second and third provisions were added to it w.e.f 1st June, 2005 has no retrospective effect. The Tribunal held that the Assessing Officer was justified in making disallowance under section 40(a)(ia). (A. Y. 2005-06).ITO v. M. Sankar (2011) 138 TTJ 690 / 127 ITD 316 / 55 DTR 289 (Chennai)(Trib.)

S. 194C : Dedcution at source - Payments to contractors and sub-contractors - Franchisee agreement - Sharing of profits. [S. 40(a)(ia)]Franchisee agreement did not stipulate payment to be made to the licence for any work done on behalf of the assessee and it was merely a case of running a study centre and to apportion profits thereof between the assessee and the licence and therefore provisions of section 194C were not applicable and no disallowance under section 40(a)(ia) can be made. (A. Ys. 2005-06, 2006-07).Career Launcher (India) Ltd. v. ACIT (2011) 139 TTJ 48 / 56 DTR 10 / 131 ITD 414 (Delhi)(Trib.)

S. 194C : Deduction at source – Payments to contractors and sub-contractors - Transportation - Hire contract - Rent - Tests to distinguish “transportation contract” from “hire contract”. (S. 194I)The assessee entered into contracts with transporters for transporting petroleum products from the plant to various destinations. The assessee deducted TDS under section 194C at 2% on the basis that the transportation contract was “work”. The Assessing Officer held that the contract was a “hiring” of vehicles on the basis that (i) the assessee had exclusive possession and usage, (ii) the use was for a fixed tenure, (iii) the tankers were customized to the assessee’s requirements and that TDS ought to have been under section 194-I at 10%. The assessee was held to be in default under section 201. On appeal, the CIT(A) reversed the Assessing Officer. On appeal by the department, HELD dismissing the appeal:To decide whether a contract is one for “transportation” or for “hiring”, the crucial thing is to see who is doing the transportation work. If the assessee takes the trucks and does the work of transportation himself, it would amount to hiring. However, if the services of the carrier were used and the payment was for actual transportation work, the contract is for transportation of goods and not an arrangement for hiring of vehicles. On facts, the agreement was of the nature of transport agreement and not one for hiring of vehicles because the tank truck owners did not simply confine themselves to providing vehicles at the disposal of the assessee in lieu of rent but also engaged their drivers in driving such vehicles and thereby in transporting petroleum products from one place to the other. In effect, the truck remained in the possession of the staff of the carrier. Further, the assessee was required to pay for the transportation work on the basis of distance and no idle charges were payable. There was no transfer of the right to use the vehicle involved in the agreement. The agreement was merely for carriage of petroleum products and so section 194-I was not applicable.( A.Ys 2008-09 to 2010-11)


ITO v. Indian Oil Corporation( 2012) 13 ITR 79 (Delhi)(Trib.) www.itatonline.org

S. 194C : Deduction at source – Payments to contractors and sub-contractors - - Service of security personnel.Service rendered by security personnel under a contract with agency would fall with in the meaning of section 194C, because security guards are skilled persons carrying out work of guarding premises from any untoward incidence therefore assessee was justified the deduction of tax at source at 2.26%. (A.Ys. 2006-07 to 2008-09).Glaxo Smith Kline Pharmaceuticals Ltd. v. ITO (TDS) (2011) 48 SOT 643 (Pune)(Trib.)

S. 194C : Deduction at source – Payments to contractors and sub-contractors - Amounts not deductible - Lease rent for cranes - Works contract - Deduction at source. [S. 40(a)(ia)]Payment made by the assessee for hiring of cranes to crane owners was with reference to the period of lease and not at all related to the work / out derived from the cranes and therefore, such payment can not be said to be payment made for “works contract” covered by section 194C and therefore, was no requirement to deduct tax at source under section 194C and consequently the payments could not be disallowed under section 40(a)(ia). (A. Y. 2006-07).ACIT v. Sanjay Kumar (2011) 48 SOT 615 / (2012) 143 TTJ 415 (Delhi)(Trib.)

S. 194C : Deduction at source – Payments to contractors and sub-contractors - - Labour Charges. [S. 40(a)(ia)]Assessee paid labour charges to various labourers which included cash payments exceeding Rs. 50,000/- to some labourers throughout year. Assessing Officer disallowed such payments by invoking provisions of section 40(a)(ia) for non-deduction of tax at source under section 194C. According to assessee the number of persons from one family worked as casual labourers at site on daily wage basis and due to practical difficulties for preparing individual vouchers for each labour payment, only one voucher was prepared in name of head of family who received the money and if individual labourers were taken in to consideration, payment does not exceed Rs. 50,000/- in a year to each person. Assessee also filed the confirmation from persons who received the sums on behalf of a number of members and same had not been repudiated by revenue. Tribunal held that the disallowance was not justified. (A. Y. 2006-07)Nalawade C. Maruti v. Jt. CIT (2011) 48 SOT 566 (Pune)(Trib.)

S. 194C : Deduction at source – Payments to contractors and sub-contractors - Hiring of tractors and trolleys - Transport and octori charges. [S. 40(a)(ia)]Assessee hired Tractors and trolleys from nearby villages for purpose of business and debited payments were on a day basis under head “transportation and Octori charges”. Assessing Officer disallowed the same on ground that said payments were transport charges and hence required deduction at source under section 194C. The Tribunal held that the nature of expenditure cannot be deduced merely on the basis treatment accorded in account books, but to be decided on basis of substantive character of transaction. As hiring of tractors /trolleys for purpose of using them in business could not be equated to a contract for transportation for carriage as contemplated under section 194C, therefore, disallowance of expenses by invoking provisions of section 40(a)(ia) was unjustified. Even if such an arrangement is considered to be falling with in the purview of section 194I of the Act, however, for the period under consideration the requirement of deduction at source on machinery rentals are not applicable. (A. Y. 2006-07).Nalawade C. Maruti v. Jt. CIT (2011) 48 SOT 566 (Pune)(Trib.)


S. 194D : Deduction at source - Insurance Commission.Assessee, a general insurance company, entered in to an arrangement with one B for facultative reinsurance. As per said arrangement, assessee was liable to pay certain percentage of premium as reinsurance inward commission to B. Assessee was receiving only net premium on reinsurance from B. Profit commission, if any, was shared between assessee and B in certain percentage. Assessing Officer held that assessee was liable to deduct tax on reinsurance commission paid to B under section 194D. The Tribunal held that provisions of section 194D were not applicable to payment of reinsurance commission made by assessee to B. (A. Ys. 2005-06 and 2008-09).Tata AIG General Insurance Co. Ltd. v. ITO (2011) 43 SOT 215 / 55 DTR 254 / 140 TTJ 319 (Mum.)(Trib.)

S. 194E : Dedcution at source - Payments to non-resident sports men or sports associations. (S. 115BBA)Once income accrues to a non resident sports man or sports association on fulfillment of the condition as mentioned in section 115BBA, then the statutory obligation of the payer under section 194E comes into play irrespective of taxability thereof, payments including guarantee money made by the assessee a committee formed by three host members of World Cup Cricket, 1996 for the purpose of conducting the tournament to ICC as well as to cricket control boards / associations of member countries of ICC in relation to matches played in India were liable to TDS under section 194E read with section 115BBA. (A. Y. 1995-96).PILCOM v. CIT (2011) 51 DTR 147 / 238 CTR 387 / 335 ITR 147 / 243 CTR 511 / 335 ITR 147 / 198 Taxman 555 (Cal.)(High Court)

S. 194E : Deduction at source - Payments to non-resident sportsmen or sports association – Umpires - Match referees are neither sportsmen nor are they on resident sports association or institution. (S. 115BBA)Amounts paid to foreign team for participation in match in India in any shape, either as prize money or as administrative expenses, is income deemed to have accrued in India and is taxable under section 115BBA and thus, section 194E is attracted. However , payments made to umpires or match referees do not come with in purview of section 115BBA because umpires and match referee are neither sportsmen (including an athletic) nor are they non-resident sports association or institution so as to attract provisions contained in section 115BBA and therefore, liability to deduct tax at source under section 194E does not arise. (A. Y. 1996-97).Indcom v. CIT (2011) 200 Taxman 40 / 58 DTR 1 / 335 ITR 485 / 242 CTR 337 (Cal.)(High Court)

S. 194H : Deduction at source – Commission or brokerage - Mobile phone service.Agents of Airline companies are permitted to sell tickets at any rate between fixed minimum commercial price and published price. Difference between commercial price and published price neither commission nor brokerage tax need not be deducted under section 194H.CIT v. Qatar Airways (2011) 332 ITR 253 (Bom.)(High Court)

S. 194H : Deduction at source - Commission or brokerage - Discount.Where agreement between assessee and distributor was on principal to principal basis payments made by the assessee to the distributor were incentives and discounts and not commission, there was no need to deduct tax under section 194H on such payments. (A. Y. 2004-05).CIT v. Jai Drinks (P) Ltd. (2011) 57 DTR 261 / 242 CTR 505 / 336 ITR 383 / 198 Taxman 271 (Delhi) (High Court)

S. 194H : Deduction at source – Commissionorbrokerage - Discount.


Assessee company was engaged in business of providing cellular mobile telephone services under brand name ‘Airtel’, provided the services through its distributors/franchisees who kept sufficient stock of rechargeable coupons and starter packs with them. After selling the Sim cards and prepaid coupons to retailers, franchisees were to make payment of sale proceeds to assessee after deducting the discount. The Court held that receipt of discount by franchisee was in real sense, commission paid to franchisees and same would attract provisions of section 194H. (A. Y. 2003-04 & 2004-05)Bharati Cellular Ltd. v. ACIT (2011) 200 Taxman 254 / 244 CTR 185 / 61 DTR 225 (Cal.)(High Court)

S. 194H : Deduction at source – Commission or brokerage – Discount - Franchisee.Franchisee acts on behalf of the assessee for selling start up pack and prepaid recharge coupons to the customers of assessee and all the trappings of liability as agent, of the franchisee towards assessee subsist and therefore discount given to the franchisee was in fact commission, subject to TDS under section 194H. (A. Ys. 2003-04 and 2004-05).Bharati Cellular Ltd. v. ACIT (2011) 61 DTR 225 / 244 CTR 185 / 200 Taxman 254 (Cal.)(High Court)

S. 194H : Deduction at source - Commission or brokerage- Principal to principal. Transaction between assessee and concessionaries, principal to principal. Payments to concessionaries for sale of milk products being not commission, tax not deductible. (A. Y. 2004-05 and 2005-06).ITO v. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 / 40 SOT 9 (Delhi)(Trib.)

S. 194H : Deduction at source - Commission or brokerage - Booking of domestic and international airline tickets. [S. 40(a)(ia)]The transaction in question were not transactions between principal and agent but those transactions were between principal and principal. In order to bring services or transactions within expression “Commission” and “Brokerage” under section 194H, element of agency must be present. When the discount allowed / given by the assessee to the intermediaries was also allowed to passenger directly who booked the tickets with the assessee and the assessee was recording the transaction in its books of account on net amount of the invoice, then it was not a case of commission or brokerage paid or payable by the assessee to the intermediaries, hence, the provisions of section 194H were not applicable therefore no disallowance can be made under section 40(a)(ia). (A. Y. 2006-07).ITL Tours and Travels (P) Ltd. v. ITO (2011) 44 SOT 277 (Mum.)(Trib.)

S. 194H : Deduction at source – Commission or brokerage - Discount.The assessee mobile phone service provider to the distributors in the course of selling SIM cards and recharge coupons under prepaid scheme against advance payment received from the distributors. Section 194H is applicable. (A. Ys. 2007-08 & 2008-09).ITO v. Vodafone Essar Cellular Ltd. (2011) 59 DTR 75 / 141 TTJ 461 (Chennai)(Trib.)

S. 194H : Deduction at source - Commission or brokerage - “Principal-Agent”. [S. 40(a)(i)] The assessee entered into agreements with hospitals etc (“collection centres“) in accordance with which the centres collected samples from patients seeking laboratory tests and forwarded it to the assessee. The centres raised a bill on the patient, retained their “discount” and paid the balance to the assessee. The assessee claimed that it had rendered “professional services” & that the centres had rightly deducted TDS under section 194J. The Assessing Officer held that in collecting the sample and forwarding it to the assessee, the centres acted as an “agent” of the assessee and that the “discount” retained by it was “commission” and that the assessee ought to have deducted TDS under section 194H. He consequently


disallowed the “discount” under section 40(a)(i) in the hands of the assessee. This was upheld by the CIT(A). On appeal by the assessee, HELD reversing the Assessing Officer & CIT(A):(i) To fall within section 194-H, the payment must be by a “person acting on behalf of another person“. The element of “agency” has necessarily to be there. If the dealings between the parties is not on a “principal to agent” basis, section 194-H does not get attracted; (ii) On facts, the relationship between the assessee and the Centres was not on a “principal & agent” basis because (a) under the agreement, the Centres availed the professional services of the assessee to test the samples and were under no obligation to always forward these samples to the assessee; (b) The Centres issued its own bill to the patient, collected the fees and issued the receipt, (c) the assessee raised its invoice on the Centres after giving a “discount” over the standard price list; (d) the rates charged by the Centres from its customers were not decided by the assessee, (e) there was no privity of contract between the assessee & the patient, (f) the amounts collected by the Centres was not on behalf of the assessee. Consequently, the relationship between the assessee and the Centres was on principal to principal basis and section 194H did not apply. (iii) Further, the obligation of TDS under section 194 H arises only at the time of “payment” or “credit”. As the assessee had not paid or credited any amount to the account of the Centres, section 194H had no application. The assessee had only credited the net amount received from the Centres as its income. SRL Ranbaxy Ltd. v. ACIT (2012) 65 DTR 185 / (2012) 143 TTJ 265 (Delhi)(Trib.) S. 194H : Deduction at source - Commission or brokerage - Business expenditure – Disallowance under section 40(a)(ia) - payment to consolidator of land.Assessee having appointed a consolidator to acquire land who, as per the terms of MOU, agreed to assign its right to purchase the land in favour of the assessee, the transaction between the assessee and the consolidator was on principal to principal basis and, therefore, provisions of section 194H were not applicable to the payments made by the assessee to the consolidator and consequently, same cannot be disallowed under section 40(a)(ia); provisions of section 40(a)(ia) are not applicable also for the reason that the assessee has reflected the impugned payments in purchases and closing stock and has not claimed any deduction for expenses on account of such payments.(A. Y. 2007-08)ITO v. Finian Estates Developers (P) Ltd. (2011) 63 DTR 314 (Delhi)(Trib.)

S. 194I : Deduction at source – Rent - Hire of machinery. (S. 194C) Amendment of section 194I to include rent for hire of machinery w.e.f. 1-6-2007, assessee paying hire charges for Millers and Rollers for laying Roads, there is no liability to deduct tax at source in accounting year relevant to assessment year 2005-06. Operation of machinery by owner of Machinery not a case of composit contract for labour and hire of machinery. Section 194I of the Act came to provide for deduction of tax at source in respect of machinery /equipment with effect from June 1, 2007, and the relevant assessment year was 2005-06, there was no scope to disallow the expenditure applying the provisions of section 40(a)(ia). (A. Y. 2005-06).CIT v. D.Rathinam (2011) 335 ITR 101 / 55 DTR 382 / 197 Taxman 486 / 241 CTR 476 (Mad.)(High Court)

S. 194I : Deduction at source - Jurisdiction – Rent – Assessing Officer in place of payment has no jurisdiction if assessee assessed outside.The assessee, based & assessed in Delhi, was allotted land by MMRDA at Bandra Kurla Complex, Mumbai, on lease for 80 years. The lease premium of Rs. 88.52 crores was paid without deduction of tax at source. The ITO (TDS) Mumbai passed an order under section 201 in which he held that the assessee had defaulted


in not deducting TDS under section 194-I on the lease premium. The assessee filed a Writ Petition to challenge the jurisdiction of the ITO (TDS) Mumbai. HELD upholding the plea:The assessee was assessed at New Delhi. Its PAN & TAN were allotted by the Assessing Officer at New Delhi. All returns including the TDS returns were filed at New Delhi. Accordingly, there was complete absence of jurisdiction on the part of the Assessing Officer at Mumbai to proceed against the assessee.India Newspaper Society v. ITO (TDS) (2011) 339 ITR 365 (Bom.)(High Court)

S. 194I : Deduction at source - Rent - Mobile service provider.Payment by assessee to other mobile telephone service providers for national roaming facility is not for use of equipment. The assessee was mere a facilitator between its subscriber and other service provider, facilitating a roaming call to be made by the subscriber. The payment of roaming charges by the assessee to other service providers could not be considered as rent within the meaning of Explanation (i) below section 194-I, therefore there was no liability on the part of the assessee to deduct tax at source. (A. Y. 2007-08, 2008-09, 2009-10)Vodafone Essar Ltd. v. Dy. CIT (2011) 9 ITR 182 / 135 TTJ 385 / 49 DTR 450 (Mum.)(Trib.)

S. 194I : Deduction at source – Rent - Fixed charges for hire of vehicles not “rent” for section 194I – TDS - Provisions under section 194C applicable. (S. 194C)Where cars were owned and maintained by the contractor and all expenditure was borne by contractor, the contract was for “carriage of passengers” for which a fixed amount was paid. Pursuant to definition of “work” as per section 194C, it was observed that, the payment of vehicle hire charges fell within the scope of section 194C and was not “rent” for section 194I. (A. Y. 2009-10)Ahmedabad Urban Devlopment Authority v. ACIT ACAJ March 2011. P. 623( 2012) 13 ITR 73(Ahd)(Trib)

S. 194J : Deduction at source –Fees for professional or technical services- “Transaction charges” paid to BSE - “fees for technical services”. [S. 9(1)(vii), 40(a)(ia)] In the instant case, there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the BSE is a complete platform for trading in securities. A stock exchange manages the entire trading activity carried on by its members and accordingly renders “managerial services”. Consequently, the transaction charges constituted “fees for technical services” under section 194-J and the assessee ought to have deducted TDS. However, on facts, because from 1995 to 2005 no tax was deducted and no objection was raised by the Assessing Officer and because from A.Y. 2006-07 onwards the assessee had deducted TDS, there was a bonafide belief that no TDS had to be deducted, hence no disallowance under section 40(a)(i) can be made for A.Y. 2005-06.CIT v. Kotak Securities Limited (2011) 62 DTR 339 / 203 Taxman 86 / 245 CTR 3 / (2012) 340 ITR 333 (Bom.)(High Court)

S. 194J : Deduction at source –Fees for professional or technical services- - Medical profession - Incidental or ancillary services.Payment made for rendering services in course of carrying on medical profession or other services as stipulated in section 194J, deduction of tax at source has to be made and it is immaterial, whether recipient is an individual, firm or artificial person. Incidental or ancillary services which are connected with carrying on medical profession are also included in term “Profession”. Payment made by TPA, on behalf of insurance company to hospital for settlement of professional fee under various claims including cash less claim, it would be liable to deduct TDS under section 194J on all such payments. Circular No. 8 of 2009 of 2009, considered.


Vipul Meicorp TPA (P) Ltd. v. CBDT (2011) 202 Taxman 463 / 63 DTR 65 / 202 Taxman 463 (Delhi)(High Court)

S. 194J : Deduction at source –Fees for professional or technical services-- Human element - Cheque processing centre.In the absence of anything on record to discern as to whether an intervention of human elements is involved in the services provided by the PNB MICR cheque processing centre to the assessee bank, orders of the authorities below were set aside and the matter is remitted to the Assessing Officer to examine afresh. (A. Y. 2004-05).CIT v. Chief Manager, State Bank of India (2011) 245 CTR 107 (P&H) (High Court)

S. 194J : Deduction at source - Fees for professional or technical services - Mobile service provider - Technical services.Considering the importance of issue whether payment made by mobile service provider for roaming facility is for technical service, the matter was remanded back to the assessing officer in the light of observation made by the Supreme Court in CIT v. Bharti Celluar Ltd. (2011) 330 ITR 239 / 234 CTR 146 / 193 Taxman 97/ 44 DTR 190 (SC). (A. Ys. 2007-08, 2008-09, 2009-10).Vodafone Essar Ltd. v. Dy. CIT (2011) 9 ITR 182 / 135 TTJ 385 / 49 DTR 450 (Mum.)(Trib.)

S. 194J : Deduction at source - Fees for professional or technical services - Service of security personnel. (S. 9(1)(vii), 194C)The Tribunal held that payment made for services of security guard provided by a contractor can not be kept in nature of managerial, technical or consultancy services to attract clause (vii) to section 9(1) reads with section 194J. For treating the payment for technical services to be covered under section 194J, should be a consideration for acquiring or using technical know how simplicitor provided or made available by human element and there should be direct and live link between payment and receipt / use of technical services information. The contention of assessee that payment is covered under section 194C is accepted. (A. Ys. 2006-07 to 2008-09)Glaxo Smith Kline Pharmaceuticals Ltd. v. ITO (TDS) (2011) 48 SOT 643 (Pune)(Trib.)

S. 194LA : Deduction at source - Payment of compensation on acquisition of certain immoveable property - Agricultural land. [S. 2(14)]When land itself was agricultural land though it may not be used for agricultural purpose but unless and until same was used for non-agricultural purpose, it had to be treated as agricultural land for purpose of section 194LA, therefore Special Land Acquisition Officer was not required to deduct tax at source from amount of compensation paid for acquisition of land. Definition of “agricultural land” as given in section 2(14) cannot be imported for purpose of section 194LA. (A. Y. 2005-06).ITO, TDS v. Special Land Acquisition Officer (2011) 46 SOT 458 (Mum.)(Trib.)

S. 195 : Dedcution at source - Other sums – Non-resident - Discounting charges - Export sales bill - Deduction at source - Interest. [S.2(28A) , 40(a)(i)]Discounting charges paid by assessee to a foreign company for discounting export sale bills is not “interest” as defined in section 2(28A), since foreign company has no permanent establishment in India, it was not liable to tax in respect of discounting charges and therefore, assessee was under no obligation to deduct tax at source under section 195 and the discounting charges could not be disallowed under section 40(a)(i). (A. Ys. 2004-05 & 2005-06).


CIT v. Cargill Global Trading (P) Ltd. (2011) 241 CTR 443 / 56 DTR 188 / 199 Taxman 320 / 335 ITR 94 (Delhi)(High Court)

S. 195 : Deduction at source - Other sums – Non-resident - sale of shares of Foreign Co. by NonResident to Non-Resident attracts Indian tax – Assessing Officer to first record finding and decide “preliminary issue”. Where one non resident had sold shares of a foreign company to another and show cause notice was issued under section 195, in view of the judgement of the Supreme Court in Vodafone International v. UOI 221 CTR 617 it was held that the interest of the assessee is safeguarded by directing that the Assessing Officer shall record a finding on the preliminary issue relating to jurisdictional fact (as to whether the overseas transaction attracts Indian tax at all). If the assessee is aggrieved by the finding, it is entitled to challenge the same by a Writ Petition. Richter Holding Ltd. v. ADIT (IT) (Karn.)(High Court) www.itatonline.orgEditorial:- See also Vodafone International Holdings B.V. v. UOI 329 ITR 126 / 235 CTR 15 / 193 Taxman 100 / 44 DTR 97 (Bom.) on the same point.

S. 195 : Deduction at source - Other sums – Non-resident - Income deemed to accrue or arise in India -Business information. (S. 201)The assessee had imported business information reports from Dun and Brand street, USA and made remittances in respect thereof without deducting tax at source. The Assessing Officer held that the assessee was liable to deduct tax at source. Tribunal set aside the order of Assessing Officer. The Court held that the Authority for Advance Rulings had held that the sale of business information reports by the subsidiaries of Dun and Brand Street, USA in Spain, Europe and the U.K. to the assessee did not attract the provisions of section 195. Though the decision of the Authority was not binding in the present case, since the decision of Authority related to the same business information reports imported by the assessee and no fault in the decision of the Authority was pointed out, the decision of the Tribunal was affirmed.DIT v. Dun and Brand Street Information Services India P. Ltd. (2011) 338 ITR 95 (Bom.)(High Court)

S. 195 : Deduction at Source - Other sums - Non-resident - Assessee in Default - Certificate not withdrawn, assessee not in Default. (S. 201)The assessee made payment of “daily allowance” to a Japanese company on account of the stay of Japanese engineers without deduction of tax at source. The Assessing Officer held that the payment was assessable to tax as “fees for technical services” and that the assessee was liable under section 201 for failure to deduct tax at source. It was held that the Assessing Officer had issued a certificate under section 195(2) authorizing the remittance without deduction of tax at source. As this certificate was not cancelled under section 195(4), the assessee was not required to deduct tax at source and could not be treated as assessee in default. The issue whether the payments were taxable or not need not be gone into. ( A. Y. 1987-88)CIT v. Swaraj Mazda Ltd. (2011) 62 DTR 205 / 198 Taxman 305 / 245 CTR 521 (P&H)(High Court)

S. 195 : Deduction at source - Other sums – Non-resident - Lower rate.Assessee cannot deduct tax at a lower rate without getting an authorization or certificate under section 195(2). (A. Y. 2002-03).CIT v. Chennai Metropolitan Water Supply & Sewerage Board (2011) 202 Taxman 454 / 64 DTR 395 (Mad.)(High Court)


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S. 195 : Deduction at source - Other sums – Non-resident - Income deemed to accrue or arise in India - Royalty or fee for technical services - Bandwidth charges paid to foreign companies for data communication. [S. 9, 40(a)(i)] Assessing officer held that assessee was required to deduct tax at source in respect of payments made to AT&T and MCI Telecommunications were covered under section 195. Where payments are made to service providers such as AT&T or MCI Telecommunications for use of band width provided for down linking signals in United States and such payments are not in the nature of managerial, consultancy or technical services nor for use or right to use industrial, commercial or scientific, equipment. Then the said payment are not in the nature of royalty or fee for technical services assessee and thus not liable to deduct tax at source. (A. Y. 2004-05)Infosys Technologies Ltd. v. Dy. CIT (2011) 45 SOT 157 / 139 TTJ 18 (Bang.)(Trib.) S. 195 : Deduction at source – Other sums – Non-resident - Commission paid outside India - Fees for technical services – DTAA - India-Russia. (S. 9(1)(i), 40(a)(ia), Art. 7, 13)Commission was paid outside India for services rendered outside India, tax was not deductible at source. The definition of “fees for technical services” in article 13 of the Double taxation Avoidance Agreement does not include managerial service. Hence, the definition of the technical services as given in the Double Taxation Avoidance Agreement is to be applied and it was beneficial. Hence, the sales commission in respect of parties situated in the U.K. could not have been subjected to tax at source because it was business profits and not fees for technical services. Moreover the non-residents had not made available technical knowledge or experience. Hence clause 13 of the Double Taxation Avoidance Agreement between India and the U.K. was not applicable. (A. Ys. 2007-08 to 2010-11).ACIT v. Modern Insulator Ltd. (2011) 10 ITR 147 / 140 TTJ 715 / 56 DTR 362 (Jp.)(Trib.)

S. 195 : Deduction at source - Other sums – Non-resident - Payment to non-resident - Training its personnel - Fees for technical service - Income deemed to accrue or arise in India. (S. 9)Assessee company during relevant assessment year made payment to non-resident party for training its personnel or customers to explain proposed buyers salient features of products imported by assessee in India and to impart training to customers to use equipment. The payment made could not be said to be fees for technical services and not liable for deduction of tax at source. (A. Y. 2007-08).ACIT v. PCI Ltd. (2011) 46 SOT 183 (Delhi)(Trib.)

S. 195 : Deduction at source – Other sums – Non-resident - Remittances of sale proceeds of shares by bank – UAE resident – DTAA - India-UAE. [S. 201, 201(1A), Article 13(3)]Abu Dahbi Commercial Bank, (ADCB) was engaged in the business of banking and operated through branch in India. ADCB made remittances to individuals being UAE residents, in respect of sale proceeds of shares which resulted in short term capital gain in India. Remittance was made without deducting tax at source. Assessing Officer treated the ADCB as an assessee in default, under section 201 and also levied interest under section 201(IA). On appeal CIT(A) held that though ADCB could be regarded as payer under section 204, there was no with holding tax obligation due to availability of treaty benefit. The Tribunal held that Liability to deduct tax on remittance, does not arise as bank is only acting as an authorized dealer in transferring the funds on behalf of the share broker in absence of liability to deduct tax , the bank could not be treated as an assessee in default.ITO v. Abu Dhabi Commercial Bank (2011) TII 103 ITAT–Mum-ITNL dt. 12-5-2011 (591 (2011) 43-A BCAJ –August P. 27) (Mum.)(Trib.)


S. 195 : Deduction at source - Other sums – Non-resident - Income deemed to accrue or arise in India - Foreign agent – Commission - Business connection - Permanent establishment. (S. 4(1), 40(a)(ia), 195).A foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him. Such commission is not received by him or in his behalf in India, and such agent is not liable to income tax in India on commission received by him. As there was no right to receive income earned in India nor there was any business connection between assessee and ETUK, therefore when income was not chargeable to tax in India under section 4(1), there was no question of invoking provisions of section 195 hence no disallowance can be made under section 40(a)(ia). (A. Y. 2007-08).Dy. CIT v Eon Technology (P) Ltd. (2011) 46 SOT 323 (Delhi)(Trib.)

S. 195 : Deduction at source - Other sums – Non-resident - Off the Shelf Software - Fee for user of software taxable as “Royalty”- DTAA - India-Switzerland. (S. 9(1)(vi), 201).While the license to use the “shrink wrapped” or “off the shelf” software does not involve transfer of intellectual property, it constitutes “royalty” under section 9(1)(vi) and Article 12(3) of the DTAA because it is for “the use of and the right to use of intellectual property such as copyright of a literary, artistic or scientific work or any patent, trade mark, design or model, plan etc“. Thus, the consideration received by Oracle for use of its software constitutes “royalty” and the assessee ought to have deducted tax at source. (A. Y. 2008-09)ING Vysya Bank Ltd. v. Dy. CIT (2011) 61 DTR 401 / (2012) 143 TTJ 249 (Bang.)(Trib.)

S. 195 : Deduction at source - Other sums – Non-resident - Data processing services.Services involving routine data entry, application sorting, document handling and data capturing service not involving use of sophisticated technology. Services rendered non-managerial, technical or consultancy service. Fees based on invoice from non-resident. Not Fees for technical services. Not taxable in India.R. R. Donnelley India Out source P. Ltd. (2011) 335 ITR 122 / 241 CTR 305 / 199 Taxman 255 / 56 DTR 1 (AAR)

S. 195 : Deduction at source - Other sums - Non-resident - Capital gains - Transfer of shares - Wholly owned subsidiary - Without consideration. (S. 45, 48, 92, 92C, 195)Transfer of shares to subsidiary company without consideration would not attract liability to tax under section 45 read with section 48. As the consideration is inapplicable on the date of transfer, as no income is chargeable to tax, provisions of section 195 or provisions of sections 92 to 92F would not apply. Good Year Tire & Rubber Co., In Re. (2011) 240 CTR 209 / 54 DTR 281 / 334 ITR 69 (AAR)

S. 195 : Deduction at source - Other sums – Interest – Protocol – Non-resident – DTAA – India-France (S. 90, Article 12)Interest payable by the applicant, an Indian company, to a French company as well as its assignee, another French company, on the credit extended by it which is insured by COFACE of France is not taxable in India, in view of the Most Favoured Nation Clause in the protocol to the DTAA, therefore there is no obligation on the applicant to withhold tax on the interest paid by it.Poonawalla Aviation (P) Ltd., In Re (2011) 64 DTR 385 / (2012) 246 CTR 22 (AAR)

S. 195 : Deduction at source - Other sums –Non-resident- Insurance premium to COFACE for guaranteeing the credit facility-exemption under Article 12.3 of India-France DTAA read with MFN clause in Protocol-DTAA with Hungary, Canada, Ireland - DTAA - India–France [Article 12(3)(b)]The applicant, Indian Company entered into an agreement for purchase of aircraft from Dassault Aviation SA, French company. On 17.3.2009, COFACE agreed to partially guarantee the credit facility to be extended


by the seller. The credit facility which was to be repaid in six-monthly installments, was paid by way of promissory notes. All the promissory notes were irrevocably and unconditionally assigned by Dassault to BNP Paribas, France. The questions before the authority are as under

a) Whether the payment of interest to Dassault and/or to BNP is taxable in view of provision of Article 12(3)(b) of the India-France DTAA?b) In light of the facts and declaration by Dassault that it does not have PE in India, whether the applicant would require to deduct tax at source under section 195(2) of the Act on the payment of interest to Dassault, if yes at what rate?c) Based on the facts and also that the interest payment by applicant is not in connection with debt that is effectively connected to a PE of BNP in India, whether the applicant would be required to deduct tax at source under section 195(2) of the Act on the payment of interest to BNP, if yes at what rate?

Article 12.3(b) of India-France DTAA covers loan or credit extended or endorsed. COFACE has neither extended the loan or credit nor guaranteed the repayment of the loan by the applicant. It has only engaged itself to pay an agreed sum to Dassault in the event Dassault incurring a loss on not being able to recover the loan or credit.A protocol was signed by India and France on 29.9.1992 by which the benefit of the Most Favoured Nation clause has been extended to this Convention and based on it, exemption is extended to insurance of the credit, in view of such exemption being granted by India in treaties with Hungary, Canada and Ireland. Thus the interest payable to Dassault is not taxable in India under Article 12.3(b) of India-France DTAA.There is nothing in contrary to state that interest payable to BNP PARIBAS, France is not beneficially owned by it. Thus India-France treaty would continue to be applicable and interest payable to BNP PARIBAS would not be taxable in India in view of Article 12.3(b). Accordingly there is no obligation on the applicant to withhold tax on the interest paid to Dassault or to BNP PARIBAS on the transaction.Poonawalla Aviation (P) Ltd., In Re (2011) 64 DTR 385 / (2012) 246 CTR 22 (AAR)

S. 195A : Deduction at source - Income tax payable “Net of tax” - Foreign companies – Royalty - Fees for technical services - Grossing up - Agreement approved by Government of India. [S. 10 (6A)]Where technical collaboration agreement between assessee and foreign company was approved by Government of India under section 10(6A), tax paid by assessee on remittance to foreign collaborator was exempt from further tax and grossing up under section 195A to cover tax component of remittance does not arise. Section 195A, authorizes assessment of gross income only when collaboration agreement is not approved by Government of India under section 10(6A). CIT v. Tata Ceramics Ltd. (2011) 203 Taxman 43 (Ker.)(High Court)

S. 197 : Deduction at source - Certificate for deduction at lower rate - Writ - Alternative remedy. (S. 264)Assessee made application under section 197 for lower deduction of tax at 0.27%. The Assessing Officer refused to grant the certificate. The Assessee has filed writ petition against the said order. The Court held that Revision under section 264 is efficacious statutory remedy against such order and Writ is not maintainable.Sime Darby Engineering SDN BHD Malaysia v. UOI (2011) TAX. L. R. 784 (Uttarakhand)(High Court)

S. 199 : Deduction at source - Credit for tax deducted – Refund. (S. 203)Assessee, from whose payments taxes have been deducted at source and who is also in receipt of the appropriate certificates in accordance with the scheme of the Act, must get credit admissible under section 199 uninfluenced by any refund of TDS subsequently granted to the tax deductor. (A. Y. 2002-03).Lucent Technologies GRL LLC v. Dy. DIT (2011) 136 TTJ 291 / 45 SOT 311 / 51 DTR 8 (Mum.)(Trib.)


S. 199 : Deduction at source - Credit for tax deducted.Credit for TDS, under section 199 is to be allowed in year in which corresponding income is assessable to tax.(A. Y. 2006-07).ITO v. Shri Anupallavi Finance & Investments (2011) 131 ITD 205 / 138 TTJ 200 / 54 DTR 198 (Chennai)(Trib.)

S. 201 : Deduction at source - Consequence of failure to deduct or pay – Assessee in default - - Limitation.When there was no period of limitation fixed for exercising power under section 201 at relevant point of time, there is no question of invoking a reasonable period of limitation for applying the provision of section 201. (A. Y. 2002-03).Bhura Exports Ltd. v. ITO (2011) 202 Taxman 88 (Cal.)(High Court)

S. 201 : Deduction at source - Consequences of failure to deduct or pay - Limitation period for taking action under section 201.No limitation period can be read into the scheme of section 201, prior to April 2010 i.e. prior to insertion of sub-section (3) to section 201. (A. Y. 2002-03)Bhura Exports v. ITO (2011) 202 Taxman 88 (Cal.)(High Court)Editorial: This view is contrary to the Special Bench decision in ‘Mahindra & Mahindra’s case, where the Tribunal applied the time-limit under section 147 to take action under section 201.

S. 201 : Deduction at source - Consequences of failure to deduct or pay - Assessee in default - Payment to non-resident. [S. 163, 195(2), 201(IA)]The Assessing Officer asked the assessee to deduct the tax and remit the amount. The assessee approached the Court of Appeal in London for permission to deduct the tax at source from the award amount. Pending the stay the Court directed the assessee to remit the amount to escrow account maintained in names of both the parties. The entire amount was remitted as by court order. Indian tax authorities sought to proceed holding assessee in default under section 201(1)(IA). The Tribunal held that assessee could not be held to be assessee in default in terms of section 201(1) and 201(IA), as it was a case of impossibility of performance, and hence assessee would be released from obligation to deduct tax at source.(A. Y. 2001-02)National Aviation Co. of India v. Dy. CIT (2011) 43 SOT 362 / 137 TTJ 662 / 53 DTR 379 (Mum.)(Trib.)

S. 201 : Deduction at source - Consequences of failure to deduct or pay - Assessee in default - Limitation - Tax duly paid by payee.Maximum time limit for initiating and completing the proceedings under section 201(1) has to be at par with the time limit available for initiating and completing the assessment / reassessment of the payee; impugned order under section 201(1) passed by the Assessing Officer with in the period of six years from the end of the relevant assessment year is not time barred.Person responsible for deduction tax cannot be treated as an assessee in default in respect of tax under section 201(1) if the payee has paid the tax directly. (A. Y. 2004-05)ACIT v. Merchant Shipping Services (P) Ltd. (2011) 49 DTR 97 / 135 TTJ 589 / 129 ITD 109 / 8 ITR 1 (Mum.)(Trib.)

S. 201 : Deduction at source - Consequences of failure to deduct or pay - Assessee in default - Burden of Proof. (S. 194I)


When assessee provided permanent account numbers of payees and confirmation from some of them. It is the duty of the assessing officer to verify payment of tax by payees. Treating the assessee as in default placing burden of proof wholly on it was not reasonable. (A. Ys. 2007-08, 2008-09, 2009-10). Vodafone Essar Ltd. v. Dy. CIT (2011) 9 ITR 182 / 135 TTJ 385 / 49 DTR 450 (Mum.)(Trib.)

S. 201(1) : Deduction at source - Consequences of failure to deduct or pay - Assessee in default - Payee showing the sale consideration. (S. 195, 201-IA)Once the payee acknowledges the receipt of the sale consideration, filed the return assessing the said amounts in his hands and paid tax, which is accepted by the department, the payer ceases to be assessee in default. (A. Y. 2004-05).CIT v. Intel Tech India (P) Ltd. (2011) 55 DTR 173 (Karn.)(High Court)

S. 201(1) : Deduction at source - Consequences of failure to deduct or pay - Assessee in default - Demand notice. [S. 156, 195, 200, 201(IA)]Where section 201(1) is attracted there is no need of giving any demand notice under section 156, and if any such notice is given the same should be held to be redundant. Provisions of section 195, 200 and 201, when conjointly read, deal with a liability which at no point of time, depends on passing any order under the Act but is attracted immediately upon the happening of the default mentioned therein, i.e., failure to deduct tax or failure to credit the sum as required by section 200. As soon as such failure occurs liability arises automatically and there is no further requirement of computation or reassessment or service of notice of demand under section 156. (A. Y. 1995-96).Pilcom v. CIT (2011) 55 DTR 209 / 243 CTR 511 (Cal.)(High Court)

S. 201(1) : Deduction at source- Consequences of failure to deduct or pay - Assessee in default - Time limit.Time limit for treating deductor as in default, is maximum time limit available for initiating and completing reassessment. On the facts as the order passed by the Assessing Officer was within six years from the end of the relevant assessment year, the order passed by the Assessing Officer was not time barred. (A. Y. 2004-05). ACIT v. Merchant Shipping Services (2011) 8 ITR 1 / 135 TTJ 589 / 129 ITD 109 / 49 DTR 97 (Mum.)(Trib.)

S. 201(IA) : Deduction at source - Consequences of failure to deduct or pay - Interest -- Assessee in default - Profits in lieu of salary - Tips collected and paid to employees. (S. 2(24),15, 17(1)(iv), 17(3), 192, 201, 273B)Payment of banquet and restaurant tips to the employees of assessee in its capacity as employer constitutes salary within the meaning of section 15 read with section 17(3). Assessee is considered as assessee in default for non-deduction of tax at source on account of banquet and restaurant tips collected by its employees and was liable to interest under section 201(IA). In the given circumstances no under section 201 could be charged, however levy of interest under section 201(IA), is neither treated as penalty nor has the said provision been included in section 273B to make reasonableness of the cause for the failure to deduct a relevant consideration, hence, there is no question of waiver of such interest on the basis that default was not intentional or any other basis. (A. Ys. 19999-2000 to 2005-06). CIT v. ITC Ltd. (2011) 59 DTR 312 / 243 CTR 114 / 199 Taxman 412 (Delhi)(High Court) S. 201(IA) : Deduction at source - Consequences of failure to deduct or pay - Interest - - Assessee in default.Interest under section 201(1A), is leviable where recipient is a loss making company. In such case interest under section 201(IA) has to be calculated from date on which tax should have been deducted to date on


which payee should have filed its return under provisions of Act. Circular No. 275/201/95–IT(B) dated 29-1-1997. (A. Y.2002-03).CIT v. Chennai Metropolitan Water Supply & Sewerage Board (2011) 202 Taxman 454 / 64 DTR 395 (Mad.) (High Court)

S. 201(IA) : Deduction at source - Interest - Consequences of failure to deduct or pay - Interest other than interest on securities - Retrospective amendment. (S. 194A)In view of the retrospective amendment of section 201 w.e.f. 1st June, 2002, by Finance Act, 2008, all persons who were liable to deduct tax at source under section 194A are liable to pay interest under section 201(IA) if they have not deducted the amount; assessee’s liability ceases from the day the creditor pays the tax. (A. Ys. 2004-05 to 2006-07).Solar Automobiles India (P) Ltd. v. Dy. CIT (2011) 64 DTR 34 (Karn.)(High Court)

S. 201(IA) : Deduction at source - Consequences of failure to deduct or pay -Interest - Payment by cheque - Delay by collecting bank.Assessee having deposited the TDS for June 2008, vide pay order dated 4th July 2008, in the authorized bank and the latter having collected the same on 7 th July, 2008, which was the due date for payment of said TDS, it cannot be said that there was a default on the part of the assessee simply because the amount was credited to the Central Government by the bank on 8th July 2008, and therefore, interest under section 201(IA) was not chargeable. (A. Y. 2009-10).ICIC I Bank Ltd. v. Dy. CIT (2011) 58 DTR 284 / 141 TTJ 380 (Lucknow)(Trib.)

S. 201(IA) : Deduction at source - Consequences of failure to deduct or pay Interest - Unequal deduction – Salary. (S. 192)If there were bonafide reasons in deducting a lesser tax during the earlier months of financial year and is made good immediately after noticing such short fall, then section 192(3), would save the employer from liability of making payment of interest under section 201(IA); however, if the Assessing Officer finds that employer has taken the deduction casually during the earlier months of the financial year, by not deducting the tax at the end of the financial year, then interest can be charged. (A. Y. 2004-05).Madhya Gujarat Vij Co. Ltd. v. ITO (2011) 64 DTR 127 / 133 ITD 89 (Ahd.)(Trib.)

BB-Collection at source.

S. 206C : Collection at source - Tax paid by buyer.If in a given case assessee had not collected tax under section 206C from buyer, before proceeding against assessee, it is necessary to find out whether buyer has paid tax in accordance provisions of Act and only in event buyer has not paid tax then the authorities can proceed against assessee, who was under obligation to collect tax and remit to Government. Matter remanded. (A. Ys. 2004-05 and 2005-06).Sree Manjunatha Wines v. CIT (2011) 202 Taxman 620 (Karn.)(High Court)

S. 206C : Collection at source - Forest produce - Tax paid by purchaser. As per the provision of section 206C(6), the liability in respect of Tax collection at source is fastened upon the person engaged in collection of forest produce and selling them whether or not he collects the Tax collection at source as per provision of section 206C(1) and therefore, the contention that the assessee should not be made liable to pay the Tax collection at source on the impugned sales, since the purchasers


have already paid the tax thereon was not sustainable. Accordingly the assessee was made liable to pay the demand. (A. Y. 2005-06).Girijan Co-op. Corporation Ltd. v. ACIT (2011) 64 DTR 433 / (2012) 143 TTJ 256 (Visakhapattanam)(Trib.)

D. Collection and recovery.S. 220 : Collection and recovery - When tax payable and when assesse deemed to be in default - –Waiver of interest.Petition for waiver of interest under section 220(2) can be filed even after interest has been paid by the assessee.(A.Y.1993-94).Jewellers Om prakash v. CCIT (2011) 202 Taxman 71 (Delhi)(High Court)

S. 220 : Collection and recovery - When tax payable and when assesse deemed to be in default - Stay - Appeal pending before Commissioner (Appeals) - Writ. (Art. 226, 227, Constitution of India) Writ petition filed by the assessee seeking stay of recovery of demand during the pendency of appeal before the Commissioner (Appeal) is not maintainable, however, Commissioner (Appeal) is directed to decide the appeal expeditiously, preferably with in a period of three months. (A. Y. 2007-08). Countrywide Buildrstate (P) Ltd. v. UOI (2011) 63 DTR 343 (Raj.)(High Court)

S. 220 : Collection and recovery – When tax payable and when assessee deemed to be in default – Interest - Notice of demand - If original demand not fully paid, interest payable even for period when demand was not in existence. (S. 156)The Assessing Officer passed an assessment order and raised a demand of Rs. 21.24 lakhs of which Rs. 10.50 lakhs was paid by the assessee and the balance of Rs. 10.94 was stayed. On 20.5.1998, the CIT(A) allowed the appeal of the assessee and no demand remained payable by the assessee. The Assessing Officer refunded the taxes paid by the assessee. Subsequently, the Tribunal reversed the CIT(A). The Assessing Officer gave effect to the Tribunal’s order on 30.7.2004 and charged interest under section 220(2) for the entire period. The assessee filed a Writ Petition claiming that it was not liable to pay interest for the period from 20.5.1998 to 30.7.2004 (6y 3M) when the CIT(A)’s order was operative and no sum was due from it. HELD by the High Court:Section 220(2) provides for levy of interest if the demand is not paid within 30 days of the service of notice under section 156. A distinction has to be drawn between a case where the assessee pays up the entire demand raised pursuant to the assessment order within the period specified in section 156, wins in appeal and the amount is refunded and subsequently loses in further appeal and has to repay the taxes. In such a case, as the assessee is not in default in the first instance, no interest under section 220(2) is payable for the period when the favourable verdict of the appellate authority was operative. However, if the assessee has not paid up the entire tax within the specified period, it is liable to pay interest under section 220(2) from that date on the unpaid amount and any variation in the amount of the demand favourable to the assessee which was directed by any of the appellate authorities in the interregnum has no effect on the liability of the assessee to pay the interest. On facts, as the assessee had paid only a part of the demand at the first stage, it was held liable to pay interest for the entire period including the period when the favourable CIT(A)’s order was operative though no interest was payable on the section 244A interest Girnar Investment Ltd. v. CIT (2012) 340 ITR 529 (Delhi)(High Court)

S. 220 : Collection and recovery - When tax payable and when assessee deemed to be in default – Stay - Money kept abroad in clandestine manner - Russia-England - Certificate recovery officer. (S. 222)


Assessee declared money received from a Russian company, kept abroad in a bank account in London in a clandestine manner, only in the revised returns and not in their original returns and there being no bar or restriction on transfer of that money or remittance thereof from Russia to India, assessee is not entitled to protection or benefit of section 220(7) and stay of recovery. (A. Ys. 2004-05, 2005-06 and 2006-07).Ravina & Associates (P) Ltd. & Anr. v. CIT (2011) 245 CTR 45 (Delhi)(High Court)Ravina Khurana v. CIT (2011) 245 CTR 45 (Delhi)(High Court)

S. 220 : Collection and recovery – When tax payable and when assessee deemed to be in default – Interest..For the assessment year 1994-95, the assessment was completed under section 143(3) on 28-2-1997. The original assessment order was set aside by Tribunal and fresh assessment order was passed on 24-12-2006. Assessing Officer held that the Interest under section 220(2) to commence after thirty days from the date of service of the original demand notice dated 28-2-1997. Tribunal held that interest would be applicable on the demand notice pursuant to fresh assessment order i.e. 24-12-2006 and question of demanding interest for the period prior to 24-2-2006 does not arise. Order of Tribunal was confirmed by High Court.CIT v. Chika Oversea Pvt. Ltd. ITA No. 3737 of 2010 dated 18-11-2011. 429 (2012) 43-B.BCAJ, January 2012. P. 41 (Bom.)(High Court) S. 220 : Collection and recovery - When tax payable and when assessee deemed to be in default - Stay - Appellate Tribunal – [S. 254(1)]Assessing Officer and CIT(A) has disallowed the expenses under section 40(a)(ia), mainly relying on the decision of Karnataka High Court which now stands overruled by the Supreme Court and liquidity being not favourable, the entire demand is stayed till the disposal of assessee’s appeal by the Tribunal or for a period of six months which ever is earlier. (A. Y. 2007-08).Softcell Technologies Ltd. v. Addl. CIT (2011) 49 DTR 129 / 135 TTJ 249 (Mum.)(Trib.)

S. 220 : Collection and recovery – When tax payable and when assessee deemed to be in default – Interest..For the assessment year 1994-95, the assessment was completed under section 143(3) on 28-2-1997. The original assessment order was set aside by Tribunal and fresh assessment order was passed on 24-12-2006. Assessing Officer held that the Interest under section 220(2) to commence after thirty days from the date of service of the original demand notice dated 28-2-1997. Tribunal held that interest would be applicable on the demand notice pursuant to fresh assessment order i.e. 24-12-2006 and question of demanding interest for the period prior to 24-2-2006 does not arise. Order of Tribunal was confirmed by High Court.CIT v. Chika Oversea Pvt. Ltd. ITA No. 3737 of 2010 dated 18-11-2011. 429 (2012) 43-B.BCAJ, January 2012. P. 41 (High Court) ?

S. 221 : Collection and recovery - Penalty payable when tax in dispute - Appeal pending before Tribunal - Assessee deemed to be in default. (S. 156)Assessing Officer levied the penalty after considering the explanation of assessee. The CIT(A) held that the no proper opportunity was given before levying the penalty. In cross objection assessee contended that the Assessing Officer should have waited to levy the penalty till the order of Tribunal. The tribunal rejected the contention holding that there was no provision in the Act that penalty under section 221(1) can be imposed only after order is passed by the Tribunal. (A. Ys. 2008-09 & 2009-10)ACIT v. Catmoss Retail Ltd. (2011) 63 DTR 1 / 133 ITD 397 (Delhi)(Trib.)


S. 222 : Collection and recovery - Certificate to Tax Recovery Officer – Writ - Sale of immoveable property - Beneficiaries of Trust - Rule 11, Schedule II. (Article 226)Petition filed by two beneficiaries of a trust challenging the attachment and proclamation of sale of properties belonging to the trust for recovery of tax dues of their deceased father without arraying the third beneficiary either as petitioner or as a party respondent cannot be entertained since the impugned order has became final and conclusive as regards 1/3rd undivided interest of the third beneficiary and no inconsistent order can be passed by the Court in the same lis. Petitioners have an alternative remedy of appeal against the impugned order passed by the respondent authorities rejecting their objections under Rule 11 of Schedule II and therefore, petition filed by two petitioners (beneficiaries of a trust) challenging the attachment and proclamation of sale of properties belonging to the trust for recovery of tax due is dismissed in limine. (A. Y. 1992-93).Sagar Sharma & Anr. v. Addl. CIT (2011) 336 ITR 611 / 52 DTR 89 / 239 CTR 169 / 198 Taxman 209 (Bom.)(High Court)

S. 222 : Collection and recovery - Certificate to Tax Rrecovery Officer - Rule 11 – Recovery.Where the sale effected by TRO did not mention that unearned increase on the property was to be paid by the buyer of the property, then such unearned increase should be paid by the Department and not by the buyer of the property.CIT v. Monoflex India Pvt. Ltd. (2011) 202 Taxman 163 / 244 CTR 251 / 61 DTR 377 (Delhi)(High Court)

S. 226 : Collection and recovery - Other modes of recovery - Attachment of property – HUF - Liability of sons tax arrears of father.Father having joined as a partner of a firm in his individual capacity and not representing the joint family, only his 1/5th share in the joint family property alone was liable to be proceeded against for realization of tax arrears and not the four-fifth share of the sons, members undivided family, for recovery of the income tax arrears of father. (A. Ys. 1971-72 & 1972-73).ITO v. Tippala China Appa Rao & Ors. (2011) 331 ITR 248 / 240 CTR 298 / 54 DTR 260 (AP)(High Court)

S. 226(3) : Collection and recovery - Other modes of recovery - - Stay - Garnishee proceedings - Application pending - Reasoned order.Though application has been filed by petitioner under section 220(6), no order was passed and therefore notice under section 226(3) can not be acted upon. Revenue was directed to decide the application under section 220(6) without taking any steps under section 226(3). As the Commissioner has not passed a reasoned order the order passed by the Commissioner was set a side and Court directed to pass a speaking order. (A. Y. 2004-05).Dagny De souza (Smt) v. ITO (2011) 56 DTR 263 / 198 Taxman 205 / 242 CTR 176 (Bom.)(High Court)

S. 226(3) : Collection and recovery - Other modes of recovery - - Assessing Officer is directed to pay costs for “recovery harassment”.The Assessing Officer’s order of attaching the bank account of the assessee even before the service of the CIT(A)’s order was wrong in view of:- (a) the CBDT’s letter dated 25.3.2004 advising that penalties under section 271D & 271E for violation of section 269SS & 269T should not be indiscriminately imposed without considering section 273B, (b) the CCIT’s direction that demand arising out of penalties imposed under section 271D & 271E should be stayed in cases of co-operative credit societies,


(c) UOI v. Raja Mohammed Amir Mohammed AIR 2005 SC 4383 where concern was expressed over dangerous attitude developing amongst Executive resulting in institutional damage & (d) KEC International Ltd. 251 ITR 158 / 170 CTR 415 / 119 Taxman 974 (Bom.) where it was held that generally coercive measures may not be adopted during the period provided by the Statute to go in appeal. Accordingly, the assessee was unnecessarily subjected to harassment by the actions of the lower authorities. It is thus a fit case for imposing costs under section 254(2B) on the Revenue to compensate the harassment caused by the officers of the Revenue at fault. (A. Y. 1998-99)Shramjivi Nagari Sahakari Pat Sanstha v. ACIT (Pune)(Trib.) www.itatonline.org

F. INTEREST CHARGEABLE IN CERTAIN CASESS. 234A : Interest - Advance tax.No interest can be charged for default on advance tax where there is amendment with retrospective effect. (A. Ys. 2001-02 & 2002-03)CIT v. Jupiter Bio-Science Ltd. (2011) 202 Taxman 80 (Karn.)(High Court)?

S. 234B : Interest - Advance tax – Company – MAT. (S. 115JA, 115JB, 234C)In view of specific provisions in section 115JA and 115JB, to the effect that all other provisions of the Act, shall apply to the MAT company, interest under sections 234A, 234B is payable on failure to pay advance tax in respect of tax payable under sections 115JA, 115JB.Jt. CIT v. Rolta India Ltd. (2011) 237 CTR 329 / 49 DTR 346 / 330 ITR 470 / 196 Taxman 594 / 2 SCC 408 (SC)

S. 234B : Interest – Advance tax - Deduction at source – Salary. (S. 191, 192, 195)Advance tax is not payable on the salary of an employee in as much as the obligation to deduct tax a t source is upon the employer under section 192, upon failure on the part of the employer to deduct at source, the assessee (employee) only becomes liable to pay the tax directly under section 191 and does not become liable to pay interest under section 234B.DIT v. Maersk Co. Ltd., as Agent of Henning Skov (2011) 334 ITR 79 / 54 DTR 41 / 198 Taxman 518 / 240 CTR 218 (FB)(Uttarakhand)(High Court)

S. 234B : Interest - Advance tax - Difficulty faced while computing interest can be the ground for not to levy of interest - Enhanced compensation.The difficulties faced by the assessee while computing advance tax cannot defeat the liability to pay advance tax. As compensation was liable to be taxed as business income, the assessee is liable to pay interest. (A. Ys. 2000-01 to 2002-03).Dy. CIT v. Gopal Ramnarayan Kasat (2011) 240 CTR 266 / 54 DTR 228 / 328 ITR 566 (Bom.)(High Court)

S. 234B : Interest - Advance tax - Capital gains. (S. 47(v), 139(9), 292B)Assessee claiming exemption in respect of capital gains on sale of shares to holding company. Return found defective and assessee filed corrected return. By that time holding company was no longer holding company. The Court held that no default at time of payment of advance tax. Interest for default not chargeable. (A. Y. 1991-92).Prime Securities Ltd. v. ACIT (2011) 333 ITR 464 / 59 DTR 251 / 243 CTR 229 (Bom.)(High Court)

S. 234B : Interest - Advance tax - Minimum alternative tax - Set off. (S. 115JAA, 234C)Minimum alternative credit in terms of section 115JAA has to be set off against tax payable before calculating interest under section 234B, 234C.


CIT v. Deccan Creations (P) Ltd. (2011) 55 DTR 206 (Karn.)(High Court)

S. 234B : Interest-Advance tax – Search and seizure - Retention of seized asserts. (S. 234C)Assets seized were released on deposit of money. Assessing Officer failing to accede to request of assessee and adjust advance tax against deposits. Interest under section 234B and 234C for default in payment of advance tax cannot be levied. (A. Y. 1995-96).Vishwanath Khanna v. UOI (2011) 335 ITR 548 / 244 CTR 208 / 61 DTR 318 (Delhi)(High Court)

S. 234B : Interest –Advance tax- Waiver or reduction - CBDT circulars. (S. 80HHC)There being no decision of jurisdictional High Court favouring interpretation of section 80HHC, assessee was not entitled to waiver or reduction interest. On the facts the assessee was not entitled to reduction or waiver of interest under section 234B under any of the CBDT circulars dt. 23rd May 1996, 30th Jan., 1997 or 2 of 2006 dt. 17th January, 2006. (A. Y. 2002-03). Raju Bhojwani v. CCIT (2011) 63 DTR 236 (Delhi)(High Court)

S. 234B : Interest – Advance tax - Book profit – Company - Retrospective amendment of law - Impossible of performance. (S. 115JB, 234C)Provisions relating to payment of advance tax are applicable in a case where book profit is deemed to be total income under section 115JB. On the facts of assessee ,there was no liability to make payment of the advance tax on the last day of the financial year i.e. 31st March 2001 when its book profit was nil according to section 115JB. Provision of section 115JB having been amended by the Finance Act, 2002, with retrospective effect from 1st April 2001, the assessee cannot be held defaulter of payment of advance tax, where on the last date of the financial year preceding the relevant assessment year, the assessee had no liability to pay advance tax, he cannot be asked to pay interest under section 234B and 234C for no default in making payment of tax in advance which was physically impossible therefore interests under sections 234B and 234C cannot be charged. (A. Y. 2001-02).Emami Ltd. v. CIT (2011) 63 DTR 301 (Cal.)(High Court)

S. 234B : Interest –Advance tax- Book profit - Company. (S. 234C)Interest is chargeable under sections 234B, 234C on failure to pay advance tax in respect of tax payable under sections 115JA/115JB. (A. Ys. 1997-98 & 2000-01 to 2004-05).Singareni Colliweries Company Ltd. v. ACIT (2011) 141 TTJ 593 / 133 ITD 213 / 57 DTR 28 (Hyd.)(Trib.)

S. 234B : Interest - Advance tax - Cash seized - Search and seizure. (S. 132B(1)(i), 234C)Cash was seized in the course of search and seizure action on 12th January, 2007. Prior to the last date for payment of installment of advance tax assessee filed a letter dated 14-3-2007 requesting to adjust the cash seized, towards the existing advance tax liability. The Tribunal directed to adjust the cash seized towards advance tax liability. High Court confirmed the view of Tribunal. (A. Y. 2007-08).CIT v. Jyotindra B. Mody ITA No. 3741 of 2010 dt. 21-9-2011 (Bom.)(High Court) 181 (2011) 43B-BCAJ 53 (November-52)

S. 234D : Interest on excess refund - Chargeability.Section 234D is applicable only from 1st June, 2003 and therefore, no interest under that section could be levied from earlier date. (A. Y. 1999-2000).CIT v. Faunc India Ltd. (2011) 57 DTR 340 / 244 CTR 529 (Karn.)(High Court)


S. 234D : Interest on excess refund - Order in pursuance of appeal order of CIT(A) - Regular assessment. [S. 143(1)]Section 234D is attracted only when the refund is granted to the assessee under section 143(1) becomes refundable to the revenue on regular assessment and cannot be charged when the refund was granted to the assessee not in the assessment under section 143(1) but pursuant to order of CIT(A) on appeal. (A. Ys 1992-93 to 1998-99).DIT v. Delta Air Lines Inc. (2011) 63 DTR 1 / 245 CTR 16 (Bom.)(High Court)

S. 234D : Interest on excess refund - Asst. Year 2003-04.Section 234D was brought under statute book from the assessment year 2004-05 the Assessing Officer was not to levy the interest under section 234D. (A. Y. 2002-03 and 2003-04).C.A. Computer Associates P. Ltd. v. Dy. CIT (2011) 8 ITR 142 (Mum.)(Trib.)

CHAPTER XIXREFUNDS

S. 244A : Refunds – Interest on refunds - Refund of tax adjusted out of seized amount.In respect of refund of tax recovered by the authorities by way of adjustment out of the amount seized from the assessee–trust, sub–cl. (b) of section 244A is attracted and accordingly, interest under section 244A is payable to the assessee on such refund. (A. Y. 2004-05).CIT v. Islamic Academy Education (2011) 52 DTR 69 / 239 CTR 209 / 202 Taxman 276 (Karn.)(High Court)

S. 244A : Refunds – Interest on refunds - MAT Credit.From the tax payable by assessee under section 115JA, MAT credits is to be adjusted first, then what becomes refundable after adjustment of MAT credit is excess advance tax, paid by assessee and on such refundable advance tax interest under section 244A has to be calculated and paid. (A. Y. 1988-99).CIT v. Bharat Aluminium Co Ltd. (2011) 200 Taxman 57 / 58 DTR 113 / 242 CTR 366 / (2011) Tax L.R. 931 (Delhi)(High Court)

S. 244A : Refunds – Interest on refunds – Adjustment of amount seized.After a search conducted at assessee’s premises, it filed its return of income. However, it failed to pay self-assessment tax due as per return and requested authorities to adjust amount of tax due out of amount seized from its office and its chairman. Subsequently, assessment order came to be passed making assessment at a lesser amount and, consequently, assessee became entitled to refund. Held that, clause (b) of section 244A was attracted and assessee was entitled to refund with interest. (A. Y. 2004-05)CIT v. Islamic Academy Education (2011) 202 Taxman 276 / 239 CTR 209 / 52 DTR 69 (Karn.)(High Court)

S. 244A : Refunds – Interest on refunds - Self assessment tax - Regular assessment - Notice of demand. (S. 156)Where the assessee is entitled to refund of self assessment tax, interest under section 244A, is to be calculated from the date of payment of tax till the date of refund and not from the 1st April of the assessment year or from the regular assessment. (A. Y. 2002-03).CIT v. Vijaya Bank (2011) 64 DTR 411 (Karn.)(High Court)

S. 244A : Refunds – Interest on refunds. (S. 201)Interest under section 244A(1)(b) is allowable and should be granted on refund of tax paid in pursuance of


an order under section 201 of the Act. (A. Y. 2006-07)Reliance Infrastructure Ltd. v. Dy. CIT (2011) 9 ITR 84 / 60 DTR 419 (Mum.)(Trib.)

S. 244A : Refunds – Interest on refunds - Self assessment tax.An assessee is entitled to interest on excess payment of self assessment tax in terms of section 244A(1)(b), from date of payment of such amount up to date on which refund is actually granted. (A. Y. 2007- 08).ADIT v. Royal Bank of Scotland N.V. (2011) 130 ITD 305 / 138 TTJ 698 / 55 DTR 307 (Kol.)(Trib.)

S. 245 : Refunds - Set off of refunds against tax remaining payable - Refund arising in earlier year on issue cannot be adjusted against demand on same issue in subsequent year.Against an order passed under section 144C / 143(3), the assessee filed a stay application before the Assessing Officer under section 220(6) and also filed a stay application before the Tribunal. The Tribunal passed an interim order directing “status quo”. Despite the interim order, the Assessing Officer passed an order under section 245 (without giving prior notice) and adjusted refunds against the demand. Before the Tribunal, the department accepted that the 245 refund adjustment was not proper and said a proper order would be passed. The Assessing Officer then passed an order under section 220(6) in which he held that the adjustment of refunds was in order on the ground that (i) an adjustment of refunds was not a “recovery” and (ii) though some issues were covered in favour of the assessee, the decision had not become final as the department was in appeal. The Tribunal then passed a stay order in which it accepted the Assessing Oficer’s stand that an adjustment of refund was not a “recovery”. It was also held that action under section 245 was not “mala fide”. The assessee filed a writ petition to challenge the adjustment of refunds. HELD allowing the Petition:(i) Section 220(6) has no application to a case where an appeal is filed before the Tribunal though the Tribunal has inherent power to grant stay. The order passed under section 220(6) is null and void. The Tribunal should have decided the stay application instead of calling upon the Assessing Officer to dispose of the application under section 220(6);(ii) It is wrong to say that an adjustment of refund under section 245 is not a “recovery” only on the ground that section 245 is placed in the Chapter of “Refunds”. The term “recovery” is comprehensive and includes adjustment thereby reducing the demand. In Circular No. 1914 dated 2.12.1993, even the CBDT did not regard ‘recovery’ as excluding ‘adjustment’ under section 245. However, different parameters may apply in considering a request for stay against coercive measures to recover the demand and a stay against refund adjustment. It is permissible for the authority to direct stay of recovery by coercive methods but not grant stay of adjustment of refund. However, when a simple & absolute order of stay of recovery is passed, it bars recover of the demand by way of adjustment of demand. The revenue must be obedient and respect the stay order and not over-reach or circumvent the stay order. No deviancy or breach should be made; (iii) It will be specious & illogical for the Revenue to contend that if an issue is decided in favour of the assessee giving rise to a refund in an earlier year, that refund can be adjusted under section 245, on account of the demand on the same issue in a subsequent year. While the Assessing Officer can made an addition on the ground that the appellate order for an earlier year has not been accepted, he cannot make an adjustment towards a demand on an issue decided in favour of the assessee. (iv) The argument that as the assessment order has been passed under section 144C after reference to the DRP, the orders passed by the CIT(A) and Tribunal in favour of the assessee have lost significance and do not justify stay of demand in covered matters is not acceptable. The decisions of the CIT(A) & Tribunal in favour of the assessee should not be ignored and have not become inconsequential. This is not a valid ground to ignore the decisions of the appellate authorities and is also not a good ground to not to stay demand or to allow adjustment under section 245;


(v) The respondents are officers of the State and the Law requires that they perform their duties with utmost objectivity and fairness, while keeping in mind the sanctity of the role and function assigned to them which at times requires tough steps. On facts, the conduct and action of the Revenue in recovering the disputed tax in respect of additions on issues which are already covered against them by the earlier orders of the ITAT or CIT(A) is unjustified and contrary to law. Directions issued to refund the tax.( A.ys 2003 04,2005-06&.2006-07) Maruti Suzuki India Limited v. Dy. CIT (2012) 204 Taxman 48 / 65 DTR 110 / 246 CTR 176 (Delhi)(High Court)

Chapter XIXASettlement of cases

S. 245D : Settlement Commission - Finality of order - Power – Jurisdiction - Assessing Officer. (S. 245C, 245F, 245-I)

Settlement Commission passed an order under section 245D(4) with observation that Commissioner of Income Tax / Assessing Officer may take such action as appropriate in respect of the matter not placed before the Commission by the applicant as per provision of section 245F(4). Assessing Officer issued notice thereafter and made additions over and above that sustained by Settlement Commission. The matter was taken up before the Tribunal, the Tribunal deleted the additions made by the Assessing Officer. In an Appeals filed by the revenue the Court held that, after passing the order by the Settlement Commission, no power vests in the Assessing Officer or any authority to issue the notice in respect of the period and income covered by the order of the Settlement Commission, except in the case of fraud or misrepresentation of facts. Assessing Officer therefore had no power to issue notice in respect of the period and income covered by the order of Settlement Commission. (A. Ys. 2001 to 2006-07).CIT v. Diksha Singh (Smt) (2011) 64 DTR 268 (All)(High Court)CIT v. Late Paramjeet Singh (2011) 64 DTR 268 (All)(High Court)

Chapter XIXBAdvance Rulings

S. 245R : Advance rulings - Procedure on receipt of application - Procedure - Jurisdiction.Section 245R is an integrated section not only dealing with admission of an application but also its final disposal. AAR can independently consider nature of transaction put forward in context of proviso (iii) to section 245R(2) because said proviso gives jurisdiction to Authority to test transaction projected before it in order to find out whether it is designed prima facie for avoidance of Income-tax.ABC International Inc. (2011) 199 Taxman 211 / 241 CTR 289 / 55 DTR 393 (AAR)

S. 245R : Advance rulings – Application - Capital gains - Colourable device - Pendency of proceedings. (S. 45, 195, 201)Applicant MA, a French company, pursuant to an understanding with the other applicant GIMD, also a French a company having floated a 100 percent subsidiary and acquired majority shares of an Indian Company in the name of said subsidiary and later both the applicants having sold their shares in the subsidiary to another French company, it was a preordained scheme to deal with the assets and control of the Indian Company without actually dealing with its shares thereby avoiding payment of tax on the capital gains in India and therefore, in view of clause (iii) of the proviso to section 245R(2) Ruling on the question relating to the taxability of the capital gains arising from the sale of said shares by the applicant was declined. The Authority also held that nature of proceedings under section 201 on the basis of section 195 are only preliminary and not conclusive and therefore, pendency of proceedings or order passed under


section 201 against the purchaser of shares cannot in the way of the Authority in giving an Advance Ruling under section 245R(4).Groupe Industrial Marcel Dassault, In. Re. (2011) 64 DTR 1 / (2012) 340 ITR 272 / 245 CTR 353 (AAR)

S. 245R : Advance rulings - Application after filing return of income - Case pending before Assessing Officer - Application dismissed.The applicant had filed return of income without showing the income in respect of which ruling is sought. The applicant submits that application should be admitted under rule 19 of the Authority for Advance Rulings (Procedure) Rules 1996. Revenue contends that rule is not attracted since that Rule relates only to rectification of mistakes apparent from the record or amending an order vitiated by any such apparent error.Applicant refers to the Hand Book on Advance Rulings wherein it is stated that in a case where a notice under section 142(1) is issued for submission of an income-tax return by the applicant, unless there is any indication in the notice or some other material to show that the issue of this notice was in such circumstances as to show that the questions posed before the Authority has already been agitated by the assessee before, or had already arisen in the mind of, or discussed by, the Assessing Officer, it is difficult to say that the terms of clause (a) of the proviso to section 254R(2) are attracted. However the authority ruled that it does not deal with the situation where return has been filed. Also as order under section 197 has been passed directing deduction of tax, it cannot be said that the income under contention will not be in the mind of Assessing Officer. It was also ruled that it difficult to read or understand explanation 1 to section 153 of the Act, as an aid to understand the bar created by section 245R(2) of the Act with particular reference to clause (i) of the proviso. Authority reiterating the ruling in Monte Harris [218ITR413] dismissed the application. (A. Ys. 2007-08 to 2009-10) SEPCO III Electric Power Construction Corporation (2011) 243 CTR 529 / 202 Taxman 149 / 61 DTR 49 (AAR)

S. 245R : Advance rulings - Procedure on receipt of application - Advance Rulings - Pendency of proceedings - Notice under sections. (S. 143(2), 147)Notices under section 143(2) and 147 having been issued to the applicant by the time it filed the application under section 245Q seeking ruling on the question as to whether the amounts received by the applicant are liable to tax in India under the provisions of the Income Tax Act, the question raised is the very question pending adjudication before the Assessing Officer so far as that particular income is concerned and therefore, application is liable to be rejected under proviso to section 245R(2).Sepco III Electric Power Construction Corporation (2011) 243 CTR 529 / 61 DTR 49 / 202 Taxman 149 / (2012) 340 ITR 225 (AAR)

S. 245S : Advance rulings - Authority for advance rulings – Precedent - Binding nature.An advance ruling under the Act is confined to the facts and law projected in the application leading to the ruling and is binding only on the party and the revenue.Cairn U.K.Holdings Ltd. In Re (2011) 59 DTR 121 / 242 CTR 449 / 337 ITR 131 / 201 Taxman 111 (AAR)

CHAPTER XXAPPEALS AND REVISION

A. APPEALS TO THE DEPUTY COMMISSIONER (APPEALS) AND COMMISSIONER (APPEALS)


S. 246A : Appeal - Commissioner(Appeals) - Recovery of tax - Sale in recovery proceedings - Limitation from the date of service of order.Tax recovery officer confirming sale in recovery proceedings Schedule II, RR, 63, 65, 86 is not conclusive, appeal maintainable. For computing limitation the date of order to be construed to mean date of knowledge of order.Vijay Kumar Ruia v. CIT (2011) 334 ITR 38 / 57 DTR 300 / 242 CTR 292 / Tax L.R. 553 / 203 Taxman 462 (All)(High Court)

S. 246A : Appeal - Commissioner(Appeals) – Power - Direction.Proceedings for assessment of an assessee cannot be based on directions issued by another co-ordinate Tribunal or even a higher forum, if that was not the subject matter before it. That would be an exercise without jurisdiction. Power of Commissioner (Appeals), directing to tax certain amounts in hands of a third party, held to be not valid. (A. Y. 2006-07).CIT v. Krishi Utpadan Mandi Samiti (2011) 336 ITR 77 / 200 Taxman 362 / 64 DTR 147 (All)(High Court)

S. 246A : Appeal - Commissioner(Appeals) - Appealable orders – Shipping - Non-resident. [S. 172(4)]Order determining amount of tax under section 172(4) is appellable.ITO v. MSC Agency (India) P. Ltd. (2011) 9 ITR 425 (Chennai)(Trib.)

S. 246A : Appeal - Commissioner(Appeals) - Withholding tax - Relief in respect of under section 90 or section 91. (S. 90, 91)Question of not allowing relief in respect of withholding tax under section 90 / 91 has direct effect of reducing refund or enhancing amount of tax payable, such an issue is squarely covered with in ambit of section 246A(1) (a). ‘Amount of tax determined’ as per section 246A(1)(a) encompasses not only determination of amount of tax on total income but also any other thing which has an effect of reducing or enhancing total amount of tax payable by assessee. Section 246A(1)(a) covers issue of not allowing relief in respect of withholding tax under section 90 or section 91. (A. Y. 2006-07).Capgemini Business Services (India) Ltd. v. Dy. CIT (2011) 131 ITD 396 / 9 ITR 391 / 139 TTJ 202 / 56 DTR 353 (Mum.)(Trib.)

S. 249 : Appeal - Commissioner(Appeals) –Admitted tax- Recovery of amount - Hundi seized.Assessing Officer recovered amount out of Hundies Seized from the assessee in excess of the admitted tax, the defect in the appeal before CIT(A) due to non payment of admitted tax as required under section 249(4) can be treated to have been removed, the matter was remitted to CIT(A) to decide on merit. (Block period 1st April 1966 to 26th June 2002).Mansukhlal v. CIT (2011) 62 DTR 356 / 245 CTR 111 (MP) (High Court)

S. 249 : Appeal - Commissioner(Appeals) - Admitted tax – Limitation - Refund of earlier years.Commissioner(Appeals), dismissed the appeal on the ground that the assessee has not paid the admitted tax. The assessee contended that in the earlier years the assessee had made excess payments of tax and it was entitled refunds, and further the bank account was also attached. The assessee made payments afterwards. The Tribunal set aside the order of Commissioner of (Appeals) and directed him to decide on merit. (A. Y. 2007-08).Endeavour Industries Ltd. v. Dy. CIT (2011) 43 SOT 322 / 55 DTR 128 / 138 TTJ 461 (Hyd.)(Trib.)


S. 249 : Appeal - Commissioner(Appeals) - Admitted tax-Paid subsequently.If the appeal is filed without the payment of tax on returned income but subsequently the required amount of tax is paid, the appeal shall be admitted on payment of tax and appeal has to be decided on merit. (A. Y. 2007-08).Bhumiraj Constructions v. Addl. CIT (2011) 49 DTR 195 / 135 TTJ 357 / 131 ITD 406 (Mum.)(Trib.)

S. 249 : Appeal - Commissioner(Appeals) - Admitted tax - Refund of earlier year.Assessee paid the tax after filing an appeal. Assessee was also entitled to refund of earlier year and the Bank account was also attached. Rejection of appeal for nonpayment of admitted tax was not justified. (A. Y. 2007-08).Endeavour Industries Ltd. v. Dy. CIT (2011) 55 DTR 128 (Hyd.)(Trib.)

S. 250 : Appeal - Commissioner(Appeals) – Power - Additional evidence – Income-tax Rules, 1962 - Rule 46A.Admission of additional evidence is with in the discretion of the Commissioner(Appeals), on the facts the said discretion has not been exercised improperly or against the provisions of law. CIT(A) was justified in admitting the additional evidence. (A. Y. 2001-02).CIT v. Better ways Fianance & Leasing (P) Ltd. (2011) 62 DTR 282 (Delhi)(High Court)

S. 250 : Appeal - Commissioner(Appeals) – Power - Additional Evidence – Income-tax Rules, 1962 - Rule 46A.Commissioner (Appeals) had recorded the reasons for admission of additional evidence, further, as per Rule 46(A)(3) he had also given an opportunity to Assessing Officer to state his objections, if any to admission of additional evidence and though Assessing Officer had raised objection to admission of additional evidence, yet he had not stated anything about veracity of additional evidence filed by assessee, Tribunal held that the Commissioner(Appeals) had not violated provisions of Rule 46A and therefore, the order of Commissioner(Appeals) up held. (A. Y. 2005-06)Dy. CIT v. Dolphine Marbles (P) Ltd. (2011) 129 ITD 163 / 139 TTJ 129 / 52 DTR 58 (JB)(TM)(Trib.)

S. 250 : Appeal - Commissioner(Appeals) – Power - Additional evidence - Powers of CIT(A) to admit additional evidence under section 250(4) & Income-tax Rules, 1962 - Rule 46A.The Assessing Officer asked the assessee to furnish confirmation letters from customers who had paid advances by cash (& not cheque) which the assessee complied with. In the assessment order, the Assessing Officer treated the advances received by cheque as “unexplained cash credits” under section 68. Before the CIT(A), the assessee produced confirmation letters from customers who paid by cheque. The CIT(A) admitted the additional evidence under Rule 46A & without giving the Assessing Officer an opportunity, deleted the addition. In appeal by the department, the Tribunal upheld the CIT(A)’s action on the ground that as the Assessing Officer had not called for the confirmations before making the addition, the CIT(A) was justified in admitting the additional evidence and there was no reason to set-aside the matter to the Assessing Officer for a second innings. On further appeal to the High Court, HELD allowing the appeal:Under section 250(4), the CIT(A) has the power to direct enquiry and call for evidence from the assessee. Under Rule 46A, the assessee has the right to ask for the admission of additional evidence. If the CIT(A) exercises his powers under section 250(4) to call for additional evidence, the Assessing Officer need not be given an opportunity to show-cause. However, if the CIT(A) acts on an application under Rule 46A, then the requirement of giving the Assessing Officer an opportunity as per Rule 46A(3) is mandatory. The argument that in all cases where additional evidence is admitted, the CIT(A) should be considered to have exercised


his powers under section 250(4) is not acceptable as it will render Rule 46A redundant. On facts, as the assessee had produced the evidence, the CIT(A) ought to have followed Rule 46A(3) and remanded the evidence to the Asseessing Officer for comments and verification (matter remanded to the CIT(A). (A. Y. 2005-06).CIT v. Manish Build Well Pvt. Ltd. (2011) 63 DTR 369 / 245 CTR 397 / (2012) 204 Taxman 106 (Delhi)(High Court)Editorial: Dy. CIT v. Manish Build Well (P) Ltd. (2011) 142 TTJ 749 / 63 DTR 448 (Delhi)]

S. 250 : Appeal - Commissioner(Appeals) – Power - Additional evidence - Income-tax Rules, 1962 - Rule 46A.Assessing Officer never directed the assessee company to produce any evidence to prove the genuineness of share holdings by the subscribing companies nor expressed any doubts regarding the genuineness of share holdings of these companies prior treating the assessee’s capital as unexplained CIT(A) correctly admitted the additional evidence produced before him and there is no question of giving an opportunity to the AO to examine the additional evidence. (A. Y. 2005-06).Dy. CIT v. Dolphine Marbles (P) lTD (2011) 57 DTR 58 / 139 TTJ 129 / 129 ITD 163 (Jab.)(TM)(Trib.)

S. 250 : Appeal - Commissioner(Appeals) - Power - Validity of assessment - Second round of appeal - Search and Seizure. Assessee having not chosen to challenge the validity of assessments on the allegation of defect or irregularity in the warrant issued either before the Assessing Officer or in the first round of appeals and raised the contention after remand before the CIT(A) for the first time, is not permissible.Jose Cyriac v. CIT (2011) 238 CTR 207 / 50 DTR 292 / 336 ITR 241 (Ker.)(High Court)

S. 250 : Appeal - Commissioner(Appeals) – Power - Reasoned order - Point for determination.An order passed by CIT(A) without mentioning point of determination as also without giving any reason for decision while dismissing the appeal is violative of section 250(6) of the Act and cannot be sustained.Rang Rasayan Agencies v. ITO, ITA No. 917/Ahd./2009, dt. 18-01-2011, ITAT ‘C’ Bench, Ahmedabad, BCAJ P.. 25, Vol. 42-B, Part 5, February 2011 (Trib.)

S. 251 : Appeal - Commissioner(Appeals) – Power - Additional evidence – Income -tax Rules, 1962 - Rule 46A.When the assessee files additional evidence before the CIT(A) it is not necessary that the CIT(A) must remand the matter to the Assessing Officer, it depends on the nature of the evidence. The CIT(A) in appropriate case without prejudice to either parties can look into the evidence itself. (A. Y. 2001-02).CIT v. Jind Co-operative Sugar Mills Ltd. (2011) 51 DTR 121 / 335 ITR 43 (P&H)(High Court)

S. 251 : Appeal - Commissioner(Appeals) – Power - Omission to claim in the return.Mere omission of the assessee to claim exemption under section 10(35) in the return of income could not debar the assessee from making the claim before the first Appellate Authority during the appellate proceedings. (A. Y. 2004-05).CIT v. Metalman Auto P. Ltd. (2011) 52 DTR 385 / 336 ITR 434 (P&H)(High Court)

S. 251 : Appeal - Commissioner(Appeals) – Power - No Jurisdiction to determine tax liability of third party.Powers of appellate authority is normally co –extensive with that of original authority. It would not be open to appellate authority to exercise a jurisdiction which Assessing Officer did not have. Assessee claimed to be charitable institution, in its assessment. Assessing Officer held that amount transferred by


assessee to Mandi Parishad as development cess and administrative expenditure were for non charitable purpose and therefore, were added in assessee’s income.On appeal Commissioner (Appeals) held that both amounts could not be assessed in hands of assessee, but in hands of Parishad. He observed that amount transferred to Mandi Parishad was not credited to “Cess Fund”. (Central Mandi Fund). Accordingly he directed Assessing Officer to make a reference to Assessing Officer of Mandi Parishad to make remedial measures, if necessary, in relevant assessment years to tax relevant receipts in hands of Mandi Parishad. The Court held that it is not open to another quasi judicial authority to give direction to determine tax liability of third party. Accordingly observations made by Commissioner(Appeals) were without jurisdiction.CIT v. Krishi Utpadan Mandi Samiti (2011) 336 ITR 77 / 200 Taxman 362 (All) (High Court)

S. 251 : Appeal - Commissioner(Appeals) – Power - New claim - Non filing of revised return.When the assessee, during the course of assessment claimed the cost of acquisition of the capital asset as per the valuation report stating the fair market value as on 1st April 1981, the Assessing Officer should have entertained the said claim and CIT(A) also erred in not considering the claim, which is a legally permissible claim. (A. Y. 2005-06)Gopi S. Shivnani (Mrs) v. ITO (2011) 57 DTR 18 / 139 TTJ 308 / 133 ITD 172 (Mum.)(Trib.)

S. 251 : Appeal - Commissioner(Appeals) – Power - Omission to claim in the return.Where the assessee had not claimed deduction under section 80IB in the return of income and facts relating to that deduction have also not been shown to be existing on record, CIT was not justified in directing the Assessing Officer to consider the claim in accordance with law.ACIT v. Parabolic Drugs Ltd. (2011) 62 DTR 73 / 141 TTJ 663 (Delhi)(Trib.)

S. 251 : Appeal - Commissioner(Appeals) – Power - New claim - Non filing of revised return - Power of CIT(A).When the assessee, during the course of assessment claimed the cost of acquisition of the capital asset as per the valuation report stating the fair market value as on 1st April, 1981, the Assessing Officer should have entertained the said claim and CIT(A) also erred in not considering the claim, which is a legally permissible claim. (A. Y. 2005-06)Gopi S. Shivnani (Mrs) v. ITO (2011) 139 TTJ 308 / 133 ITD 172 (Mum.)(Trib.)

S. 253 : Appellate Tribunal – Power - Penalty. (S. 246A(1)(q), 271FA)Income tax Appellate Tribunal has no power to entertain the appeal against the order passed under section 271FA i.e. delay in filing information. An appeal against the order passed under section 271FA can be preferred before the CIT(A). (A. Ys. 2005-06 to 2008-09).Sub-Registrar, Nakoar v. DIT (2011) 57 DTR 497 / 139 TTJ 734 (Asr.)(Trib.)

S. 253 : Appellate Tribunal – Fees - Income determined - Order under section 154.Order passed under section 143(1), assessed income is Rs. 13,06,780/-. Appeal filed against order under section 154. Total income determined at more than Rs. 2 lakhs fee payable shall be one percent of assessed income subject to a maximum of Rs. 10,000/-. The Tribunal held that fee rate dependent on total income determined. (A. Y. 2002-03).M. M. Bagwan and Brothers v. ACIT (2011) 7 ITR 298 (Bang.)(Trib.)

S. 254 : Appellate Tribunal - Cross Objection - Dismissal of revenue appeal – Adjudication.


Revenue filing appeal and the assessee filing cross objection before the Tribunal. Tribunal dismissed the revenue’s appeal and not adjudicated the assesses cross objection. The Court held that the cross objection to be decided.Ram Ji Dass & Co. v. CIT (2011) 220 Taxation 90 (P&H)(High Court)

S. 254 : Appellate Tribunal - Duty - Reasoned order.A judicial order must be supported by sufficient reasons for coming to the conclusion. Failure to record reason would violate the principles of natural justice and is against the basic concept of fairness and transparency, therefore, orders passed by the CIT(A) and the Tribunal suffer from violation of principles of natural justice can not be sustained. (A. Y. 2001-02). Iskraremeco Regent Ltd. v. CIT (2011) 237 CTR 239 / 49 DTR 185 / 331 ITR 317 / 196 Taxman 103 (Mad.)(High Court)

S. 254 : Appellate Tribunal - Additional Grounds – Factual Plea – Rule 11 (Income -tax Appellate Tribunal Rule, 1963)Where the Revenue had not contested / urged before the lower appellate authority or as an additional ground before the Tribunal nor the Assessing Officer had taken such stand in his assessment order. The Tribunal was held to have committed an error in allowing the Revenue to raise such new factual plea for the first time before it at the stage of argument and adjudicating upon such plea. (A. Ys. 1966-67 to 1981-82)Meghji Girdhar (HUF) v. CIT (2011) 52 DTR 397 / 239 CTR 411 (MP)(High Court)

S. 254 : Appellate Tribunal – Duty – Reasoned Order.A judicial order must be supported by sufficient reasons for coming to the conclusion. Failure to record reason would violate the principles of natural justice and is against the basic concept of fairness and transparency, therefore, orders passed by the CIT(A) and the Tribunal suffer from violation of principles of natural justice cannot be sustained. (A. Y. 2001-02).Iskraremeco Regent Ltd. v. CIT (2011) 237 CTR 239 / 49 DTR 185 / 331 ITR 317 / 196 Taxman 103 (Mad.)(High Court)

S. 254 : Appellate Tribunal - Additional Ground – Issue of Notice.Assessee cannot be allowed to raise the plea as to whether the notice under section 143(2) was validly served on it for the first time before the Tribunal. (A. Y. 1997-98).Aravali Engineers P. Ltd. v. CIT & Anr. (2011) 49 DTR 68 / 237 CTR 312 / 335 ITR 508 (P&H)(High Court)

S. 254 : Appellate Tribunal - Natural justice - Administrative law - Opportunity for filing paper book.The Tribunal had decided the Departmental appeal against the assessee without waiting for the paper book containing the relevant documents promised to be filed by the Department. The Department appeal was allowed. The High court remitted the matter back to the Tribunal to decide the matter a fresh.Krishan Kumar Sethi v. CIT (2011) 333 ITR 16 (Delhi)(High Court)

S. 254 : Appellate Tribunal – Duty – Jurisdiction – Reopening of assessment. (S. 147)The assessee had raised a specific ground challenging the jurisdiction of the assessing officer on framing the assessment order beyond limitation before the CIT(A) and succeeded before him in appeal. The Tribunal was held not justified in deciding the issue on merits and reversing the order of the CIT(A) without deciding the issue on jurisdiction under section 147 of the Act. (A. Y. 1990-91)Kumudam Printers (P) Ltd. v. CIT (2011) 56 DTR 61 (Mad.)(High Court)


S. 254 : Appellate Tribunal - Order giving effect to order of tribunal – Scope - Binding nature of order of tribunal - Assessment. (S. 143(3), 237)While giving to the effect to the appellate order Assessing Officer cannot travel beyond the order of Tribunal and assessee the prize money as income from other sources. Assessing Officer being a quasi judicial authority and subordinate to the Tribunal is bound by the decision of the Tribunal. The assessee is entitled to refund of advance tax collected with interest as per law. (A. Y.2001-02).Lopamudra Misra (Miss) v. ACIT (2011) 59 DTR 257 / 243 CTR 66 / 337 ITR 92 / 202 Taxman 437 (Ori.)(High Court)

S. 254 : Appellate Tribunal - Duty - Additional evidence - Report of Forensic & Scientific Laboratory.The revenue has filed the report of the Forensic Science Laboratory was a relevant material and so was affidavit of the searched person. The additional evidence was necessary for just decision of the matter. The Tribunal was not justified in declining to consider the additional evidence comprising the opinion of the laboratory of the Government examiner and also the affidavit of the author of the diary, as the documents had a direct bearing on the issue.CIT v. Mukta Metal Works (2011) 336 ITR 555 / 244 CTR 544 / 62 DTR 167 (P&H)(High Court)

S. 254 : Appellate Tribunal – Duty - Binding – Precedent – Jurisdiction – High Court. It is the duty of the Tribunal to follow decision of jurisdictional High Court. Tribunal cannot hold High Court decision erroneous because it did not consider relevant provision. (A. Y. 1989-90)National Textile Corporation Ltd. (M.P.) v. CIT (2011) 338 ITR 371 / 216 CTR 153 / 171 Taxman 339 / 5 DTR 159 (MP)(High Court)

S. 254 : Appellate Tribunal – Power - Power of enhancement.The arrears of rent & damages received by the assessee were claimed as ‘not taxable’ by the assessee, being capital receipts whereas the Department contended that the same were taxable, being on revenue account. The Tribunal remanded the matter back to consider whether the same could amount to ‘Capital Gains’, being received for surrender of tenancy. It was not even the case of the Department that these were ‘capital gains’. It was held that the Tribunal cannot enhance the scope of the appeal by adjudicating on grounds not raised by the Appellant. Jasmine Commercials Ltd. v. CIT (2011) 200 Taxman 338 / 56 DTR 159 (Cal.)(High Court)

S. 254 : Appellate Tribunal – Power - Additional ground - Remand of the matter.When the material called upon by Tribunal was produced and available on record, remand of the matter to the CIT(A) was not valid, once the materials are available on record, the Appellate Court should have disposed of the case on merit taking those materials into consideration and there is no need to remand the matter. (A. Ys. 2000-01 to 2006-07).Siksha “O” Anusandhan v. CIT (2011) 244 CTR 515 / 62 DTR 191 / 336 ITR 112 (Ori.)(High Court)

S. 254 : Appellate Tribunal – Power - Search and seizure - Validity.A search took place in case of assessee and two sons. Assessee filed the return declaring 1/3 share of rent as his share. Assessing Officer completed the assessment treating the said property as HUF. Assessee challenged the validity of search. Tribunal declined to go into validity of search. On merits the Tribunal remitted the matter back to the assessing Officer. The Court held that refusal on part of Tribunal to go into validity of search which is sine qua non for initiating block assessment is illegal. The Court also held that it was not proper for the Tribunal to remand matter without attempting to settle at its stage. The order


passed by the Tribunal was set aside and the matter was remanded to it for fresh consideration. (A. Ys. 2000-01, 2004-05 and 2005-06).CIT v. Subbalakshmi (Smt) (2011) 202 Taxman 448 (Karn.)(High Court)

S. 254 : Appellate Tribunal – Power - Search and seizure – Validity - Authorisation. [S. 132(1)]Validity of search and seizure operation could not be gone in to by the Tribunal in appeal proceedings.Brij Mohan Bhatia v. Income Tax Appellate Tribunal (2011) 64 DTR 212 (P&H)(High Court)

S. 254 : Appellate Tribunal – Powers - Second remand. Where the CIT(A) failed to pass order in terms of remand made by the Tribunal, the Tribunal had power to make a second remand to the CIT(A). (A. Y. 2001-02)Vipan Khanna v. CIT (2011) 202 Taxman 250 (P&H)(High Court)

S. 254 : Appellate Tribunal - Power - Applicability of provision of section 14A for the first time before Tribunal. (S. 14A)Issue of disallowance under section 14A, cannot be raised for the first time before the Tribunal where the provision of section 14A, was not invoked against the assessee by the Assessing Officer while making disallowance of interest expenditure under section 36(1)(iii) and CIT(A) also at no stage considered the application of section 14A.ACIT v. Delite Enterprises (P) Ltd. (2011) 135 TTJ 663 / 50 DTR 193 / 128 ITD 146 (Mum.)(Trib.)

S. 254 : Appellate Tribunal - Recovery – Stay. (S. 220)Besides considerations like existence of strong prima facie case, financial constraints of the applicant are important, even if not sole or qualifying consideration in entertaining a stay application, and therefore stay granted to the assessee subject to certain conditions. (A. Y. 2006-07).KEC International Ltd. v. Addl. CIT (2011) 136 TTJ 60 / 49 DTR 428 (Mum.)(Trib.)

S. 254 : Appellate Tribunal – Binding - Precedent - Decision of co-ordinate bench.When the issue is already covered by an earlier order of Tribunal, that too in assesse’s own case, a co-ordinate bench of Tribunal should not differ the earlier decision of the bench simply for the reason that a contrary view is possible. (A. Ys. 2001-02 to 2004-2005)Patspin India Ltd. v. Dy. CIT (2011) 51 DTR 57 / 129 ITD 35 / 136 TTJ 377 (Cochin)(Trib.)(TM)

S. 254 : Appellate Tribunal – Appeal - CBDT Circular on monetary limits for filing appeals applies to pending appeals.As per Instruction No. 3 of 2011 dated 09.02.2011 appeal before Tribunal can be filed where the tax effect exceeds the monetary limit of Rs. 3 lakhs. However, considering the similar situation where tax limits were modified by the CBDT Instruction No. 5 of 2008 the jurisdictional High Court in Madhukar K. Inamdar (HUF) 318 ITR 149 held that the circular will be applicable to the cases pending before the court either for admission or for final disposal. In view of the order of the jurisdictional High Court we hold that Instruction No. 3 dated 09.02.2011 is applicable for the appeal preferred by the Revenue. ITO v. Laxmi Jewel Pvt. (Mum.)(Trib.) (2011) BCAJ July – P. 33 – Vol. 43A Part 4 / www.itatonline.org

S. 254 : Appellate Tribunal – Power - Stay - Direct stay application to Tribunal maintainable - Not necessary that lower authorities must be approached first. (S. 220)


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It is settled law that a Direct Stay Application filed before the Tribunal is maintainable and it is not the requirement of the law that assessee should necessarily approach the CIT before approaching the Tribunal for grant of stay. In deciding a stay application, the following aspects have to be considered: (i) liquidity of the funds of the assessee to clear the tax arrears out of own funds at the relevant point of time based on the assessee’s financial status at the time of the stay petition hearing; (ii) creditworthiness of the assessee to outsource the funds to clear the departmental dues; (iii) prima facie views on the likely decision of the Tribunal on the issues raised in the appeal; (iv) departmental urgencies in matters of collection and recovery; (v) guarantees provided by the assessee to safe guard the interest of the revenue etc. (A. Y. 2006-07).Honeywell Automation India Ltd. v. Dy. CIT (2011) 54 DTR 265 / 138 TTJ 373 / (2012) 49 SOT 333 (Pune)(Trib.)

S. 254 : Appellate Tribunal - Power - Stay - Despite third proviso to section 254(2A) - Tribunal has power to extend stay beyond 365 days if delay not attributable to assessee. (S. 220, 245)The Third Proviso to section 254(2A), as amended w.e.f. 1.10.2008, provides that if the appeal filed by the assessee is not disposed off within the period of stay granted by the Tribunal (which cannot exceed 365 days), the order of stay shall stand vacated even if the delay in disposing of the appeal is not attributable to the assessee. The assessee filed a stay application requesting stay of demand for penalty of Rs. 369 crores. On the expiry of 365 days of stay, the assessee asked for extension of stay relying on the Tribunal’s order in Ronak Industries where, stay had been granted beyond 365 days relying on the judgement of the Bombay High Court in Narang Overseas 295 ITR 22 (Bom.). As it was felt by the Tribunal that the reliance in Ronak Industries and Narang Overseas was misplaced in view of the amendment to the Third proviso to section 254(2A) w.e.f. 1.10.2008, the question whether the Tribunal had jurisdiction to extend stay beyond 365 days referred to the Special Bench. HELD by the Special Bench:(i) In Ronak Industries, the Tribunal held, relying on Narang Industries, that the Tribunal has the power to extend stay beyond 365 days. This decision of the Tribunal was challenged by the department in the Bombay High Court by specifically raising a question as to the applicability of the Third Proviso to section 254(2A) as amended w.e.f 1.10.2008. The High Court, vide order dated 22.10.2010, dismissed the department’s appeal. As such, the Tribunal’s order holding that there was power to extend stay even after 365 days stood affirmed;(ii) The department’s argument that the High Court’s order in Ronak Industries should be treated as per incuriam on the ground that the amendment made by the FA 2008 was not considered by it is not acceptable because (a) In Narang Overseas (rendered prior to the amendment) a wider view was taken as regards the power to grant stay, (b) In the appeal filed by the department in Ronak Industries a specific question with regard to the effect of the Third Proviso was raised and so it cannot be said that the High Court had not taken cognizance of the amendment, (c) the Tribunal cannot ignore a High Court’s decision on the ground that a provision of law was not considered by the High Court and (d) the fact that there is no discussion in the High Court’s order in Ronak Industries does not mean that does not lay down any ratio decidendi;(iii) However, the recovery of the arrears by the Assessing Officer on the expiry of 365 days of stay cannot be ordered to be refunded because on the date of recovery the stay had expired and the application for extension was pending before the Special Bench. The Assessing Officer’s act was bona fide and as the recovery was by adjustment of refunds, it was not a “coercive measure” (RPG Enterprises 251 ITR (AT) 20 (Mum) & other cases holding that the Assessing Officer must refund taxes collected during the pendency of a stay application distinguished).(A. Y. 2000 to 2002-03)Tata Communications Ltd. v. ACIT (2011) 130 ITD 19 / 54 DTR 274 / 138 TTJ 257 / 9 ITR 1 (Mum.)(SB)(Trib.)


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S. 254 : Appellate Tribunal - Even issues “sub-judice” before High Court can be heard by Tribunal.The objection to the Special Bench hearing the issue only on the ground that the High Court has admitted the appeal is not acceptable for two reasons. Firstly, the mere fact that a superior authority is seized of an issue identical to the one before the lower authority does not create any impediment on the powers of the lower authority in disposing off the matters involving such issue as per prevailing law. If the suggestion is accepted, there would be chaos and the entire working of the Tribunal will come to standstill. Secondly, the Special Bench was constituted at the assessee’s request because it then wanted an “escape route” from a potential adverse view. The assessee cannot now argue that the Special Bench be deconstituted. Such “vacillating stand” cannot be approved. (A. Y. 2006-07) Dy. CIT v. Summit Securities Limited (2011) 59 DTR 313 / 11 ITR 88 / 132 ITD 1 / 140 TTJ 393 (Mum.)(SB)(Trib)

S. 254 : Appellate Tribunal – Power - Additional evidence - Data of comparables - Annual reports.In view of the fact that annual reports / data base extracts of three companies which were selected as comparable cases were not available earlier in the public domain and having regard to the fact that these documents are essential for determining ALP, these additional evidences are admitted for consideration. (A. Y. 2005-06).ACIT v. NIT Ltd. (2011) 57 DTR 334 (Delhi)(Trib.)

S. 254 : Appellate Tribunal – Power – Assessment - New claim - Without revised return.Assessee has raised new claim before the Assessing Officer with regard to doctrine of mutuality without filing revised return under section 139. Assessing officer has not entertained the claim following the judgment of Apex Court in Goetze (India) Ltd. v. CIT (2006) 284 ITR 323 (SC), which was confirmed by CIT(A). On further appeal, the Tribunal held that as the issue required proper verification of facts and relevant facts are not available on record nor in the assessment proceedings it could not be admitted. If this ground was admitted, it had to go back to the Assessing Officer to verify the facts and adjudicate the claim of assessee would be against the spirit of the Supreme Court Judgment. Therefore, the claim of assessee with regard to doctrine of mutuality could not be entertained at this stage. (A. Y. 2004-05).Jay Bharat Co-operative Society Ltd. v. ITO (2011) 10 ITR 717 / 125 TTJ 552 / 125 ITD 90 / 29 DTR 278 (Mum.)(Trib.)Editorial:- Refer Mumbai and Delhi (High Court) - CIT v. Jai Parabolic Springs Ltd. (2008) 306 ITR 42 / 6 DTR 233 / 172 Taxman 258 (Delhi)(High Court) & CIT v. Ramco International (2009) 221 CTR 491 / 332 ITR 306 / 180 Taxman 584 / 17 DTR 214 (P&H)(High Court). S. 254 : Appellate Tribunal – Power – Contempt – Commissioner - DR’s “false & frivolous” submissions constitute “criminal contempt” & justify recovery of costs from salary.In the department’s appeal, the assessee raised a preliminary objection that the notice under section 143(2) was not issued within the prescribed period of 12 months. The Assessing Officer accepted that the section 143(2) notice had not been issued in time. Accordingly, the Tribunal, relying on Hotel Blue Moon 321 ITR 362 (SC), dismissed the department’s appeal without going into the merits of the appeal. Thereafter, the CIT-DR addressed two letters to the Hon’ble Members in which it made certain allegation against the bench . It was also alleged that the letter was sent by post as the Bench clerk had refused to accept the letter. The letters were treated as a MA by the Tribunal and heard. Thereafter, the CIT-DR filed a letter of apology clarifying that it was not his intention to “hurt the sentiments” of the Members though he did not appear personally before the Bench. The Tribunal dealing meticulously with each assertion made by the CIT-DR and terming them as “frivolous and untrue“ and held that :“We are of the view that the conduct of the learned CIT(A) in addressing correspondence to the Hon’ble Members in respect of an appeal which has been heard and under consideration for passing orders is


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improper. It is an attempt to interfere with the due course of any judicial proceeding and tends to interfere with or obstructs or tends to obstruct the administration of justice and as such would be “Criminal contempt” within the meaning of the Contempt of Courts Act, 1971. The allegations made in the letters dated 23.3.2010 and 24.3.2010 are serious enough to warrant an action seeking protection of the Hon’ble High Court in exercise of its powers to punish for contempt of the sub-ordinate Courts and Tribunals. In our opinion, there cannot be a fitter case for imposition of exemplary costs on the learned Departmental Representative, who in our view, is responsible for such a M.A. and for wasting the time of the Tribunal by raising frivolous arguments and making blatantly false submissions. The cost should have to be recovered from the salary of the delinquent employee, who is responsible for such actions and entry made in his service record on the adverse comments made against the D.R. by the Tribunal. We however refrain from doing so in the hope that such indiscretion would not be repeated in future and also in view of the letter of apology filed by the D.R.”Commissioner (Departmental Representative) v. Simoni Gems (Mum.)(Trib.) www.itatonline.org

S. 254 : Appellate Tribunal – Binding – Precedent - Decision of co-ordinate bench.A co-ordinate Bench decision, which is admittedly contrary to earlier precedents on the issue from other Co-ordinate Benches, does not bind the subsequent co-ordinate Benches. (A. Y. 2006-07).Addl. DIT v. TII Team Telecom International (P) Ltd. (2011) 60 DTR 177 / 140 TTJ 649 / 12 ITR 688 (Mum.)(Trib.) S. 254 : Appellate Tribunal – Power - Stay – Deduction at source - Disallowance of interest – Commission - Interest. (S. 40(a)(ia), 220(2), 234B, 234D)Assessee moved the stay application before the Tribunal to stay the demand of tax and interest. Demand has arisen mainly because of disallowance of interest commission etc due to failure to deduct tax at source. The Tribunal held that the assessee has failed to prove a prima facie case in his favour, hence the stay application was rejected. (A.Y. 2007-08).Maharastra State Electricity Distribution Co. Ltd. v. ACIT (2011) 133 ITD 519 (Mum.)(SB)(Trib.)

S. 254 : Appellate Tribunal - Additional ground – Appeal against penalty.Tribunal can admit the additional ground while deciding the penalty appeal a pure question of law not involving investigation into the facts. (A. Y. 2005-06) Dy. CIT v. B.J.D. Paper Products (2011) 141 TTJ 108 / 60 DTR 81 (Luck.)(Trib.)

S. 254 : Appellate Tribunal - Additional ground.If relevant facts are available on record Tribunal can admit a question of law as additional ground. (A. Ys. 2000-01 to 2004-05) ACIT v. Wolkman India Ltd. (2011) 142 TTJ 888 (Jd.)(Trib.)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Business loss. (S. 28)Loss was allowed for earlier and subsequent year. Appellate Tribunal refused the rectify the order. The Apex Court remanded the matter to Tribunal for consideration afresh in light of CIT v. Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC). (A. Y. 1998-99).Perfetti Van Melle India (P) Ltd. v. CIT (2011) 334 ITR 259 / 63 DTR 189 / 245 CTR 235 (SC)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Review.While exercising the power of rectification under section 254(2), Tribunal can recall its order in entirety if it is satisfied that prejudice has resulted to the party which is attributable to the Tribunal’s mistake, error or


omission and which error is a manifest error and it has nothing to do with the doctrine or concept of inherent power of review. (A. Y. 2000-2001 to 2005-06).Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 237 CTR 117 / 330 ITR 243 / 196 Taxman 563 / 49 DTR 98 / (2011) Tax L. R. 101 (Delhi)(FB)(High Court)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Power to review - Additional evidence.Once the Tribunal has disposed the appeal on merits, it cannot review its order and therefore, miscellaneous application filed by the assessee seeking modification of the order of Tribunal so as to admit more additional evidence than that permitted by the order was rightly rejected by the Tribunal. (A. Y. 1998-99)Indrakumar Patodia v. ITO (2011) 51 DTR 183 / 238 CTR 437 (Bom.)(High Court)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Orders not cited - Tribunal entitled to do “own research” and rely on non-cited cases. Reliance and reference to reasons stated in another decision cannot be regarded as a mistake apparent from the record. It is not unusual or abnormal for Judges or adjudicators to refer and rely upon judgements / decisions after making their own research. Geofin Investment (P) Ltd. v. CIT (Delhi)(High Court) www.itatonline.org

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Admission by counsel.Tribunal recording admission by counsel for assessee, assessee filing application denying admission, application should be considered on merits. (A. Y. 1997-98).Bagoria Udyog v. CIT (2011) 334 ITR 380 / 60 DTR 386 / 244 CTR 339 (Cal.)(High Court)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record – Merger.On the facts of the case, the High Court had reversed the order passed by the Tribunal holding that since the assessee had paid arm’s length remuneration for services of its Indian agent, no further profits could be attributed to foreign enterprises in India under Article 7(1) of DTAA.In such cases the application filed by the revenue under section 254 read with section 9 & 90 of the Income-tax Act, 1961 Article 7 of DTAA between India and Singapore was rendered infructuous as the impugned order of Tribunal had already merged with the order passed by High Court & Tribunal had no jurisdiction to modify its earlier order. The revenue’s application was therefore dismissed. (A. Y. 1999-2000).Dy. D IT v. SET Satellite (Singapore) Pte. Ltd. (2011) 43 SOT 1 (Mum.)(URO)(Trib.)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Mistake in order passed under section 254(2), cannot be rectified.The miscellaneous application filed by the assessee against earlier order passed under section 254(2) is not maintainable only course open to the assessee is to file an appeal against the said order. (A. Y. 1995-96).Padma Prakash (HUF) v. ITO (2011) 51 DTR 1 / 136 TTJ 257 / 8 ITR 135 / 131 ITD 121 (Delhi)(Trib.)(SB)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Powers - Stay.Power of Tribunal to pass an order of stay is not confined to a case where an appeal is pending before Tribunal, but also extends to any proceedings relating to an appeal pending before it.Application under section 254(2) is maintainable against order passed by Tribunal granting stay. (A. Y. 2007-08 and 2009-2010).ITO v. Vodafone Essar Ltd. (2011) 44 SOT 304 / 54 DTR 253 / 138 TTJ 284 (Mum.)(Trib.)


S. 254(2) : Appellate Tribunal - Mistake apparent from the record – Income- tax (Appellate Tribunal) Rules 1963 Rule 34 – Rectifiable Order – Pronouncement.Order pronounced at the conclusion of hearing, though not passed in writing, constitute an order of the Tribunal and the same could be rectified under section 254(2). (A. Y. 1999-2000 to 2004-05).ITO v. Meenakshi (Smt.) (2011) 128 ITD 1 / (2010) 128 TTJ 619 / 36 DTR 42 (Chennai)(TM)(Trib.)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Second rectification application - Power.The Tribunal has no power to adjudicate upon subsequent application filed under section 254(2). Only course permissible to assessee in such a case is to file an appeal against that order. (A. Y. 1995-96).Shri Padma Prakash (HUF) v. ITO (2011) 131 ITD 121 / 136 TTJ 257 / 51 DTR 2 / 87 ITR 135 (Delhi)(SB)(Trib.)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record – Powers - Jurisdiction of Income-tax Appellate Tribunal, which originally heard matter, to recall its order. The Tribunal omitted to consider an issue. A Miscellaneous application was moved seeking to recall the order. The tribunal recalled the order and registry was directed to fix the appeal as far as ground regarding rent receipt was concerned. Assessee moved instant application seeking admission of additional ground that reopening was bad in law. Held that the statute permits bench, which originally heard the matter, to recall its order in its entirety or to recall in a limited way or to pass a corrigendum or correct certain mistakes apparent from record and bench has no jurisdiction to go into other issues other than one which was recalled. Hence, Assessee was not entitled to raise any additional ground. (A.Y.1999-2000). Tokhem Enterprises v. ITO (2011) 132 ITD 375 (Mum.)(Trib.)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record - Review or Recall of the order.Tribunal cannot recall its previous order unless there are manifest errors which are obvious, clear and self-evident. (A. Y. 2007-08)Sudhakar M. Shetty v. ACIT (2011) 139 TTJ 687 / 58 DTR 289 / 130 ITD 197 (Mum.)(Trib.)

S. 254(2) : Appellate Tribunal - Mistake apparent from the record – Power - Reference in log book.In the log book of the author of the order of the Tribunal there is reference to CIT(A)’s order which contains the relevant findings on the issue of agency PE, there is also a reference to Departmental Representative’s submission contesting the finding of the CIT(A) on this issue, therefore, assessee’s plea that the question of agency PE was never raised before the Bench at the time of hearing of the appeal cannot be accepted. Tribunal having given its finding on the issue of agency PE which was actually raised before the Bench at the time of hearing of the appeal and arrived at its conclusions based on relevant reasoning, miscellaneous application filed by the assessee questioning the correctness of the view of the Tribunal without indicating any apparent error in the order of the Tribunal without indicating any apparent error in the order of the Tribunal is not maintainable. (A. Y. 1997-98).Reuters Limited v. Jt. CIT (2011) 62 DTR 322 / 48 SOT 246 / 7 ITR 422 / 33 SOT 301 (Mum.)(Trib.)

S. 254(2A) : Appellate Tribunal - Power – Stay – Extension of Period.The Tribunal has power to extend period of stay beyond three hundred and sixty five days under the provisions of section 254(2A) of the Income-tax Act,1961. (A. Y. 2003-04).CIT v. Ronuk Industries Ltd. (2011) 333 ITR 99 / 240 CTR 265 / 54 DTR 291 / 203 Taxman 90 (Bom.)(High Court)


S. 255 : Appellate Tribunal – Abatement - Legal heirs on record – Income-tax Rules, 1963 - Rule 26 ITAT - CPC 1908, Order 22, R. 4.Though Rule 26 of the ITAT Rules 1963, provides for bringing legal heirs of deceased on record, no time limit has been prescribed under that rule, and provisions of order 22 rule 4 of the CPC, 1908 have to be applied. Revenue having failed to bring the legal heirs of deceased assessee on record, in spite of giving reasonable opportunity the appeal of revenue was dismissed. (A. Ys. 1999-2000 to 2002-03).ITO v. Myeni Raghava Rao (2011) 139 TTJ 740 / 131 ITD 321 / 58 DTR 357 (Visakhapatnam)(Trib.)

S. 255(4) : Appellate Tribunal - Third member – Jurisdiction - Scope.Jurisdiction of the third member is limited to the issue in the question referred to him and he is not supposed to investigate new facts beyond the scope of the question referred to him. (A. Y. 2004-05).Dy. CIT v. Akay Flavours & Aromatics (P) Ltd. (2011) 55 DTR 1 / 130 ITD 41 / 138 TTJ 513 (Coch.)(TM) (Trib.)

CC. APPEALS TO HIGH COURTS. 260A : Appeal - High Court - Substantial question of law - Cash credit. (S. 68)It is manifest from a bare reading of section 260A of the Income Tax Act, 1961, that an appeal to High Court from a decision of the Tribunal lies only when a substantial question of law is involved, and where the High Court comes to the conclusion that a substantial question of law arises from the order of Tribunal, it is mandatory that such questions must be formulated. A finding of fact may give rise to a substantial question of law, inter alia, in the event the findings are based on no evidence and / or while arriving at the said finding, relevant evidence has been taken into consideration or legal principles have not been applied in appreciating the evidence, or when the evidence has been misread. On the facts the Tribunal has given a finding that the assessee has failed to prove the source of cash credit satisfactorily hence, the no question of law arise from the order. (A. Y. 1983-84).Vijay Kumar Talwar v. CIT (2011) 330 ITR 1 / 1 SCC 673 / 236 CTR 454 / 196 Taxman 136 / 48 DTR 179 (SC)

S. 260A : Appeal - High Court – Condonation of delay – Long delay due to procedural reasons in filing Dept appeals cannot be condoned.The SLP challenging the order of the Bombay High Court declining to condone delay of 656 days in filing the appeal was dismissed on the basis that several facts such as non traceability of case records, procedural formalities involved in the Department and the papers are to be processed through different officers in rank for their comments, approval etc. and then the preparation of the draft of appeal memo, paper book and the administrative difficulties such as shortage of staff does not make sufficient cause for condonation of delay.CIT v. Indian Hotels Co. Ltd. (SC) www.itatonline.org

S. 260A : Appeal - High court - Condonation of delay - Appeal by department.The department delayed in filing appeal in the matter involving huge stakes. The High Court dismissed the appeal. Held, considering the amount of tax involved, the High Court ought to have decided the appeal before it on the merits. The matter was remanded to the High Court to decide de novo in accordance with law.CIT v. West Bengal Infrastructure Development Finance Corp. Ltd. (2011) 334 ITR 269 / 56 DTR 351 / 241 CTR 504 / 196 Taxman 321 (SC)

S. 260A : Appeal - High Court - Limit of 10 laks - CBDT’s low tax effect circular not applicable to matters having “cascading effect”.


The High Court, relying on CBDT’s Instruction No. 3/2011 dated 9-2-2011, dismissed the department’s appeal as not maintainable on the ground that the tax effect was less than Rs. 10 lakhs. The department filed a SLP in the Supreme Court. The Apex Court allowing the petition held that, Liberty is given to the Department to move the High Court pointing out that the Circular dated 9th February, 2011, should not be applied ipso facto, particularly, when the matter has a cascading effect. There are cases under the Income-tax Act, 1961, in which a common principle may be involved in subsequent group of matters or large number of matters. The High Court shall not apply the Circular ipso facto. For that purpose, liberty was granted to the Department to move the High Court in two weeks.CIT v. Surya Herbal Ltd. (2011) 60 DTR 165 / 243 CTR 327 / 243 CTR 327 / 202 Taxman 462 (SC)

S. 260A : Appeal - High Court – Assessment - Article 226 of the Constitution – Opportunity to cross-examine – Alternative remedy – Validity of order. (S. 143)Instead of setting aside the assessment order, the High Court should have directed the Assessing Officer to grant opportunity to the assessee to cross-examine the concerned witness; further, assessee having failed to avail the statutory remedy of appeal, High Court should not have quashed the assessment proceedings under section 226 of the Constitution, assessee given liberty to move CIT(A).ITO v. M. Pirai Choodi (2011) 63 DTR 187 (SC)

S. 260A : Appeal - High Court - Power of review.Section 35G(9) of the Central Excise Act (section 260A(7) of the IT Act) provides that “the provisions of Civil Procedure Code, 1908 relating to appeals to the High Court shall as far as may be apply in the case of appeals under this Section”. Given that only the provisions of the CPC relating to “appeals” are made applicable and not those relating to “review”, the High Court had to consider whether the provisions of section 114 and Order XLVII of the Civil Procedure Code which confer power on the High Court to review its judgments apply to appeals filed under the Excise Act. The assessee and the department were agreed that the High Court had that power. HELD accepting the claim: (i) The High Court is a Court of record as envisaged in Article 215 of the Constitution and has inherent powers to correct the record. As the High Court has plenary jurisdiction, it has inherent power of review to prevent miscarriage of justice or to correct grave and palpable errors committed by it. CCE v Hongo India (236) ELT 417 (SC) & D. N. Singh v. CIT 325 ITR 349 (Patna)(FB) followed;(ii) In dealing with matters under a special enactment, the practice and procedure of the ordinary Court will apply if the special enactment refers to and adopts the practice and procedure to be followed by the ordinary Court. Accordingly, all provisions of the CPC apply to appeals under the Excise Act;(iii) Section 35G(9) does not restrict the jurisdiction of the High Court to only the provisions of the CPC relating to appeal. Section 35G(9) is enacted out of abundant caution to provide that in respect of matters not dealt with by the special enactment, the provisions of the CPC shall apply. Even if section 35G(9) were not there, the ordinary law of the court have to be applied in the absence of anything contrary in the special law; (iv) One of the grounds of review is an error apparent on the face of the record. Where a statute is amended retrospectively, a judgment applying the un amended law constitutes an error apparent on the face of record and can be reviewed. VIP Industries Ltd. v. CCE (Bom.)(High Court) www.itatonline.org

S. 260A : Appeal - High Court - Monetary limit - CBDT circular - Filing appeals - Pending appeals





The Department filed an appeal in the year 2008 where the tax effect was less than Rs. 10 lakhs. The question arose whether in view of Instruction No. 3/2011 Dated 9-2-2011 the appeal was maintainable. HELD dismissing the appeal:In view of CIT v. P. S. Jain & Co. (included in file) which followed Pithwa Engineering 276 ITR 519 (Bom.) & Ashok Patel 317 ITR 386 (MP) and where it was held that the CBDT Circular imposing limits on the filing of appeals by the department applied to pending appeals, Instruction No. 3/2011 Dated 9-2-2011 also applied to pending appeals and as the tax effect was less than Rs. 10 lakhs, the appeal was not maintainable. CIT v. Delhi Race Club Ltd. (Delhi)(High Court) www.itatonline.org

S. 260A : Appeal - High Court - Monetary limit - CBDT circular - Pending appealCircular dated 15.5.2008 laying down monetary limit controls the filing of the appeals and not their hearing. Appeals filed as per applicable limit at the time of filing cannot be governed by circular applicable at the time of hearing. The object of the Circular under section 268A is only to govern monetary limit for filing of the appeals. There is no scope for reading the circular as being applicable to pending appeals. [Abhinav Gupta 41 DTR 129 (P&H) (FB) reversed] CIT v. Varinder Construction Co. (2011) 51 DTR 290 / 239 CTR 1 / 198 Taxman 42 / 331 ITR 449 (P&H) (FB)(High Court)

S. 260A : Appeal – High Court - Monetory limit - Instruction of Board No. 3/2001. F. No. 279/Misc.142/2007 – ITJ / Dt. 9th February, 2011.( 2011) 332 ITR 1 (ST). www.itatonline.orgAppeal before Appellate Tribunal ` 3,00,000.Appeal u/s 260A before High Court ` 10,00,000.Appeal before Supreme Court. ` 25,00,000.Appeal appeal filed on or after 9th February, 2011. (A. Y. 1990-91)Reference to case laws Bombay High Court.CWT v. Executors of late D. T. Udeshi (1991) 189 ITR 319 (Bom.)(High Court)CIT v. Camco Colour Co. (2002) 254 ITR 565 / 173 CTR 255 / 122 Taxman 336 (Bom.)(High Court)CIT v. Pithwa Engg Works (2005) 276 ITR 519 / 197 CTR 655 (Bom.)(High Court)CIT v. Zeob Topiwalla (2006) 284 ITR 379 / 199 CTR 656 (Bom.)(High Court)CIT v. Madhukar K. Inamdar (HUF) (2010) 229 CTR 77 / (2009) 318 ITR 149 / 185 Taxman 101 / 27 DTR 132 (Bom.)(High Court)CIT v. Vitessee Trading Ltd. (2011) 331 ITR 433 / 202 Taxman 242 (Bom.) S. 260A : Appeal - High Court – Notice - Paper Publication - Proper mode.Income Tax Department having failed to serve notice on the assessee company (Respondent) other than by way of paper publication at the admission of the appeal, CIT is directed to set right the defect in the presentation of the appeal. Income Tax Department is deprecated for wasting public money by resorting to service of notice by paper publication as a matter of routine thereby incurring considerable unnecessary expenditure on cost of advertisement.CIT v. Happy Farms & Resorts Ltd. (2011) 51 DTR 334 / 239 CTR 110 (Karn.)(High Court)

S. 260A : Appeal – High Court - Question of law.Where though the appeal was admitted on the question, as to whether the Dy. Director of Inspection has power to make reference to the Valuation Officer under section 131(1A) of the Act. The Hon’ble High Court dismissed the appeal of the revenue holding that the question did not arise for consideration of the High



Court, as non of the lower authorities recorded the finding that the Dy. Director of Inspection was having no power to make reference to Valuation Officer. (A. Y. 1998-99).ITO v. Hotel Shyama (2011) 56 DTR 174 / 244 CTR 229 (MP)(High Court)

S. 260A : Appeal - High Court - Abatement of appeal. If the assessee dies, the question of abatement of appeal filed under section 260 A of the Act would not arise. Further, the Hon’ble High Court condoned delay of 523 day in filing the application for bringing the legal heirs on record by the Revenue, rejecting the objection taken by the assessee under Order 22 of Civil Procedure Code, which provides that, if there is delay in bringing legal heirs on record the proceedings abates does not apply to an appeal filed under section 260 A of the Act. CIT & Anr. v. V. Rukmini (Smt.) By LR’s (2011) 53 DTR 30 / 240 CTR 134 / 331 ITR 102 / 202 Taxman 100 (Karn.)(High Court)

S. 260A : Appeal - High Court - Small tax effect - Below 2 lakhs - Appeal before Tribunal. [S. 253(2)]In cases where tax effect is below Rs. 2,00,000, Revenue cannot file appeal contrary to the terms of circular which is binding on the department. (A. Y. 1997-98 & 1998-99).CIT v. Mangilal Jain (2011) 58 DTR 20 (MP)(High Court)

S. 260A: Appeal - High Court - Plea not raised before Tribunal.Plea not raised before Tribunal, cannot be raised for first time before High Court.CIT v. Vijay Enterprises (2011) 332 ITR 235 / Tax .L.R .497 / 59 DTR 98 / 243 CTR 488 / 201 Taxman 324 (AP)(High Court)

S. 260A : Appeal - High Court - Single appeal to High Court - Court fee is payable in respect of each appeal.One appeal in respect of common order is maintainable however Court fee will be payable in respect of each appeal. (A. Y. 2006-07).DIT v. Transocean Offshore International Ventures Ltd. and Others (2011) 336 ITR 637 (Uttarakhand)(High Court)

S. 260A : Appeal - High Court - Tax effect less than 4 Lakhs - Reference returned unanswered.In view of Instruction No. 2/2005 dated 24-10-2005, issued by CBDT, it has to be directed that wherever tax effect is less than 4 lakhs, department should not file appeal under section 260A, unless question of law involved or raised in appeal is of recurring nature which is to be settled by High Court .CIT v. Vitessee Trading Ltd. (2011) 331 ITR 433 / 202 Taxman 242 (Bom.)(High Court)

S. 260A : Appeal - High Court – Power - No power to consider issue not raised before Tribunal.The assessee filed an appeal before the Tribunal in which it argued that it had constructed a “temporary construction” which was eligible for 100% depreciation. This was rejected by the Tribunal on the basis that the construction was permanent. Before the High Court, the assessee argued for the first time that the expenditure was “revenue” in nature and admissible as business expenditure. HELD not permitting the assessee to raise the plea:A contention/ issue, which is not raised, dealt with or answered by the Tribunal, cannot be raised before the High Court for the first time in an appeal under section 260A. Though section 260A(6) empowers the High Court to “determine any issue which has not been determined by the Appellate Tribunal”, the word “determined” means that the issue is not dealt with, though it was raised before the Tribunal. The word “determined” presupposes an issue was raised or argued but there is failure of the Tribunal to decide or


adjudicated the same. However, as the issue whether the expenditure is capital or revenue was not raised before the Tribunal, it does not arise from the order of the Tribunal and cannot be entertained (Mahalakshmi Textile Mills 66 ITR 710 (SC) distinguished).C & C Construction Pvt. Ltd. v. CIT (Delhi)(High Court) www.itatonline.org

S. 260A : Appeal - High Court - Grounds not raised before Assessing Officer or Tribunal.Grounds not raised before Assessing Officer or Tribunal cannot be raised first time before High Court.Alok Todi and another v. CIT (2011) 339 ITR 102 (Cal.)(High Court)

E. REVISION BY THE COMMISSIONERS. 263 : Revision of orders prejudicial to revenue – Commissioner is not permitted to change view & revise under section 263 without changed circumstances. It was held that as the department had examined the fundamental nature of the transaction in the earlier years and its nature remained unchanged, the department could not have changed its view as regards the nature of the transaction by dubbing it as erroneous. The department is not entitled to re-open an assessment based on a fresh inference of transactions accepted by the revenue for several preceding years on the pretext of dubbing them as erroneous. Associated Food Products 280 ITR 377 (MP), Sirpur Paper Mills Ltd. (1978) 114 ITR 404 (AP) & CIT v. Gopal Purohit 228 CTR 582 / 336 ITR 287 / 188 Taxman 140 / 34 DTR 52 (Bom.) followed.CIT v. Escorts Ltd. (2011) 51 DTR 321 / 338 ITR 435 / 198 Taxman 324 (Delhi)(High Court)

S. 263 : Revision of orders prejudicial to revenue – Depreciation – Goodwill. (S. 32)Assessing Officer allowed depreciation on goodwill treating the same as intangible asset. Commissioner revised the order, the Tribunal quashed the order of revision. High Court confirmed the order of Tribunal. The Court held that where two views are possible and the assessing officer accepting one view which is plausible one, not appropriate to exercise power under section 263. (A. Y. 2001-02 to 2003-04).CIT v. Hindustan Coca Cola Beverages P. Ltd (2011) 331 ITR 192 / 238 CTR 1 / 198 Taxmand 104 / 50 DTR 122 (Delhi)(High Court)Editorial:- Refer Hindustan Coca Cola Beverages (P) Ltd. v. Dy. CIT (2010) 132 TTJ 602 / 34 SOT 171 / 43 DTR 416 (Delhi)

S. 263 : Revision of orders prejudicial to revenue - Exempted income - Proviso to section 14A - Law on the passing of the order under section 263 has to be considered. (S. 14A)Proviso to section 14A did not apply to the facts of the case as on date of orders of CIT under section 263 (29th December 1999), said proviso was not even existence, CIT was justified in revising the order of Assessing Officer and in directing him to compute the interest payable on such sum which has been invested in the partnership firm (Which was erroneously allowed by him earlier) and disallow those portions which can be attributable towards investment in partnership.(1995-96).Mahesh G. Shetty & Ors. v. CIT (2011) 51 DTR 104 / 238 CTR 440 / 198 Taxman 22(Karn.)(High Court)

S. 263 : Revision orders prejudicial to revenue – Export – Deduction. (S. 80HHC)Where the Assessing Officer had allowed deduction under section 80HHC of the Act without excluding the certain receipts as mentioned in Explanation (baa) to section 80HHC of the Act. CIT was held to be justified in invoking jurisdiction under section 263 of the Act and setting aside the assessment order passed by the Assessing Officer under section 143(3) of the Act, as there was a prima facie error committed by the Assessing Officer while framing assessment under section 143(3) of the Act. (A. Y. 1995-96-97)




CIT v. N. C. John & Sons P. Ltd. (2011) 51 DTR 142 (Ker.)(High Court)

S. 263 : Revision of orders prejudicial to revenue – Effect order not passed within “reasonable time” - order becomes “infructuous”. Even if there is no period of limitation prescribed under section 153(3)(ii) to give effect to section 263 orders, the Assessing Officer is required to pass the order within a “reasonable period”. Non-specification of period of limitation does not mean that the Assessing Officer can wait for indefinite period before passing the consequential order. CIT v. Goyal M. G. Cases Pvt. Ltd. (Delhi) (High Court) www.itatonline.org / Tax world August-2011 P. 41.

S. 263 : Revision of orders prejudicial to revenue - Two views - One of the possible view.Where the Assessing Officer has taken one of the possible views which resulted in loss of revenue, the order cannot be treated as ‘erroneous’ and the Commissioner cannot invoke jurisdiction under section 263. (A. Y. 1989-90)CIT v. Kelvinator of India Ltd. (2011) 332 ITR 231 / 201 Taxman 88 (Delhi)(Mag.)(High Court)

S. 263 : Revision of orders prejudicial to revenue - Assessing Officer’s self - determination of ALP without referring to TPO is “erroneous & prejudicial to interests of revenue” - International transaction - Transfer pricing. (S. 92C)The assessee entered into international transactions with its AEs, the value of which exceeded Rs. 5 crores. The Assessing Officer passed an order under section 143(3) in which he recorded the finding that he had examined the transactions and found them to be at arms’ length and no transfer pricing adjustment was required to be made. The CIT thereafter passed an order under section 263 on the ground that in view of Instruction No. 3 of 2003 dated 20.5.2003, the Assessing Officer ought to have referred the issue to the TPO instead of himself determining the arms’ length price of the transactions and that the assessment order was consequently “erroneous and prejudicial to the interests of the revenue”. On appeal, the Tribunal (114 TTJ (Delhi) 1) upheld the revision order. On further appeal by the assessee, HELD dismissing the appeal:Though section 92CA enables the Assessing Officer to refer an international transaction to the TPO if he considers it “necessary or expedient” to do so, Instruction No. 3 dated 25.5.2003 makes it mandatory for the Assessing to make a reference to the TPO if the aggregate value of the international transaction exceeds Rs. 5 crores. This Circular, having been issued under section 119, is binding on the Assessing Officer. The Assessing Officer ought to have referred the matter to the TPO having regard to the fact that Specialized Cell was created to deal with complicated and complex issues arising out of the transfer mechanism. The Assessing Officer’s omission to follow the binding Circular amounted to making assessment without conducting proper inquiry and investigation and resulted in the order becoming “erroneous and prejudicial to the interest of the Revenue”. The observations in Sony India 288 ITR 52 (Delhi) (while upholding the constitutional validity of the aforesaid Circular) that the said Circular was a “Guideline” which did not take away the discretion of the Assessing Officer was made in a different context.Ranbaxy Laboratories Ltd. v. CIT (2012) 204 Taxman 294 (Delhi)(High Court)

S. 263 : Revision of orders prejudicial to revenue - Exemption - Capital gains - Investment in house with in time specified under section 139(4). (S. 54F)Commissioner passed the order under section 263 withdrawing exemption under section 54F, on the ground that new house was registered in favour of the assessee beyond the due date prescribed under sub section (1), of section 139 and that the assessee failed to deposit the sale proceeds as provided under


section 54F(4). High Court held that Tribunal was justified in setting a side the order of the Commissioner by holding that the investment made by the assessee being with in time specified under section 139(4), the assessee is eligible for exemption under section 54F in view of the binding decision of the Jurisdictional High Court. (A. Y. 2006-07).CIT v. Vrinder P. Issac (Smt) (2011) 64 DTR 376 (Karn.)(High Court)

S. 263 : Revision of orders prejudicial to revenue - Block assessment - Documents seized.In the block assessment order the assessing Officer made an addition of Rs. 90 Lakhs on the basis of the documents seized from the premises of Viswas R. Bhoir. The said addition was deleted by the Tribunal and the appeal is pending before the Bombay High Court. In the mean time the CIT passed a revision order under section 263 on 16-0- 2005, directing the Assessing Officer to consider the tax implication of Page Nos. 1 to 13 of bundle No. 12 seized from the residence of Viswas R.Bhoir. The Tribunal held that once taxability under both the documents has been considered by the Assessing Officer and the CIT(A), it is not open to CIT to invoke the jurisdiction under section 263. On appeal to the High Court, the High Court confirmed the order of Tribunal.CIT v. Mukesh J. Upadhyaya (Bom.)(High Court) (ITA No. 428 of 2010 dated 13-6-2011 594 (2011) 43A- BCAJ – August – P. 30).

S. 263 : Revision of orders prejudicial to revenue – Penalty - Two Views.The Assessing Officer dropped the penalty proposal holding that appeal against the quantum is pending before the High Court. The Commissioner of Income-tax revised the order. The Tribunal held that the view of Assessing Officer cannot be held to be erroneous in dropping penalty proceedings. The Assessing Officer can impose penalty even after appeal is determined by High Court. Two view possible hence revision was held to be not valid. (A. Y. 2004-05).V. K. Natesan v. Dy. CIT (2011) 128 ITD 81 / 49 DTR 233 / 135 TTJ 257 (Cochin)(TM)(Trib.)

S. 263 : Revision of orders prejudicial to revenue - Show cause notice - Reasons not stated in showcause notice - Order invalid.If a ground of revision is not mentioned in the show-cause notice, it cannot be made the basis of the order for the reason that the assessee would have had no opportunity to meet the point (Maxpack Investments 13 SOT 67 (Delhi), G. K. Kabra 211 ITR 336 (AP) & Jagadhri Electric Supply 140 ITR 490 (P&H) followed);Synergy Enterpreneur Solutions Pvt. Ltd. v. Dy. CIT (2012) 13 ITR 377 (Mum.)(Trib.)

S. 263 : Revision of orders prejudicial to revenue – Block Assessment – Time limit. (S. 158BC, 158BE)Provisions of section 263 are applicable to the Block Assessment. In such cases question of restriction under section 158BE as regards time-limit completion of fresh assessment does not arise. In such cases by virtue of section 156BH limitation as laid down in section 153(2A) would be applicable.Bhartiben M. Kelawala (Smt.) v. CIT (2011) 128 ITD 468 / 135 TTJ 455 (Ahd.)(Trib.) / Amita Devi Sanganeria (Smt.) v. ACIT (2011) 129 ITD 72 / 53 DTR 214 / 137 TTJ 521 (Gau.)(TM)(Trib.)

S. 263 : Revision of orders prejudicial to revenue – Jurisdiction - Power of commissione – Absence of notice under section 143(2) vis-à-vis limitation for completion of assessment. When the assessment for Asst. year 1987-88 was completed under section 143(1)(a) and notice under section 143(2) had not been issued and time for completing asst. under section 143(3) expired on 31st March 1990, CIT could not direct Asst. under section 143(3) by his revision order under S. 263 dated 22nd March,


1991, the order was held to be contrary to provisions of section 143(2), 143(3) and 153(1)(a). (A. Ys. 1987-88 & 1990-91)V. Narayanan v. Dy. CIT (2011) 53 DTR 188 / 137 TTJ 403 / 127 ITD 133 / 2 ITR 446 (Chennai)(TM)(Trib.)

S. 263 : Revision of orders prejudicial to revenue - Business income - Capital gains - Income from purchase and sale of shares. [S. 28(i), 45]Assessing Officer accepted the income declared by the assessee under the head long term capital gains without any application of mind or enquiry though the assessee was investment company, the assessment was erroneous and revision order under section 263 was justified. (A. Y. 2006-07).Spectra Shares & Scrips (P) Ltd. v. Dy. CIT (2011) 62 DTR 411 (Hyd.)(Trib.)

S. 263 : Revision of orders prejudicial to revenue – Power - Sweeping manner - Cannot direct Assessing Officer to frame entire assessment. While exercising revisional jurisdiction under section 263 commissioner can not ordinarily exercise this power in a sweeping manner directing Assessing Officer to frame entire assessment afresh, when assessment order indicates consideration of majority of relevant issues. (A. Y. 2004-05).New India Assurance Co. Ltd. v. Addl. Commissioner (2011) 133 ITD 131 (Mum.)(Trib.)

S. 263 : Revision of orders prejudicial to revenue – Penalty - Concealment - Cannot initiate penalty proceeding. [S. 271(1)(c)]The Tribunal held that once revision order is passed, it is for assessing authority to consider whether penalty is to be levied or not and if assessing authority has not levied penalty where it is imperative, then only, Commissioner can in his wisdom interfere in the matter. Therefore when there is no penalty order subsisting at time of passing of revision order it is not proper on part of Commissioner to initiate penalty proceedings under section 271(1)(c). (A. Y. 2008-09).S. Sudaha (Smt) v. ACIT (2011) 48 SOT 335 (Chennai)(Trib.)

S. 263 : Revision of orders prejudicial to revenue – Lack of proper enquiry.Where all the details of expenditure was duly furnished by the assessee to the Assessing Officer the CIT cannot revise the return filed by the assessee on the basis of rack of enquiry. (A. Y. 2004-05)Vodafone Essar South Ltd. v. CIT (2011) 141 TTJ 84 (UO)(Delhi)(Trib.)

CHAPTER XX-CPURCAHSE BY CENTRAL GOVERNMENT OF IMMOVEABLE PROPERTIES IN CERTAIN CASES OF TRANSFER

S. 269UA(f)(i) : Purchase of immoveable property by Central Government - Lease for 9 years - Renewable at the option for a further period of 9 years.Lease for 9 years renewable at option of lessee for a further period of 9 years, amounts to lease for more than 12 years. Parties obliged to submit Form No. 37–I, within 15 days of draft agreement.Govind Impex P. Ltd & Others v. Appropriate Authority (2011) 330 ITR 10 / 1 SSC 529 / 236 CTR 449 / 196 Taxman 424 / 48 DTR 169 (2011) Tax L. R. 1 (SC)

CHAPTER XXIPENALTIES IMPOSABLE


S. 271(1)(c) : Penalty - Concealment - Revised return - After survey – Voluntary.Revised return filed disclosing additional income as a consequence of follow-up proceedings taken by Deputy Director of Income Tax in respect of purchasers hence revised return cannot be said to be voluntary, hence, levy of penalty was justified. (A. Y. 1985-86 and 1987-88).LMP Precision Engg. Co. Ltd. v. Dy. CIT (2011) 330 ITR 93 / (2009) 223 CTR 301 / 183 Taxation 12 / 20 DTR 294 (Guj.)(High Court)

S. 271(1)(c) : Penalty - Concealment – Disclosure of all facts – No penalty for concealment.In penalty proceedings, it is incumbent on the Tribunal to examine independently, the evidence and material on record for the purpose of judging whether penalty proceedings are justified on account of concealment of income or furnishing of inaccurate particulars thereof. If the assessee has disclosed all the facts, then just because the department does not agree with the legal stand taken by the assessee, the same would not result into penalty. (A. Y. 1995-96).Devsons P. Ltd. v. CIT (2011) 196 Taxman 21 / 241 CTR 344 / 329 ITR 483 / 48 DTR 137 (Delhi)(High Court)

S. 271(1)(c) : Penalty - Concealment - Revised return.Where the revised return was filed by the assessee within the time limit prescribed under section 139(5) of the Act and there was nothing to suggest that the assessee had filed revised return with the knowledge that the department had detected such additional income. Penalty under section 271(1)(c) of the Act was not leviable as there was no willful and deliberate suppression of income. (A. Y. 2005-06).CIT v. R. Gopalakrishnan (Dr.) (2011) 50 DTR 345 / 239 CTR 558 (Mad.)(High Court)

S. 271(1)(c) : Penalty - Concealment - Withdrawal of claim.Where the assessee withdraw its claim of deduction under section 80-IA of the Act by filing revised return under section 139(5) of the Act immediately, after it received notice under section 154 of the Act proposing to withdraw deduction under section 80-IA of the Act for earlier year. Penalty under section 271(1)(c) of the Act was held to be not leviable as the claim under section 80-IA was made under a bona fide believe which was rectified later on by the assessee by filing revised return. (A. Y. 2001-02).CIT v. Backbone Enterprises (2011) 50 DTR 321 / 238 CTR 197 / 195 Taxman 200 (Guj.)(High Court)

S. 271(1)(c) : Penalty – Concealment – Where surrender of income is not voluntary – Levy of penalty justified.In the instant case the assessee has surrendered his income after the Assessing Officer had made substantial progress in the investigation and the assessee had also not co-operated with the enquiry. The High Court held that such surrender cannot held to be voluntary nor made bona fide, so as to avoid penalty. The High Court relied on the decision in the case of Bhairav Lal Verma v. Union of India 230 ITR 855, where the meaning of word ‘voluntary’ in the context of waiver provisions under section 273A was discussed. (A. Y. 2004-05).CIT v. Rakesh Suri (2011) 331 ITR 458 / 233 CTR 184 / 41 DTR 175 (All)(High Court)

S. 271(1)(c) : Penalty – Concealment - Despite detection in survey, concealment penalty cannot be levied if income was offered in return filed. (S.133A)Penalty under section 271(1)(c) can be levied only if Assessing officer ‘during the course of proceedings’ is satisfied that there is ‘concealment’ or ‘furnishing if inaccurate particulars’. Where assessee offers detected income in the return, there was neither concealment nor furnishing of inaccurate particulars. Thus penalty u/s. 271(1)(c) cannot be levied. (A. Y. 2002-03)


CIT v. SAS Pharmaceutical (2011) 60 DTR 258 / 335 ITR 176 / 244 Taxman 422 (Delhi)(High Court)

S. 271(1)(c) : Penalty – Concealment - Valuation of closing stock - Explanation 1.Valuation of stock on account of deterioration of old stock and the same has not been accepted by the Revenue, penalty under section 271(1)(c) is not leviable, in the absence of any finding that the claim of the assessee was false or that it fudged the books of account. (A. Y. 1987-88).CIT v. H. P. State Forest Corporation Ltd. (2001) 56 DTR 113 / 241 CTR 413 / (2012) 340 ITR 204 (HP)(High Court)

S. 271(1)(c) : Penalty – Concealment - Failure to file return - Explanation 3.For the purpose of invoking the provisions of Expln. 3 to section 271(1), the conditions enumerated therein are required to be to be satisfied cumulatively. Assessing Officer having issued a notice under section 148 to the petitioner with in the period specified under section 153(1), the third condition, namely, the notice under section 142(1) or 148 should have been issued with in the period specified under sub-section (1) or of section 153 is clearly not satisfied and therefore, the failure on the part of the petitioner to furnish return with in the specified period cannot be deemed to be concealment with in the meaning of Explanation 3 to section 271(I)(c), and penalty under section 271(1)(c) could not be levied. (A. Y. 1994-95).Chhaganlal Suteriya v. ITO (2011) 58 DTR 89 / 242 CTR 528 / 337 ITR 350 (Guj.)(High Court)

S. 271(1)(c) : Penalty – Concealment - Immunity under Explanation 5 - Disloure under section 132(4).Unaccounted stock surrendered by assessee in the statement recorded under section 132(4), on the date of search is covered by ‘other valuable articles or things’ and therefore, the conditions enumerated under explanation 5 to section 271(1)(c), were fulfilled and penalty under section 271(1)(c) is not leviable. (A. Y. 1989-90).CIT v. Bhandari Silk Store (2011) 242 CTR 443 / 337 ITR 153 / 47 DTR 259 (P&H) (High Court)

S. 271(1)(c) : Penalty - Concealment - Search and seizure - Explanation 5.Income offered after detection consequent to search operations was rightly treated as concealed income, therefore, penalty under section 271(1)(c), was rightly levied; in the circumstances, Explanation 5 was not attracted. (A. Ys. 1982-83 & 1983-84).D. K. B. & Co. v. Dy. CIT (2011) 58 DTR 299 / 243 CTR 198 / 198 Taxman 339 (Ker.)(High Court)

S. 271(1)(c) : Penalty – Concealment - Search and seizure – Disclosure - Due date of filing of return -Explanation 5. [S. 132(4)]Assessee made disclosure under section 132(4), and paid the tax. Time for filing of return has not expired. Penalty cannot be imposed. (A. Y. 1989- 90).CIT v. Bhandari Silk Store (2011) 337 ITR 153 / 242 CTR 443 / 47 DTR 259 (P&H)(High Court)

S. 271(1)(c) : Penalty – Concealment - No penalty can be levied without Assessing officers finding on “Inaccurate Particulars”.Where there is no finding by the Assessing Officer that the assessee furnished inaccurate particulars and that its explanation was not bonafide ,the imposition of penalty under section 271(1)(c) was a “complete non-starter”. A mere erroneous claim made by an assessee, though under a bonafide belief that, it was a claim which was maintainable in law cannot lead to an imposition of penalty. The claim for deduction was made in a bona fide manner and the information with respect to the claims was provided in the return and documents appended thereto. Accordingly, there is no furnishing of “inaccurate particulars”. Making of an incorrect claim for expenditure does not constitute furnishing of inaccurate particulars of income.


CIT v. Mahanagar Telphone Nigam Ltd. (Delhi)(High Court) www.itatonline.org

S. 271(1)(c) : Penalty – Concealment - Furnishing inaccurate particulars - Despite disclosure of conversion of stock into investment and acceptance by the Assessing Officer claim that gains is Long term capital gain penalty is leviable.The assessee owned a plot of land which in the earlier years was treated as “stock-in-trade”. In the year of sale, the assessee converted the stock into “investment” and offered the gains as Long term capital gain. Penalty under section 271(1)(c) was levied. It was held that though the Assessing Officer accepted the conversion, the assessee’s claim that the gains was a LTCG amounted to furnishing inaccurate particulars of income. The issue was not debatable as held by the Tribunal. When the order of the Assessing Officer in quantum proceedings was sustained by all successive authorities and the High Court also dismissed the appeal at the admission stage, albeit after admitting the same, it cannot be said that the issue was debatable. CIT v. Splender Construction (Delhi)(High Court) www.itatonline.org

S. 271(1)(c) : Penalty - Concealment - Capital gains - Development agreement - Year of taxability.Assessee received only the initial payment of Rs. 6 crores and not the last installment as per the terms of the property development agreement with the developer in the relevant assessment year 2002-03, it was justified in not offering the capital gains to tax in the assessment year. Assessee has disclosed in the return as advance and the Assessing Officer himself was not sure till the date of passing of the assessment order so as to whether the assessee is liable to pay tax on the impugned amount and if so, in which assessment year and under which head of income . The Court held that penalty is not leviable. (A. Y. 2002-03).Metal Rolling Works Ltd. v. CIT (2011) 62 DTR 328 / 339 ITR 373 / 245 CTR 113 (Bom.)(High Court)

S. 271(1)(c) : Penalty - Concealment - Business loss - Capital loss.Assessee treated certain sum as a business loss, where as the Revenue treated it as a capital loss, the penalty under section 271(1)(c) cannot be levied. (A. Y. 2004-05).CIT v. Praveen B. Gada (HUF) (2011) 244 CTR 463 / 62 DTR 23 (MP)(High Court)

S. 271(1)(c) : Penalty – Concealment - Non disclosure of salary - Deduction at source.If an assessee does not disclose his salary for a part of the year not withstanding the fact that he has worked as an employee for full 12 months and claims higher refund of TDS, such act amounts to concealment of income attracting penalty under section 271(1)(c). (A.Y. 2001-02).Pankaj Rathi v. CIT (2011) 62 DTR 185 / 245 CTR 218 (Cal.)(High Court)

S. 271(1)(c) : Penalty - Concealment - Two set of books of accounts.In the present case, the assessee was maintaining two sets of books; one was meant for showing to Income Tax Authorities and the other for himself. In the second set, he was recording sales and certain expenses on the basis of these documentary evidence, addition had been made which had been confirmed up to the Tribunal. Thus it was not the case of simplicitor estimation of the income by disbelieving the books of account or other details submitted by the assessee during the course of assessment proceedings. In the present case the department was able to lay its hands on the documentary evidence exhibiting the conduct of assessee for avoiding tax and carrying out the business activity out of the regular books. In the above circumstances penalty under section 271(1)(c) of the Act, which was confirmed by the Commissioner (A) was upheld. (A. Y. 1985-86 and 1990-91).Shyam Behari v. ACIT (2011) 43 SOT 129 (Delhi)(Trib.)


S. 271(1)(c) : Penalty – Concealment – Return filed after survey.The assessee disclosed the income in the Return filed after survey. The Tribunal held that what is punishable under section 271(1)(c) is actual concealment of income in the Return of income and not merely an attempt to make concealment. If the assessee rectifies it itself and declares the correct income in valid return of income and does not file return by concealing the income then such act is not punishable under section 271(1)(c). Hence, penalty under section 271(1)(c) cannot be levied. (A. Y. 2002-03).Sadhbav Builders v. ITO, ITA No. 1418/Ahd/2008, Bench ‘D’ dt. 21/1/2011, Ahmedabad Chartered Accountants Journal, Vol. 34 Part 10 January 2011, Pg. 480. S. 271(1)(c) : Penalty - Concealment - Admission by High Court - Mere admission of appeal by High Court sufficient to disbar section 271(1)(c) penalty.In quantum proceedings, the Tribunal upheld the addition of three items of income. The assessee filed an appeal to the High Court which was admitted. The Assessing Officer levied penalty under section 271(1)(c) in respect of the said three items. The penalty was upheld by the CIT(A). On appeal to the Tribunal, HELD allowing the appeal:When the High Court admits substantial question of law on an addition, it becomes apparent that the addition is certainly debatable. In such circumstances penalty cannot be levied under section 271(1)(c). The admission of substantial question of law by the High Court lends credence to the bona fides of the assessee in claiming deduction. Once it turns out that the claim of the assessee could have been considered for deduction as per a person properly instructed in law and is not completely debarred at all, the mere fact of confirmation of disallowance would not per se lead to the imposition of penalty. (A. Y. 1995-96)Nayan Builders & Developers Pvt. Ltd. v. ITO (2011) 43A BCAJ, May Pg. 37 (Trib.) Editorial:- Refer, Rupam Mercantile Ltd. v. Dy. CIT (2004) 91 ITD 237 / 85 TTJ 609 (Ahd.)(TM)(Trib.)

S. 271(1)(c) : Penalty - Concealment - Book profit - Despite concealment, no section 271(1)(c) penalty if section 115JB book profits assessed. (S. 115JB)Pursuant to a search under section 132 and the detection of incriminating documents, the assessee offered additional income. The Assessing Officer computed the income under the normal provisions and levied penalty under section 271(1)(c) for concealment of income. However, as the book profits computed under section 115JB was higher, the assessee was assessed under section 115JB. The assessee’s appeal against the levy of penalty under section 271(1)(c) was rejected by the CIT(A). However, on appeal to the Tribunal, HELD:It was held by Hon’ble Mumbai Tribunal that, the concealment of income had its repercussions only when the assessment was done under the normal procedure. If the assessment as per the normal procedure was not acted upon and it was the deemed income assessed under section 115JB which became the basis of assessment, the concealment had no role to play and was totally irrelevant. The concealment did not lead to tax evasion at all. (A. Y. 2005-06)Ruchi Strips & Alloys Ltd. v. Dy. CIT BCAJ p. 39, Vol. 42-B, Part 6, March 2011 (Mum.)(Trib.) www.itatonline.org

S. 271(1)(c) : Penalty - Concealment - Failure to voluntarily apply section 50C does not attract penalty under section 271(1)(c). (S. 50C)No penalty under section 271(1)(c) can be levied where assessee agreed to the addition made under section 50C as the fact that assessee agreed to addition is not conclusive proof that the sale consideration as per agreement is not correct or accurate. The addition made purely on the basis of deeming provisions of section 50C. (A. Y. 2006-07).


Renu Hingorani v. ACIT BCAJ P. 38, Vol. 42-B, Part 6, March 2011 (Mum.)(Trib.) www.itatonline.org S. 271(1)(c) : Penalty - Concealment - Mere making of claim not sustainable in law not sufficient for levy of penalty.Mere making of a claim which is not sustainable in law, by itself, will not amount to furnishing inaccurate particulars regarding the income of the assessee. Such a claim made in the return cannot amount to furnishing inaccurate particulars. The assessee in the present case had made a bona fide claim and hence following the Apex Court’s decision in the case of Reliance Petro Products Pvt. Ltd., it was held that penalty under section 271(1)(c) of the Act was not leviable. (A. Y. 2006-07).Walter Saldhana v. Dy. CIT (2011) 44 SOT 26 (Mum.)(Trib.)

S. 271(1)(c) : Penalty - Concealment – Valuation by stamp authorities.Penalty under section 271(1)(c) is not leviable on addition arising under section 50C as per valuation by stamp authorities.Renu Hingorani v. ACIT, BCAJ p. 38, Vol. 42-B, Part 6, March 2011 (Mum.)(Trib.)

S. 271(1)(c) : Penalty - Concealment – Book profit – Total Income less than book profit.Assessee returning income based on book profits. Pursuant to search action additional income declared. Total income as per normal provisions of the Act less than the book profit. Penalty cannot be imposed.Ruchi Strips & Alloys Ltd. v. Dy. CIT, BCAJ p. 39, Vol. 42-B, Part 6, March 2011 (Mum.)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Additional income after survey - Revised return.Assessee having declared additional income following survey under section 133A and further enhanced the same filing a revised return despite the fact that no incriminating material was found either during the survey action or during the post survey enquiries and the Assessing Officer having accepted the revised return without pointing out any inaccuracy therein or making any further addition, penalty under section 271(1)(c) was not leviable, more so as the additional income is not free from dispute as far as its ownership and the year of incidence of tax is concerned. (A. Ys. 2002-03 & 2003-04).Dilip Yeshwant OAK v. ACIT (2011) 55 DTR 113 / 138 TTJ 559 (Pune)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Failure to disallow under section 14A there cannot be penalty.As there is no allegation by the Assessing Officer that there was collusion between the auditor and the assessee to ignore section 14A, it cannot be said that the explanation was not bona fide. Further, as Rule 8D was not enacted at the time, segregation of expenditure relatable to tax-free income would be disputable and lead to bona fide difference in opinion. So, penalty under section 271(1)(c) cannot be levied. (A Y. 2005-06).Dy. CIT v. Nalwa Investment Ltd. (Delhi)(Trib.) www.itatonline.org

S. 271(1)(c) : Penalty – Concealment - Surrender of income during survey – No penalty leviable. (S. 133A) Where Assessing Officer has not brought on record any material to show that the additional income surrendered by the assessee during survey under section 133A was concealed income or that explanation was false, penalty under section 271(1)(c) is not leviable. (A. Y. 2006-07).Dy. CIT v. Bhanwar Lal Mahendra Kunar Soni (2011) 138 TTJ 381 / 54 DTR 271 (Jd.)(Trib.)

S. 271(1)(c) : Penalty – Concealment – Non-genuine gift claimed as capital gains - Transfer of tenancy right.


In the return of income the assessee declared of Rs.17 lakhs as long term capital gains arising from transfer of tenancy right and paid tax @ 20% applicable to long term capital gains. Claim of assessee was that amount paid for receiving the gift was from the cash received on surrender of tenancy right. Assessing Officer held that as there was no supporting evidence the amount was assessed as income from undisclosed sources. The Tribunal held that as tax sought to be evaded is very clear as the tax rate applicable on the impugned receipt of Rs.17 lakhs is 30% being income from undisclosed sources, whereas the assessee has paid 20% claiming the same to be capital gain on transfer of tenancy right, provisions of Explanation 1 are not applicable to the instant case as tax sought to be evaded was because of the lower rate of tax paid and not because of any addition to the income and, therefore, penalty is imposable under the main provisions of section 271(1)(c). (A. Y. 1996-97)Harish P. Mashruwala v. ACIT (2011) 139 TTJ 563 / 38 SOT 398 / 58 DTR 182 / 9 ITR 752 (Mum.)(SB)(Trib.)

S. 271(1)(c) : Penalty – Concealment – Survey - Surrender of additional income.Assessee having surrendered additional income following detection of certain discrepancies in the documents found during the survey proceedings at its premises despite filing an explanation and Assessing Officer proceeded to assess the said income on the basis of the surrender made by the assessee Penalty under section 271(1)(c) is not leviable. (A. Y. 2005-06).Ajay Sangari & Company v. Addl. CIT (2011) 57 DTR 397 / 140 TTJ 388 (Chd.)(Trib.)

S. 271(1)(c) : Penalty – Concealment – Assessing Officer reprimanded for harassing the assessee by wrongly levying penalty.In the instant case, the assessment order supplied by Assessing Officer to assessee did not contain any direction for initiation of penalty though assessment order filed by department with memo of appeal had a reference to issue of notice under section 271(1)(c). The Tribunal considering the case fit for awarding cost under section 254(2B) of the Act, held that they were inclined to record over here that Assessing Officer should have confined himself in making just and proper assessment only, as per the provisions of the law and harassment of assessee, which is not permitted under the statute should have been avoided at all cost. ITO v. Audyogik Tantra Shikshan (Pune)(Trib.) www.itatonline.org

S. 271(1)(c) : Penalty – Concealment - Revised return – Additional income - Explanation 2.Additional income offered by way of revised return and accepted by Assessing Officer cannot be said to be an addition so as to attract Explanation 2 to section 271(1)(c). (A. Y. 2004-05).SVC Projects (P) Ltd. v. Jt. CIT (2011) 58 DTR 433 / 140 TTJ 79 / 132 ITD 11 / 10 ITR 552 (Visakha)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Fees paid for ROC for increasing authorized share capital.Assessee having claimed deduction of fees paid to the ROC for increasing authorized share capital contrary to the ruling of the Supreme Court, the claim is ex facie wrong and cannot be accepted as a bona fide claim as the circumstances in which the auditors committed the error of treating the same as revenue expenditure have not been explained and, therefore, levy of penalty under section 271(1)(c) is justified. (A. Y. 2006-07).Trinity Touch (P) Ltd. v. ITO (2011) 59 DTR 195 / 140 TTJ 309 / 132 ITD 88 (Delhi)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Despite disclosure, legal opinion, favourable CIT(A) order & High Court appeal on merits, section 271(1)(c) penalty leviable if issue not “debatable” in Tribunal’s view.


The assessee, a firm of Chartered Accountants, was one of the “associate members” of Deloitte Haskins & Sells pursuant to which it was entitled to practice in that name. Deloitte desired to merge all the associate members into one firm. As this was not acceptable to the assessee, it withdrew from the membership and received consideration of Rs. 1.15 crores from Deloitte. The said amount was credited to the partners’ capital accounts & claimed to be a non-taxable capital receipt by the assessee. The Assessing Officer rejected the claim though the CIT (A) accepted it on the ground that it had “great force“. The Tribunal reversed the CIT (A). The Assessing Officer levied section 271(1)(c) penalty which the CIT(A) deleted. On appeal by the department to the Tribunal, the assessee argued that penalty was not leviable because (i) there was a disclosure of the facts in the computation & the balance sheet, (ii) the opinion of 3 tax experts had been taken, (iii) the issue was debatable & (iv) the assessee’s appeal on the merits had been admitted by the High Court. HELD allowing the appeal:(i) Section 271(1)(c) imposes “strict civil liability“.(ii) The fact that the legal opinions were not furnished during the assessment proceedings (but were furnished only during the CIT(A) penalty proceedings) indicates that the assessee realized the ineffectiveness of these opinions and still ventured into making the non-allowable claim;(iii) Though there was disclosure in the computation and balance sheet, in order to minimize disclosure, the assessee took the “smart route” of directly crediting the receipt in the capital accounts of partners to evade tax;(iv) The fact that a substantial question of law on the merits was admitted by High Court does not mean penalty is not leviable (Rupam Mercantiles 91 ITD 237 (Ahd.)(TM) not followed);ACIT v. Khanna & Annadhanam (Delhi)(Trib.) www.itatonline.org

S. 271(1)(c) : Penalty – Concealment - Transfer pricing - No penalty under expl. 7 to section 271(1)(c) for dispute regarding ALP method.The assessee adopted the TNMM to determine the ALP in respect of the broking transactions entered into with its affiliates. The Assessing Officer & TPO held that the assessee ought to have adopted the CUP method and made an adjustment of Rs. 1.10 crores. This was accepted by the assessee. The Assessing Officer levied penalty under Explanation 1 to section 271(1)(c) on the ground that the assessee had filed inaccurate particulars of income. This was deleted by the CIT(A). On appeal by the department to the Tribunal, the Tribunal dismissing the appeal held that, Explanation 1 to section 271(1)(c) does not apply to transfer pricing adjustments. Penalty for transfer pricing adjustments is governed by Explanation 7 to section 271(1)(c). Under Explanation 7 to section 271(1)(c), the onus on the assessee is only to show that the ALP was computed by the assessee in accordance with the scheme of section 92C in “good faith” and with “due diligence”. The assessee adopted the TNMM and no fault was found with the computation of ALP as per that method. Instead, the method was rejected on the ground that CUP method was applicable. It is a contentious issue whether any priority in the methods of determining ALPs exists. So, when TNMM is rejected, without any specific reasons for inapplicability of the TNMM and simply on the ground that a direct method is more appropriate to the fact situation, it is not a fit case for imposition of penalty. (A.Y.2004-05).Dy. CIT v. RBS Equities India Ltd. (2011) 133 ITD 77 / 60 DTR 273 / 141 TTJ 58 (Mum.)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Carry forward loss shown at a wrong figure - Mistake of consultant - Disallowance of deduction under section 80G.Carry forward loss shown at a wrong figure due to mistake of tax consultant would not attract penalty under section 271(1)(c), as the correct figure was available with Assessing Officer from the assessment of earlier years and the mistake was rectified on being pointed out before finalization of assessment.


Recognition to donee trust under section 80G being available earlier, there was bona fide belief to claim deduction under section 80G hence there was no case for levying penalty under section 271(1)(c). (A. Y.2004-05).ACIT v. A. H. Wheeler & Co. (P) Ltd. (2011) 60 DTR 25 / 142 TTJ 112 / 132 ITD 34 (All)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Search and seizure - Loss return.In the course of search it was found from records that some loose papers were found having jottings on them, no other valuable assets like money, bullion, jewellery etc., were found and losses declared by assessee for four assessment years were accepted by Assessing Officer hence, there was no tax liability on assessee. The Tribunal held that penalty cannot be levied by invoking Explanation 5 to section 5 to section 271(1)(c). (A. Ys. 2002-03 to 2005-06).Lallubhai Amicahnd Ltd. v. Dy. CIT (2011) 133 ITD 205 / 64 DTR 442 (Mum.)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Failure to deduction at source - Royalty – Advertisement – Publicity. [S. 40(a)(ia)]The assessee not deducted the tax at source in respect of payments of royalty, advertisement and publicity, audit fee and recruitment expenses. In the audit report accompanying the return it was mentioned that the amount was not admissible under section 40(a)(ia). The assessee contended that due to inadvertently this amount was not reduced in the computation of income. The Tribunal held that the as the assessee disclosed the amount in accounts, there was no concealment and hence levy of concealment penalty was not justified. (A. Y. 2005-06).New Horizon India Ltd. v. Dy. CIT (2011) 12 ITR 332 (Delhii)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Survey - Additional income. (S. 133A)Assessing Officer has not give a clear finding in penalty order whether addition on account of concealment of income or furnishing in accurate particulars of income. The Tribunal held penalty was not justified. (A. Y. 2006-07).ACIT v. Rmp Infotech P. Ltd. (2011) 12 ITR 581 (Chennai)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Search and seizure - Revised return. (S. 153A)A Search and seizure operation was conducted at assesses premises. In response to notice under section 153A, the assessee filed return showing income of Rs. 2,11,297, without disclosing any unaccounted income. In response to further enquiry, assessee filed revised return disclosing additional income by way of declaring gross profit rate of 15% as against 6.93% which was declared in return filed under section 153A. Assessing Officer completed assessment by taking gross profit at 15%. The Tribunal held that since the assessee had failed to establish that disclosure of additional income in revised return under section 153A was made voluntarily and in good faith to buy peace with revenue and since, assessee filed the revised return only after concealment was detected by Assessing Officer, penalty under section 271(1)(c) was rightly imposed. (A. Y. 2005-06).Dy. CIT v. Sushma Devi Agrwal (2011) 133 ITD 155 (Kol.)(TM)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Search and seizure - Statement – Retraction - Unaccounted donation.There was a search in case of one of trustees, during course of which several incriminating documents were found which among other showed unaccounted transaction by trust. The Trustees had clearly stated that unaccounted donations were received, though retracted after thought. The Tribunal held that assessee had


concealed particulars of income with in meaning of provision of Explanation 1 to section 271(1)(c). (A. Ys. 1989 and 1990-91).Dy. DIT v. St .Xavier’s Education Trust (2011) 133 ITD 576 (Mum.)(Trib.)

S. 271(1)(c) : Penalty – Concealment – Survey - Stock – Addition. (S. 69)On the date of survey, as per physical verification stock found was of value of Rs. 87,93,380, where as stock as per books of account maintained works out Rs. 78,93,380. Assessee had agreed pay tax on excess stock so worked amounting to Rs. 9 lakhs. In the trading account for period ending 31-3-2000 the assessee shown the said amount as other income, however the assessee increased the valuation of opening stock by Rs. 9 Lakhs and nullified the effect of declaration. The Assessing Officer made addition of Rs. 9 lakah as unexplained investment in stock under section 69 and also levied the penalty under section 271(1)(c). The Tribunal held that the assessee had deliberately prepared trading account in such away so as to nullify effect of excess stock found during survey, conduct clearly showed that assessee had concealed income hence justified the levy of penalty. (A. Y. 2000-01).Tribhovandas Chelaram v. ACIT (2011) 133 ITD 587 (Ahd.)(Trib.).

S. 271(1)(c) : Penalty - Concealment – Goodwill – Depreciation - Intangible asset.The assessee has goodwill as ‘certain other intangible assets’ and claimed depreciation. The Tribunal held that claimed such a false claim could not be considered as a debatable or possible claim and assessee was liable to penalty under section 271(1)(c). (A.Y. 2000-01).Mahindra Intertrade Ltd. v. Dy. CIT (2011) 133 ITD 597 (Mum.)(Trib.)

S. 271(1)(c) : Penalty - Concealment – Commissioner – Revision - Cost of acquisition. (S. 263)The Tribunal held that once revision order is passed, it is for assessing authority to consider whether penalty is to be levied or not and if assessing authority has not levied penalty where it is imperative, then only, Commissioner can in his wisdom interfere in the matter. Therefore, when there is no penalty order subsisting at time of passing of revision order it is not proper on part of Commissioner to initiate penalty proceedings under section 271(1)(c). On merit the Tribunal held that whether the expenses relating to tiles, white washing electrical rewiring and wood work incurred after purchasing of property as part of acquisition on a bonafide belief that law permits such a treatment, there was no question of furnishing any inaccurate particulars or any case concealment of income, therefore penalty under section 271(1)(c) cannot be levied. (A. Y. 2008-09).S. Sudaha (Smt) v. ACIT (2011) 48 SOT 335 (Chennai)(Trib.)

S. 271(1)(c) : Penalty – Concealment - Wrong claim of deduction.Mere making a claim which is not sustainable in law will not amount to furnishing of inaccurate particulars for involving penalty under section 271(1)(c). (A. Y. 2006-07)Dy. CIT v. Pathankot Primary Co-op. Development Bank Ltd. (2011) 142 TTJ 401 / 59 DTR 67 (Asr.)(Trib.)

S. 271(1)(c) : Penalty – Concealment – Bona fide belief that income not taxable.Assessee having not offered capital gains on the sale of agricultural land and the interest income earned thereon under the impression that the sale of agricultural land did not give rise to any capital gain, and later filed a revised return before any enquiry was initiated by the Assessing Officer, there was no deliberate attempt to conceal income on the part of the assessee, more so when only interest income was held taxable, and, therefore, levy of penalty under section 271(1)(c) was not justified. (A. Y. 2006-07) Manjoor Ahmed v. ITO (2011) 62 DTR 70 / 141 TTJ 646 (jd.)(Trib.)


S. 271AA : Penalty - Transfer pricing - Failure to maintain and keep documents - International Transaction. (S. 92D, Rule 1D).Assessee was engaged in business of manufacturing and distributing non-pharmaceutical health care products. It had entered in to an International transactions with its associated enterprises (AE). During the course of assessment proceedings the Assessing Officer observed that as the assessee failed to maintain books of accounts for international transaction levied the penalty of Rs. 13,57,720. The Tribunal held that the Assessing Officer did not specify what was the failure on part of assessee under section 92D read with Rule 10D, secondly in the course of assessment proceedings assess had furnished all details required by Assessing Officer and International transaction with Associated Enterprise which had been accepted to be one confirming to arm’s length price by the Assessing Officer. The Tribunal held that the penalty levied by the Assessing Officer was without any basis hence, cancelled the penalty order. (A. Y. 2003-04).ACIT v. Smith & Newphew Healthcare (P) Ltd. (2011) 48 SOT 607 (Mum.)(Trib.)

S. 271B : Failure to get accounts audited - Penalty – Project Completion Method – Advance received cannot be treated as sale.When the assessee was following the project completion method of accounting, the advances received against booking of flats could not be treated as sale proceeds/turnover/gross receipts. Thus penalty under section 271B is deleted.Siroya Developers v. Dy. CIT, ITA No. 600/Mum/2010, dt.12-1-2011, ITAT Mumbai ‘I’ Bench, BCAJ P. 38, Vol. 42-B, Part 6, March 2011 (Trib.)

S. 271BA : Penalty - Failure to furnish transfer pricing report under section 92E - Reasonable cause. (S. 273B)Assessee has not obtained the audit report as required under section 92E due to failure of auditor to advice who has audited the accounts under section 44AB of the Act, however, filed the same immediately when he came to know that he was required to file such report in Form No. 3 CEB before completion of assessments for the relevant years, as there was bonafide reason for not obtaining the report in Form No. 3CEB in time and it was venial and technical default, penalty cannot be attracted. (A. Ys. 2003-04 & 2004-05)Ravi Kumar Rawat v. ITO (2011) 138 TTJ 254 / 48 DTR 230 (Jaipur)(Trib.)

S. 271C : Penalty for failure to deduct tax at source - Reasonable cause. (S. 194J, 273B)Following the ratio of Judgment of Bombay High Court in Dedicated Health Care Services TPA (India) (P) Ltd. v. ACIT (2010) 324 ITR 345, the part of Circular No. 8 of 2009 dated 24-11-2009, was set aside, on the said aspects, the Assessing Officer and the appellate authorities were directed to apply the mind independently in exercise of their quasi judicial powers, without being tied down by the circular. Vipul Meicorp TPA (P) Ltd. v. CBDT (2011) 202 Taxman 463 / 245 CTR 125 (Delhi)(High Court)

S. 271C : Penalty for failure to deduct tax at source - Failure to deduct tax attract penalty and also imprisonment. (S. 192, 200, 206, 271C, 276B and 276BB, S. 482 of Cr. PC)Where the materials show that the proceeding is of a civil nature and cannot be adjudicated by the criminal court or, if it is an abuse of the process of the court, the High Court would be well within its power to exercise its inherent jurisdiction and quash the same. In view of the provisions of the Income-tax Act and the assertion of the appellants that deductions were being made for all the persons liable to pay tax in


terms of the Income-tax Act, the proper remedy for the respondents was to approach the authority/officer concerned and not by filing a complaint.Rajeswar Tiwari and Ors. v. Nanada Kishore Roy (2010) 8 SCC 442 / 333 ITR 534 / 59 DTR 75 / 242 CTR 476 / 200 Taxman 139 (SC)

S. 271C : Penalty for failure to deduct tax at source - Mala fide intention - Deliberate defiance of law - No penalty for tax deduction at source breach if no “mala fide intention” or “deliberate defiance” of law. (S. 194C, 194I, 194J, 201)It was held that the fact that the assessee has not disputed the quantum is not a good ground for imposition of penalty unless and until material is brought on record to the effect that assessee deliberately defied the provisions (Anwar Ali 76 ITR 696 (SC) referred). Further, it was also observed that levy of penalty under section 271C is not automatic. (Woodward Governor India 253 ITR 745 (Delhi) followed). If no malafide intentions of any kind are attributed to the assessee for deducting tax under one provision of law than other, thus no penalty could be levied. CIT v. Cadbury India Ltd. (2001) 55 DTR 318 (Delhi)(High Court)

S. 271C : Penalty for failure to deduct tax at source – Limitation. [S. 201(1)]The Tribunal has quashed the order passed by the Dy. CIT (TDS) under section 201(1) and 201(IA), on the ground that initiation of proceedings was beyond a period of six years and hence was barred by limitation. The Tribunal in penalty appeal held that penalty under section 271C cannot be levied if the order under section 201(1) is barred by limitation. (A. Y. 2000-01 to 2002-03).ACIT v. American School of Bombay Education Trust (2011) TIOL 209 ITAT–Mum. (172) (2011) 43A BCAJ, May P. 32 (Trib.)

S. 271D : Penalty - Loan or deposit - Income offered by Director - Entry in books of account of company by journal entry. (S. 269SS)The premises of K, a director of the assessee company were searched by the Income Tax Authorities. During the course of search, incriminating documents regarding unaccounted expenditure incurred by K were seized. In the proceedings initiated under section 153C, K offered for tax the undisclosed expenditure incurred by him for and on behalf of the company for construction activities. Accordingly journal entries were passed in the books of the company. Assessing Officer was of the opinion that the assessee has violated section 269SS and accordingly levied the penalty but the Tribunal deleted. High Court confirmed the order of Tribunal.CIT v. Motta Construction P. Ltd. (2011) 338 ITR 66 (Bom.)(High Court)

S. 271G : Penalty - Transfer pricing - No penalty for failure to respond to “omnibus” notice.Section 271G authorizes the levy of penalty if the information/ documents prescribed by section 92D(3) are not furnished. Rule 10D prescribes a voluminous list of information and documents required to be maintained and it is only in rare cases that all clauses would be attracted. Some of the documents may not be necessary in case of some assessees. Before issuing a notice under section 92D(3), the Assessing Officer has to apply his mind to what information and documents are relevant and necessary for determining ALP. A notice under section 92D(3) is not routine and cannot be casually issued but requires application of mind to consider the material on record and what further information on specific points is required. The notice cannot be vague or call for un-prescribed information. Dy. CIT v. Leroy Somer & Controls (India)(P) Ltd. (2012) 65 DTR 205 (Delhi)(ITAT)


S. 272A(2)(c) : Penalty - Failure to file TDS return – Statement - Quarterly return.Failure to file quarterly return penalty is not leviable. Clause (c) of section 272A(2) relates to return / statement under section 133, 206 and 206C, which are unrelated to TDS, therefore, penalty under section 272A(2)(c) is not leviable for non submission of quarterly returns for TDS. (A. Ys. 2006-07 & 2007-08)Porwal Creative Vision (P) Ltd. v. Addl. CIT (2011) 139 TTJ 1 / 55 DTR 241 (Mum.)(Trib.)

S. 275 : Penalty – Concealment - Bar of limitation on imposition - Limitation period not curbed by Proviso. [S. 271(1)(c)]The period of six months provided for imposition of penalty under section 275(1)(a) starts running after the successive appeals from an assessment order have been finally decided by the CIT(A) or the ITAT. The proviso to section 275(1)(a) extends the period for imposing penalty from six months to one year of the receipt of the CIT(A)’s order after 1.6.2003. The proviso carves out an exception from the main section inasmuch as in cases where no appeal is filed before the ITAT the Assessing Officer must impose penalty within a period of one year of the date of receipt of the CIT(A)’s order. A proviso is merely a subsidiary to the main section and must be construed harmoniously with the main provision. The proviso to section 275(1)(a) does not nullify the availability to the Assessing Officer of the period of limitation of six months from the end of the month when the order of the ITAT is received. (A. Y. 2001-02).CIT v. Mohair Investment & Trading Co. (2011) 63 DTR 226 / 245 CTR 313 (Delhi)(High Court)

S. 275 : Penalty - Concealment - Bar of limitation for imposing concealment penalty. [S. 271(1)(c)]Assessee, a public Limited Company, filed a loss return. Assessing Officer completed assessment at positive income by making various additions and disallowances. The additions were confirmed by Commissioner (Appeals) and Tribunal on 30-8-2004 and 9-5-2008, respectively. Assessing Officer imposed penalty order under section 271(1)(c) on 30-1-2009. Assessee claimed that said order of penalty order of 30-1-2009 was barred by limitation in terms of section 275. The Tribunal held that where assessee had filed an appeal before Tribunal against quantum, section 275(1)(a) fixes time limit of six months from date of receipt of order of Tribunal by Commissioner / Chief Commissioner or passing an order of penalty, therefore, penalty levied was proper. (A. Y. 2000-01). Mahindra Intertrade Ltd. v. Dy. CIT (2011) 133 ITD 597 (Mum.)(Trib.)

CHAPTER XXIIOFFENCES AND PROCECUTIONS

S. 276B : Offences and prosecutions - Compounding of offences – Guidelines - Technical offences.Under the guidelines of September 30, 1994, technical offences could be compounded by the Chief Commissioner or Director General on certain conditions. The Court held that compounding is not possible after filing of complaint. (A. Y. 1982-83).Anil Batra v. CCIT (2011) 337 ITR 251 (Delhi)(High Court)

S. 276C : Offences and prosecutions - Wilful attempt to evade tax - - Penalty set aside - No Prosecution.Where penalty is set aside in appeal by the Tribunal which was confirmed by the High Court, holding that the non disclosure of the items of income was purely due to mistake on the part of the assessee. In the light of the decision of the Court it cannot be said that the assessee has made a wilful attempt to evade taxes, therefore, assessee cannot be prosecuted for alleged offence under section 276C of the Act. (A. Y. 1989-90)N. S. Babu v. CIT (2011) 50 DTR 27 (Ker.)(High Court)


S. 276C : Offences and prosecutions - Proof of signing of return by accused. (S. 277, 278)Accused partner of the assessee firm not having raised any objection at any point of time that the return did not bear his signature or that it was not filed by him and paid the penalty levied in the assessment, the accused could not be acquitted of the offences under sections 276C, 277 and 278 on the ground that the prosecution has not been able to prove that the return was signed by the accused partner : the impugned orders are set a side and the judgment of conviction passed by the Chief Magistrate is restored. (A. Y. 1988-89)ITO v. Mangat Ram Norata Ram Narwana and another (2011) 336 ITR 624 / 57 DTR 257 / 242 CTR 113 / 200 Taxman 432 (SC)

CHAPTER XXIIIMISCELLANEOUS

S. 281 : Certain transfers to be void - Recovery of tax - Sale and attachment of property of assessee in default.Property transferred by assessee during pendency of recovery proceedings, can be attached and sold without filing suit, as section 281 statutorily declaring such transfer as void provides for such mode. Notice to transferee is invariably not necessary before taking such action.Karnail Singh v. UOI (2011) Tax. L. R. 648 / 63 DTR 336 / 245 CTR 437 (P&H)(High Court)

S. 282 : Service of notice - Received by assessee - Service on counsel authorized to receive all documents. (S. 288, Income Tax (Appellate Tribunal) Rules, 1963. R. 35, Code of Civil Procedure Code, O. 3. R. 3).The assessee’s counsel who duly authorized to receive all documents on behalf of the assessee, received the certified copy of the order of the Tribunal, which was passed it on to another counsel of the assessee from whom the assessee collected the certified copy of order. On appeal to the High Court with an application for condonation of delay, in filing the appeal, contending that certified copy of the order of Tribunal was not served on the assessee by the office of the Tribunal in accordance with Rule 35 of the Income Tax (Appellate Tribunal) Rules, 1963. The Court held that the phrase “received by the assessee” means received by assessee either him self or through his authorized agent. The counsel was empowered to accept the copy of the order of the Tribunal and hence, the service on him was valid service for purposes of calculation of limitation for filing an appeal. Thus the appeal filed by the assessee was barred by limitation. (A. Y. 1997-98).Sultanpur Kshetriya Grmin Bank v. Jt. CIT (2011) 336 ITR 156 / 245 CTR 64 (All)(High Court)

S. 282 : Service of notice - Reassessment – Service of notice on Chartered Accountant. (S. 148)Service of notice under section 148 on a chartered accountant who was not empowered to receive such notice on behalf of the assessee company or any other person who was not authorised to receive was not a valid service of notice on the assessee, more so when it was not shown that the assessee was keeping out of way for the purpose of avoiding service of notice or that there was any other reason that the notice could not be served on the assessee in the ordinary way and therefore, assessment completed pursuant to said notice was bad in law. (A. Y. 1999-2000).Harsingar Gutkha (P) Ltd. v. Dy. CIT (2011) 138 TTJ 318 (Lucknow)(Trib.)

S. 288 : Appearnce by authorised representative - Need not be a registered Income-tax practitioner.Under Rule 49(a), of the Income-tax Rules,1962, an authorized Income-tax practitioner means any authorized representative as defined in clause (v) or clause (vi) or clause (vii) of section (2) of section 288 of the Income-tax Act, 1961, for appearing before the Tribunal. It cannot be read to mean that an


authorized representative as defined in sub-section (2) has to get him self registered as an authorized Income-tax practitioner. Section 288(2) does not say that the authorized representative shall also be an authorized income tax practitioner registered under rule 54 and 55 of the Rules.The right given in this respect by the Act can not be diluted by the Rules nor can it be restricted, by specifying a procedure for registration. The right given to an assessee to appoint a qualified authorized representative cannot be denied. (A. Y. 2009-10)Vidya Sikshaa Educational and Charitable Trust v. CIT (2011) 11 ITR 236 (Chennai)(Trib.)

WEALTH-TAX ACT, 1957S. 2(e) : Wealth-tax - Asset - Land taken on lease.Assessee was in possession of after expiry of lease. As the assessee does not have vested interest inland for a period exceeding six years. Following the earlier year, the property was not liable to wealth tax. (A. Y. 1992-93).George Oakes Ltd. v. Dy. CWT (2011) 339 ITR 630 (Mad.)(High Court)

S. 2(ea) : Wealth-tax – Asset – Ware house – Purpose of business.In a case where the assessee owns a warehouse which is let out on rental basis and the same is not used by the assessee for the purposes of its business but is used by the tenant for its business, the warehouse is to be excluded as an asset in view of Section 2(ea)(i)(5) of the Act.Dy. CIT v. Hind Ceramics Pvt. Ltd., WTA No. 42 & 43/Kol.2010, dt.07-01-2011, ITAT Kolkata ‘B’ Bench, BCAJ Pg. 27, Vol. 42-B, Part 5, February 2011 (Trib.)

S. 2(ea)(3) : Wealth-tax – Asset – House - Business centre. (S. 7 Schedule III, R. 3, 5 & 8)Premises in a business centre cannot be said to be a house within the meaning of cl. (3) of section 2(ea). The assessee had given the premises on lease under an agreement which had all the covenants that are usually found to be included in a lease and it cannot be said that the agreement was for a licence and therefore, it cannot be said that he was in occupation of the property for the purpose of a business or profession carried on by him so as to exclude it from the definition of the term “asset”. (A. Y. 1997-98 and 1998-99).Cravatex Ltd. v. Addl. CIT (2011) 52 DTR 123 / 138 TTJ 58 (Mum.)(Trib.)

S. 2(m) : Wealth-tax - Net wealth - Debt owed - Security deposit.Security deposit received against the lease of chargeable property, is debt owed, that deposit invested in securities exempt from wealth tax is not relevant. Debt deductible net wealth. (A.Y. 1986-87 and 1988-89).Denna J. Jeejeebhoy (Miss) v. WTO (2011) 330 ITR 149 / (2009) 222 CTR 202 / 180 Taxation 586 / 18 DTR 273 (Bom.)(High Court)

S. 2(m) : Wealth-tax - Net wealth - Belonging to assessee – Assets - Contraband article.Gold given on trust by the assessee to some persons which has neither returned by them nor recovered by the police is to be treated as lost once civil remedy has became time barred and it is not to be included in the net wealth of the assessee. Gold alleged given by assessee to third parties which was recovered from third parties and has been delivered to Gold control authority by an order of the Court, same being a contraband article, cannot be said to be assets belonging to the assessee on the relevant valuation dates and therefore, it is not includible in its net wealth. (A. Ys. 1966-67 to 1975-76, 1978-79 to 1981-82)Meghji Girdhar (HUF) v. CWT (2011) 52 DTR 397 / 239 CTR 411 (MP)(High Court)


S. 17 : Reassessment - Notice to a person who is not in existence - Amalgamated company - Reasons. (S. 42C)Notice under section 17 issued to a person who is not in existence at the time of issuing such notice is not valid. Fact that the assessee (Amalgamated company) subsequently filed its return with the objection that notice in the name of amalgamating company is invalid cannot cure the defects which go to the root of the jurisdiction to reopen the proceedings. Reason for initiation of reopening proceedings need not be known to the assessee by reflecting the same in the notice.L. K. Agencies (P) Ltd. v. CWT (2011) 55 DTR 138 / 241 CTR 185 (Cal.)(High Court) S. 35B : Offences and prosecutions - Willful failure to file return – Sanction - Criminal Procedure Code - S. 245(1). (S. 35O)Sanction authority has sanctioned the prosecution, without application of mind, there was no evidence that default was willful. The Court held that prosecution was not valid. (A. Y. 1993-94).J. Jayalaitha v. ACIT (2011) 337 ITR 1 / 60 DTR 169 / 243 CTR 466 (Mad.)(High Court)

Finance Act, 1983 – Wealth-tax – Valuation – Land - Urban Land Ceiling Act - Schedule III.Assessee’s land was declared as surplus under ULCRA but possession was not taken over by authorities and in view of section 3 and 4 of repealed Act, 1999 ,the assessee continued to be owner of the land and its value was includible in net wealth. Land being subject to ULCRA, the same has to be valued taking in to consideration restriction under ULCRA. (A. Ys. 1984-85 to 1989-90, 1991-92 & 1992-93).CWT v. Chemsford Club Ltd. (2011) 243 CTR 89 / 56 DTR 145 (Delhi)(High Court)

GIFT-TAX ACT, 1958 S. 4 : Deemed gift - Transfer of assets without consideration - Transfer of shares of company from one group to another. [S. 5(1)(xiv)]The assessee company was managed by two groups of share holders, K and P. Disputes cropped up regarding the entitlement to the sum of Rs. 80 Lakhs receivable from S for the sale of surplus FSI. According to the decree of Court, the K group transferred all its shares in the assessee to the P group. In the annual accounts, the value of the properties alienated to the K group was shown at Rs. 35 Lakhs. The Assessing Officer held that the assessee had gifted Rs. 35 lakhs without any consideration and such amount was exigible to gift tax. The order was confirmed by CIT(A) and Tribunal. On reference the Court held that the K group had relinquished and waived its right, title and interest in the property and also the consideration which the assessee was to receive out of the land transaction and in lieu thereof it got properties free from all liabilities on ownership basis. The consideration was the transfer of property in favour of K group. The consideration for the transaction could be spelt out from the award of the arbitrator. There was no gift exigible to tax. (A. Y. 1983-84)Pananlal Silk Mills P. Ltd. v. CGT (2011) 338 ITR 1 (Bom.)(High Court)Editorial: Judgement of Mumbai Tribuanl Panalal Silk Mills Pvt. Ltd. v. Dy. CIT (1993) 44 ITD 458 reversed. INTEREST-TAX ACT, 1974S. 2(5A) : Chargeable interest - Financial company - Business of hire purchase and leasing – Appeal - Supreme Court - Interest Tax.High Court has not examined whether the transactions entered into by the assessee constituted financial transactions so as to attract the provisions of the 1974 Act, apart from the fact that the issues covered a wide spectrum, the impugned order is set a side and matter restored back for fresh adjudication. (A. Y. 1995-96)


Motor and General Finance Ltd. v. CIT (2011) 334 ITR 33 / 242 CTR 472 / 58 DTR 312 / 200 Taxman 101 (SC)Editorial:- CIT v. Motor and General Finance Ltd. (2010) 236 CTR 487 / 48 DTR 118 / 327 ITR 530 (Delhi)(High Court) set aside.

S. 2(5) : Chargeable interest - Interest on loans and advances - Bills discounting. (S. 2(7), 5, 6)Sections 5 and 6 of the Interest Act, specifically exclude the interest accruing or arising to a credit institution on loans and advances made to other credit institutions from the purview of chargeable interest and, therefore, interest received by the assessee on loans and advances made under the bills rediscounting scheme from different banking companies to which Banking Regulation Act 1949, applies, does not form part of chargeable interest. (A.Y. 1992-93).National Insurance Co. Ltd. v. CIT (2011) 58 DTR 137 / 339 ITR 573 (Cal.)(High Court)

S. 5 : Interest–tax – Charge - Loans and advance - Bills rediscounting scheme.Interest received by the assessee on loans and advances made under the bills rediscounting scheme from different banking companies to which the Banking Regulation Act, 1949, applies did not form part of chargeable interest defined under the Act and no tax was payable on such amount. (A. Y. 1992-93).National Insurance Co. Ltd. v. CIT (2011) 339 ITR 573 (Cal.)(High Court) Kar Vivad Samadhan Scheme 1998 - Finance (No. 2) Act, 1998 – Discrimination – Article 14 of Constitution of India.Discrimination resulting from fortuitous circumstances arising out of particular situations, in which some of tax payers find them selves is not hit by Article 14 if Legislation as such is of general application and does not single them out for harsh treatment. Test adopted to determine whether a classification is reasonable or not are that classification must be founded on an intelligible differentia which distinguishes person or things that are grouped together from others left out of groups and that differentia must have rational relation to object sought to be achieved by statute in question. Section 87(m), (ii)(b), which denies benefit of Kar Vivad Samadhan Scheme to those who were in arrears of tax as on 31-3-1998 but to whom demand notices /show cause notices were issued after 31-3-1998 is based on a reasonable basis which is firstly amount to duties, cess, interest, fine or penalty must have been determined as on 31-3-1998 but not paid as on that date of declaration and secondly date of issuance of demand or show cause notice on or before 31-3-1998, which is not disputed but duties remain unpaid on date of filing of declaration. Therefore scheme 1998 does not violate equal protection clause where there is an essential difference and real basis for classification which is made.UOI v. Nitdip Textile Processors (P) Ltd. (2011) 203 Taxman 1 / 245 CTR 241 (SC)

Kar Vivad Samadhan Scheme 1998 – Constitutional validityExtending the benefit of the KVSS only to those assessee whose tax arrears were outstanding as on 31st

March 1998, or who were issued demand or show cause notice on or before the said date and denying the benefit to those assessees whose duty were quantified but who were not issued demand or show-cause notice as on 31st March 1998, cannot be said to arbitrary or illogical which has nexus with the purpose of the legislation and therefore, the provisions of section 87(m)(ii)(b) of the Finance (No.2) Act, 1998 are not violative of Article 14 of the Constitution.Union of India & Ors. v. Nitdip Textile Processors (P) Ltd. & Ors. (2011) 63 DTR 145 (SC)

Voluntary Disclosure Scheme 1997 - Finance Act (26) of 1997 - Criminal Procedure Code – Prosecution - Benefit of scheme.


Person against whom only F.I.R. filed is not a person against whom prosecution is pending. Prosecution gets initiated when summons is issued by court on report of investigating officer, therefore, the benefit of scheme cannot be denied to a person against whom only F.I.R. is filed, therefore the order of Tribunal was confirmed.CIT v. Meena Goyal (Smt) (2011) Tax. L. R. 936 (Uttarakhand)(High Court)

Companies Act, 1956S. 391 : Companies Act – Merger – Demerger - Sanction of Court - Tax Avoidance – Gift.Proposed scheme of arrangement which contemplates transfer of passive infrastructure assets of the petitioner and other group companies to another group company without any consideration and thereafter amalgamation / merger of the transferee company with another company is explicitly a scheme of tax avoidance as it is devised to artificially deplete the taxable profits of the transferor companies apart from evading tax on capital gains by showing the transfer as gift and therefore, the proposed scheme cannot be sanctioned under 391 of the Companies Act, 1956.Vodafone Essar Gujarat Ltd., In Re (2011) 52 DTR 293 / 239 CTR 229 (Guj.)(High Court)

Contempt of Courts Act 1971 - Malicious Imputations against Judicial Officer - Apology tendered not accepted. (S. 6)The contemner has made wild allegations against the judicial officer, when contempt proceedings were initiated he tendered apology. The Hon’ble Court refuse to accept the apology. Before discussing the facts the Hon’ble Court referred the observation of Apex Court in M. R. Parashar v. Dr. Farooq Abdullah AIR 1984 SC 615 which reads as under. “The Judges cannot defend themselves. They need due protection of law from unfounded attacks on their character. Law of Contempt is one such laws. We would like to remind those who criticise the Judiciary that it has no form from which to defend itself. The legislature can act in defence of itself from the floor of the House. It enjoys privileges which are beyond reach of law. The executive is all powerful and ample resources and media at its command to explain its actions and, if need be, to counter attack. Those, who attack the judiciary must remember that they are attacking the institution which is indispensable for the survival of the rule of law but which has no means of defending itself.The sword of Justice is in the hands of Goddess of Justice, not in the hands of mortal judges. Therefore, Judges must receive the due protection of law from unfounded attacks on their character”.Accordingly the Hon’ble Court held that benefit of section 6 of the Contempt Courts Act 1971 may not be given to the contemner as the allegations imputed against the judicial Officer were not in good faith.High Court on its own motion v. Dnyandev Tulshiram Jadhav and State of Maharashtra (2011) Vol 113 920 Bom. L.R. 1145 (April)Note:- Refer Contempt of Court. www.itatonline.org

Service Tax – Activation of SIMThe amount received by the cellular company from its subscribers towards SIM cards forms part of the taxable value for levy of service tax, as SIM cards are never sold as goods independent of the services provided and therefore, the value of the taxable service is calculated on the gross total amount received by the operator from the subscribers. (A. Ys. 1997-98 & 1998-99)Idea Mobile Communications Ltd. v. CCEC (2011) 59 DTR 209 / 243 CTR 1 (SC)


INTERPRETATIONSPrecedent – Decision of jurisdictional High Court – Binding nature.Tribunal has to follow the decision of the jurisdictional High Court without making any comment upon the said decision, it is not permissible for the Tribunal to sidetrack and / or ignore the decision of the jurisdictional High Court on the ground that it did not take into consideration a particular provision of law. (A. Ys. 1999-2000 & 2002-03)Dy. CIT v. Gujarat Ambuja Cements Ltd. (2011) 57 DTR 179 (Mum.)(Trib.)

Precedent - Advance rulings.Decision of Authority on similar facts in respect of same subject matter can be followed.Director of Income Tax v. Dun and Brand Street Information Services India P. Ltd. (2011) 338 ITR 95 (Bom.)(High Court)

Precedent - Binding - Authority for advance ruling - Deserves highest respect - Not binding.Authority for Advance ruling deserves highest respect and consideration, however it can not be open to any one to treat this as a binding judicial precedent. If there is some thing which has not been considered in the process of arriving at their conclusions in the Ruling, the same has to be considered and adjudicated upon. (A. Y. 2005-06).G. D. Metasteel (P) Ltd. v. ACIT (2011) 47 SOT 62 / 64 DTR 161 (Mum.)(Trib.)

Precedent - Interpretation - Contextual interpretation.A judgment cannot be read like a statute. Courts should not place reliance on decision without discussing factual situation involved in the said decision and how it would apply to the facts involved in the subsequent case. A ratio laid down by a higher forum should not be taken out context and construed like a statute. (A. Y. 2001-02)Iskrareco Regent Ltd. v. CIT (2011) 237 CTR 239 / 49 DTR 185 / 196 Taxman 103 / 313 ITR 317 (Mad.)(High Court)

Precedent - Interpretation - Binding - Subsequent secision of smaller Bench of Supreme Court - Article 149 of the Constitution of India.If subsequent decision of smaller Bench of Supreme Court interpreting decision of larger Bench of Supreme Court is placed before a High Court, latter is bound to follow subsequent decision by smaller Bench which interprets decision of Larger Bench because that is interpretation of larger Bench of Supreme Court and High Court cannot make a different interpretation than one made by subsequent decision of Supreme Court which is binding upon it. (A. Y. 1996-97)CIT v. Oberoi Hotels (P) Ltd. (2011) 334 ITR 293 / 198 Taxman 310 / 59 DTR 272 (Cal.)(High Court)

Precedent - Advance rulings - Binding on others.The Andhra Pradesh High Court held that the Advance Ruling Authorities order under section 67(4)(11) was binding not only on the applicant but also similar situated other dealers.Tirupati Chemicals, Vijaywada & Anr. v. Dy. Commercial Tax Officer (2011) 52 APSTJ P. 48 (AP)(High Court)

Precedent - Binding nature – Non Jurisdictional High Court - Tribunal.In the absence of any contrary view, decisions of non jurisdictional High Court have to be followed by the Tribunal. It is not permissible for the authorities below to ignore the decision of the higher forum on pretext that an appeal is filed in the Supreme Court, which is pending or that steps are to be taken to file an appeal. (A. Y. 2007-08).


Addl. CIT v. Royal Bank of Scotland N. V. (2011) 130 ITD 305 / 138 TTJ 698 / 55 DTR 307 (Kol.)(Trib.)

Precedent - Dismissal of appeal by Supreme Court.Though the appeal is dismissed by Supreme Court in one line order, High Court’s order stand merged and operates as binding precedent.Binani Industries Ltd. v. CIT (2011) Tax LR. 343 (Cal.)(High Court) Interpretation of Taxing Statutes - Term not defined under Income-tax Act – Definition in different acts and meaning common parlance to be taken.The High Court held that though specific provisions are made in respect of investment in bonds of financial corporation state or central government that would not mean that one has to give restrictive meaning to the term debenture more particularly when the term is not defined under the Act. The principle of interpretation is that in the absence of any definition given to a particular term in a statute, the meaning which is to be given to the term is the meaning in which it is understood in common parlance.DIT v. Shree Visheshwar Nath Memorial Public Charitable Trust (2011) 333 ITR 248 / 46 DTR 49 / 194 Taxman 280 (Delhi)(High Court)

Interpretation of Statutes - External aid - Speech of Finance Minster. [S. 10(26AAB)]Speech made by the Union Finance Minister while relying to the debate to the Finance Bill is not conclusive regarding the intention of legislature whether or not a new provision is inserted by way of a declaration. (A. Ys. 2003-04 to 2008-09).CIT v. Agricultural Market Committee Tanuku & Ors. (2011) 63 DTR 119 / 336 ITR 641 / 244 CTR 417 (AP)(High Court)

Appeal - Condonation of Delay - Substantial Justice – Appeal - Unless mala fides are writ large, delay should be condoned. Matters should be disposed of on merits and not technicalities. Justice can be done only when the matter is fought on merits and in accordance with law rather than to dispose it of on such technicalities and that too at the threshold. Unless malafides are writ large on the conduct of the party, generally as a normal rule, delay should be condoned.Improvement Trust v. Ujagar Singh (2010) 6 SSC 786 / (2010) 6 Scale 173 (SC)

Appeal - Condonation of delay – Departmental SLP Dismissed. The department filed a SLP challenging the order of the Bombay High Court declining to condone delay of 656 days in filing the appeal. The delay was explained as having been caused by “several facts such as non traceability of case records, procedural formalities involved in the Department and the papers are to be processed through different officers in rank for their comments, approval etc. and then the preparation of the draft of appeal memo, paper book and the administrative difficulties such as shortage of staff“. HELD dismissing the SLP:In our opinion, the said explanation does not make out a sufficient cause for condonation of delay in filing the appeal before the High Court. In that view of the matter, we do not find any ground to interfere with the impugned judgment. The Special Leave Petition is dismissed on the ground of delay as well as on merits.CIT v. Indian Hotels Co. Ltd. (SC) www.itatonline.org

Appeal - Inter departmental litigation - Public sector undertakings - Clearance from committee on disputes - Supreme Court recalls law requiring PSUs to obtain COD approval.


Larger Bench of Supreme Court recalled its order laid down in ONGC v. CCE 104 CTR (SC) 31 and ONGC v. CIDCO (2007) 7 SCC 39, that no litigation could be proceeded with in the absence of COD approval in case of dispute between Government and PSUs. It was held that the mechanism was set up with a laudatory object. However, the mechanism has led to delay in filing of civil appeals causing loss of revenue. Thus, in view of the said circumstances it was decided by Larger Bench to recall the directions of this Court.Electronics Corporation of India Ltd. v. UOI / CCE v. Bharat Petroleum Corpn. Ltd. (2011) 51 DTR 193 / 238 CTR 353 / 332 ITR 58 (SC) (5 Member Bench)

Appeal - CBDT directed to formulate uniform policy with strict parameters on appeal filing.It is high time when the Central Board of Direct and Indirect Taxes comes out with a uniform policy, laying down strict parameters for the guidance of the field staff for deciding whether or not an appeal in a particular case is to be filed. We are constrained to observe that the existing guidelines are followed more in breach, resulting in avoidable allegations of malafides etc on the part of the officers concerned.CCE v. Doaba Steel Rolling Mills (SC) www.itatonline.org

Bias - Question of “bias” in judicial function must be seen from “reasonable man’s” perspective.To decide whether there is “bias”, the “real likelihood test” has to be adopted. In each case, the Court has to consider whether a fair minded and informed person, having considered all the facts would reasonably apprehend that the Judge would not act impartially. To put it differently, the test would be whether a reasonably intelligent man fully apprised of all the facts would have a serious apprehension of bias. In deciding the question of bias one has to take into consideration human probabilities and ordinary course of human conduct.P. D. Dinakaran, Justice v. Hon’ble Judges Inquiry Committee (2011) JT (10) 230 / 9 SCALE 437 (SC)

Black Money - DTAA does not protect tax evaders - SIT formed to probe black money - Fundamental rights - Double taxation avoidance – DTAA – India-Germany.We are convinced that the said agreement, by itself, does not proscribe the disclosure of the relevant documents and details of the same, including the names of various bank account holders in Liechtenstein. The “information” that is referred to in Article 26 is that which is “necessary for carrying out the purposes of this agreement”, i.e. the Indo-German DTAA. Therefore, the information sought does not fall within the ambit of this provision. It is disingenuous for the Union of India, under these circumstances, to repeatedly claim that it is unable to reveal the documents and names as sought by the Petitioners on the ground that the same is proscribed by the said agreement. It is for the Union of India, and the courts, in appropriate proceedings, to determine whether such information concerns matters that are covered by the double taxation agreement or not. Ram Jethmalani and others v. UOI (2011) 339 ITR 107 / 200 Taxman 171 / 8 SCC 1 (SC)

Income-tax appellate Tribunal - Appointment of Members – Government’s decision not to appoint ITAT Members till amendment providing for 2 years’ appointment upheld- Income- tax Appellate Tribunal(Recruitment and Conditions of Service ) Rules , 1963- Rule 4.Out of 23 vacancies in the post of Judicial Member (JM) & Accountant Member (AM), the Selection Board recommended 18 candidates in the main select list and 4 candidates in the wait list. Out of the 18 selected candidates, 2 were not cleared by Vigilance. On 26.04.2006, the 16 were approved by the Appointments Committee of the Union Cabinet for a period of 2 years. The Law Ministry was directed to first amend the ITAT (Recruitment and Conditions of Service) Rules, 1963, so as to provide for appointment of the members of the ITAT for a period of two years. As the selection list was not given effect to pending the amendment


in the Rules, the Revenue Bar Association filed a Writ Petition in the Madras High Court for a mandamus to give effect to the selection list which was allowed. This was challenged by the UOI in the Supreme Court but the SLP was dismissed with the direction that all formalities to give effect to the Selection List should be completed. The Appointments Committee thereafter approved the names of all the 16 selected candidates and appointed them till the date of retirement on attaining the age of 62 years. On 31.08.2007, the Appointments Committee also decided that the appointment of members of the ITAT in future will be taken up only after the recruitment rules of ITAT are amended. In 2008, the candidates who were in the “wait list” filed applications in the Central Administrative Tribunal for directions for their appointment which was opposed by the UOI on the ground that the Appointments Committee had decided that no further appointment of members in the ITAT would be made until the ITAT Recruitment Rules were amended. The CAT allowed the applications and directed that the wait-listed candidates be considered for filling up the advertised vacancies existing in the posts of JM & AM. The UOI challenged the order of CAT in the Delhi High Court contending that the vacancies in the post of JM & AM can be filled up only after the recruitment rules were amended as decided by the Appointments Committee. The High Court dismissed the challenge on the ground that the recruitment rules had already been amended by insertion of Rule 4(a) and there was nothing in the amendment which disqualified the wait-listed candidates from being appointed as members of the ITAT. It was also held that the selection having been conducted by a high-power Selection Board presided over by a sitting Judge of the Supreme Court deserved to be given due weightage and consideration. It was also held that the only way of reducing the backlog was to fill up the vacancies at the earliest and by not doing so, the UOI was prolonging the agony of a large number of assesses apart from depriving itself of its legitimate dues which depends upon the verdict of the ITAT. On appeal by the UOI, HELD reversing the CAT & High Court: Under Rule 4, a person on the select panel has no vested right to be appointed to the post for which he has been selected, but he has a right to be considered for appointment. The candidates in the wait-list, not having been approved by the Appointments Committee, were not persons selected for appointment pursuant to the decision that further appointments would be made only after the amendment of the Rules. As the Central Government is both the rule making authority as well as the appointing authority of any member of the ITAT, if it has taken a decision to undertake appointments in future after amendment of the rules, it is difficult for the Court to hold that the reason given by the Government for not making any further appointments because of the proposed amendments to the rules is not a justifiable or proper reason and that the decision of the Government in not approving the wait list of candidates recommended by the Selection Board is not proper. The High Court’s reliance of Rule 4(a) was wrong because this had been inserted on 26.04.2004 and was not in the mind of the Appointments Committee when it took the decision on 26.04.2006 and 31.08.2007 to make further appointments only after the Rules were amended. As the immediate need for filling up the vacancies has been met by the appointment of the 16 Members, the Court cannot compel the Government to make the appointments from the wait-listed candidates by a writ of mandamus.UOI v. Pradip Kumar Kedia( 2012) 204 Taxman 71 (SC) www.itatonline.org

Income-tax Appellate Tribunal – President – Power - The President of the Tribunal has no power to write the Members’ ACR.The Petitioner, a Judicial Member of the Tribunal, was superseded to the post of Vice President by his junior Mr. P. Mohanarajan. The Petitioner claimed that the supersession was on account of adverse Annual Confidential Reports (“ACRs”) written by the President of the Tribunal which had misguided the high level Selection Committee without the Petitioner being giving an opportunity to represent against the ACR. The Petitioner’s challenge before the Central Administrative Tribunal was rejected on the ground that the


Selection Committee had decided on the basis of merit. The Petitioner challenged the decision before the High Court and raised two issues: (i) whether the post of Vice President is a promotional post to that of the Member of the ITAT or not? & (ii) whether the President of the ITAT has the authority to record the ACRs of the Members & if so, whether the Government has the right to review the ACRs of the Members? HELD by the High Court:(i) The Vice Presidents of the Tribunal are appointed from amongst the Members in terms of Rule 7A of the Tribunal Members (Recruitment and Conditions of Service) Rules, 1963. Under Rule 7C, the criteria for selection is merit. The argument that because there is a merger of the pay scales of the posts of Members and Vice Presidents, there is also a merger of the posts and hence the Members cannot be subjected to selection process is not acceptable. There is only a unification of the pay and not a merger of the posts. Under the scheme of the Act, the post of Vice President is over and above the level of Member & carries higher responsibilities, higher pay band and is definitely a promotional post from that of the Member;(ii) The Tribunal is a judicial body and while the President exercises administrative control over the Benches, he has no power to write the ACRs of the Members. Further, being a judicial body, the Tribunal should have judicial autonomy and therefore, the Government cannot act like a reviewing authority;(iii) On merits, the Petitioner’s ACR showed that while he was a hard working and knowledgeable person, he behaved in a rude manner with the colleagues and his rigid tendency and non-adjustable nature had invited many problems, resulting in his frequent transfers. These must have weighed with the Selection Committee. As the ACRs were illegally recorded by the President and reviewed by the Government, the Selection Committee must reconsider the claim of the Petitioner on merits de hors the ACRs;(iv) On the conduct of the Petitioner, the Court observed that it was “pained” & “disturbed” by the material on record that showed the he was “arrogant” and “would always throw to winds the well established judicial conventions” including “instances of keeping the matters for writing dissenting orders for months together and fighting with the other Members on silly aspects“. It was noted that the Petitioner was “transferring his personal feelings against his colleagues into the orders circulated by them and nurturing unnecessary hatred and ill-feelings” and advice was given that the Petitioner should “mend his ways and conduct himself in a dignified manner and follow the established judicial conventions, so as to maintain the decorum on and off the dais“. Uttam Bir Singh Bedi v. UOI (Mad.)(High Court) www.itatonline.org

Natural Justice : Adjudication – Duty of Disclosure - Extent and Scope - Foreign Exchange.The documents which the appellants wanted were documents upon which no reliance was placed by the authority for setting the law in to motion. The demand for supply of all documents in possession of the authority was based on vague, indefinite and irrelevant grounds. The appellants were not sure whether they were asking for copies of documents in the possession of the adjudicating authority or in the possession of the authorized officer who lodged the complaint. The only object in making such demand was to obstruct the proceedings.Kanwar Natwar Singh v. Director of Enforcement (2011) 330 ITR 374 (SC) / (2010) 160 Comp Cas

Prosecution - FERA, 1973 - Ss. 8, 9, 50, 51 and 56 Adjudication proceedings and criminal proceedings can be initiated simultaneously and independent of each other – finding in the adjudication proceeding is not binding in the criminal proceeding – adjudication proceedings does not attract the provisions of Art. 20(2) of the Constitution or section 300 of the Cr. PC. If the exoneration in the adjudication proceeding is on the merit, a criminal prosecution on the same facts cannot be allowed to continue.Standard Chartered Bank v. Directorate of Enforcement (2006) 130 Comp Cas 341 (SC) distinguished.


Radheshyam Kejriwal v. State of West Bengal and Anr. (2011) 333 ITR 58 / (266) ELT 294 (SC)

Tax evasion – Black money – Tax evasion & money laundering – Bail cancelled.Respondent 1 having deposits in a Swiss bank were not satisfactorily accounted for. His total income for various assessment years between 2001-02 to 2007-08 was estimated by the department as Rs.1.104 lakh crores. He was not able to discharge burden of proof on him under section 24 of the PMLA, 2002 that wealth possessed by him was neither proceeds of crime not untainted property. In these circumstances, order granting bail by High Court Set aside.Union of India v. Hassan Ali Khan and another (2011) 10 SCC 235

Transfer of property Act, 1982 – Sale - Immoveable property - General Power of Attorney. (S. 54)The Apex Court held that immoveable property can be legally and law fully transferred / conveyed only by a registered deed of conveyance. Transactions of nature of General Power of Attorney Sales (GPA Sales) or sale Agreement / General Power of Attorney /Will Transfers (SA/GPA/ Will transfers) do not convey title and do not amount to transfer, nor can they be recognized as valid mode of transfer of immoveable property. Such transactions cannot be relied upon or made basis for mutations in Municipal revenue records.Suraj Lamp & Industries (P) Ltd. v. State of Haryana (2011) 202 Taxman 607 / (2012) 340 ITR 1 (SC)

WRIT PETITIONSWrit - Maintainability - Foundational facts to be established. (Article 226)Where the foundational facts had to be established, the assessee ought not to have filed a writ petition. (A. Ys. 2002-03 to 2006-07)Coca Cola India Inc. v. Addl. CIT & Ors. (2011) 336 ITR 1 / 236 CTR 561 / 48 DTR 249 (SC)

FOREIGN JUDGMENTS Transfer Pricing - Australian Tax Office Ruling on Transfer Pricing Implications.The Australian Taxation Office has issued a ‘Taxation Ruling’ dated 9.2.2011 in which it has discussed the application of the transfer pricing provisions to business restructuring by multinational enterprises. The Ruling considers situations where such transfers occur between MNE members to implement changes in the MNE’s existing business arrangements or operations. Common examples are product supply chain restructurings involving conversion of a distributor into a sales agency arrangement or of a manufacturer into a provider of manufacturing services. Business restructurings also commonly involve the transfer of the ownership and management of intangibles such as patents, trademarks and brand names. The Ruling explains the following process for setting or reviewing transfer pricing

Step 1: Characterize the international dealings between the associated enterprises in the context of the taxpayer’s business

Step 2: Select the most appropriate transfer pricing methodology or methodologies

Step 3: Apply the most appropriate method and determine an arm’s length outcomeThe Ruling refers extensively to the “Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (OECD Guidelines)”.The Ruling also gives practical examples to explain the transfer pricing law.Source: www.itatonline.org



Transfer Pricing – Holding and Subsidiary Co. - Canada Court Ruling – “Implicit support” by holding company to subsidiary to be considered in determining “arms length” price.In determining the arms length price, all economically relevant factors (including the “implicit support” that the subsidiary enjoys from the holding company) have to be considered. The explicit guarantee by the holding company also has a value to the subsidiary. The “yield method” can be adopted which requires a comparison between the credit rating which an arm’s length party, in the same circumstances as the assessee, would have obtained and the credit rating which would have been obtained without the explicit guarantee. The Queen v. General Electric Capital Canada Inc. www.itatonline.org

General Anti Avoidance Rule (GAAR) Law ExplainedThe assessee, a Canadian Co controlled by its sole director Peter Cohen, earned capital gain of $7.7M from the transfer of property. Another company named “Rcongold Systems Inc” which was controlled by the assessee issued 8,000 voting “common shares” for a consideration of $8M to the assessee. Thereafter, Rcongold issued 80,000 Class “E” non-voting preferred shares with a redemption price of $100 each to the shareholders (the assessee) by way of dividend. The redemption price of the Class “E” non-voting preferred shares was identical to the fair market value (“FMV”) of the common shares. The said 8,000 “common shares” of Rcongold were sold by the assessee to “the Peter Cohen Trust” for an amount of $65, which resulted in the assessee reporting a capital loss of $7.9 M. The assessee’s claim to set-off the said capital loss of $7.9M against the capital gain of $7.9M was denied by the Assessing Officer on the ground that the scheme was one for “tax avoidance” and hit by the “General Anti Avoidance Rule” (“GAAR”) in s. 245 of the Canadian Income-tax Act. HELD upholding the stand of the Assessing Officer:

(i) For the GAAR in section 245 to apply, three aspects have to be satisfied

(a) the assessee must obtain a “tax benefit” from a “transaction” or “series of transactions”,

(b) the transaction(s) must be an “avoidance transaction” in the sense of not having been “arranged primarily for bona fide purposes other than to obtain the tax benefit” and

(c) the avoidance transaction(s) must be abusive of the provisions of the Act, the burden being on the Assessing Officer to establish the abuse;

(ii) On facts, all three requirements were satisfied because

(1) there were a “series of transactions” comprising of (a) the incorporation of Rcongold, (b) the subscription for shares of Rcongold by the assessee, (c) the declaration of a stock dividend by Rcongold,

(d) the creation of the trust and (d) the sale by the assessee of shares of Rcongold to the trust and there was a “tax benefit” as a result of the transactions;

(2) the primary purpose of each transaction in the series was the avoidance of tax. While the incorporation of Rcongold and the issuance by it of common shares were not avoidance transactions in and of themselves, they were necessary steps taken in furtherance of the scheme. The primary purpose of the


entire series of transactions was to obtain a tax benefit and so the entire series of transactions is an avoidance transaction;

(3) The transactions amounted to “abusive tax avoidance” because they sought to defeat the underlying rationale of the capital loss provisions in the Act. The assessee sought to create an “artificial capital loss” without incurring any “real economic loss”. Triad Getsco Ltd. v. H. M. the Queen (Canada Tax Court). www.itatonline.org

Dependent Agent Permanent Establishment - Tests to determine Agent’s right to bind, & dependence on, principal.The assessee, a company registered in the Netherlands but resident in Ireland for tax purposes appointed Dell AS, a Norwegian company, as its “commissionaire” for sales to customers in Norway. Dell AS entered into agreements in its own name and its acts (under the commission agreement and Commission Act) did not bind the principal. The assessee claimed that it was not taxable in Norway in respect of the products sold through Dell AS on the ground that Dell AS was not its “Dependent Agent Permanent Establishment” (DAPE) under Article 5(5) of the Norway-Ireland DTAA on the ground that (a) the agent had no authority to enter into contracts “in the name of the assessee” and legally bind the assessee and (b) the agent was not a “dependent” agent. However, the income-tax department took the view that Dell AS constituted a PE under Article 5(5) of the DTAA and that 60 percent of Dell Products’ net profit on sales in Norway was attributable to the PE. This was confirmed by the Oslo District Court. On appeal by the assessee to the Court of Appeal, HELD dismissing the appeal:

(i) Under Article 5(5) of the DTAA, an agent is considered a permanent establishment for the principal if two conditions are fulfilled (i) the agent must be “dependent” on the principal and (ii) the agent must have the right to conclude contracts “in the name of” the principal. The question whether the agent has the authority to conclude contracts on behalf of the enterprise has to be considered, not from a literal sense whether the contracts are “in the name of the enterprise”, but from a functional sense whether the agent “in reality” binds the principal. The objective of Article 5 (5) is to protect the principle of source taxation, i.e. that the tax shall be due to the country where the revenue was created. This principle would be disregarded if only the commission relationship was considered despite the financial and legal attachment between the agent and the principal being strong. To ask if Dell AS “in reality” binds Dell Products is in accordance with the functional interpretation of Article 5(5). The “substance” must prevail over the form. The fact that a commissionaire under the Commissionaire Act and the commission agreement does not bind the principal through his sales is not enough to rule out that a permanent establishment does not exist (Vienna Convention, OECD Model Convention Commentary, Commentaries by Klaus Vogel & ArvidSkaar considered, decision of the French SAT in Zimmer that as the commissionaire did not bind the principal, it was not a PE despite dependence on the principal not followed);

(ii) On facts, Dell Products was “in reality” bound by the contracts concluded by Dell AS because (a) all sales were made under the trademark “Dell”; (b) the sales were made on standard / approved conditions laid down by Dell Products; (c) in practice, all of the agent’s agreements were honoured by the principal and (d) there were no instances where the agent’s sales have not been accepted by the principal;

(iii) The question whether the agent is “dependent” on the principal has to be decided on the application of various tests such as the degree of instruction and control. On facts, Dell AS was “dependent” on Dell Products because (a) Dell AS was only allowed to sell permitted products on conditions of prices and


guarantees determined by Dell Products, (b) there was an overlap of board members in the two companies and a board member of Dell Products was the general manager of Dell AS, (c) due to the integrated accounting system of the Dell companies Dell Products had full insight to the finances of Dell AS, (d) under the commission agreement, Dell Products had access to Dell AS’ premises, (e) Dell AS sold goods as a commissionaire only on behalf of Dell Products though it had the theoretical right to sell for others; (f) all business of Dell AS was done under the trademark Dell, its letterheads, agreements and advertisements had the logo “Dell”. Dell AS was thus “branded” identically as the rest of the Dell Group, but without owning the brand. All these facts made Dell AS fully dependent on the principal. Without the commission agreement, Dell AS may as well close down its operations. The fact that the agent acted independently in matters of staff hire, purchase and lease of assets and premises, etc was irrelevant because the “big picture” showed Dell AS to be dependent on Dell Products;

(iv) The determination of profits “attributable” to the PE has to be done as if the agent was “independent” of the principal. On the methods to be used, Article 7(2) of the DTAA provides for the “direct method” of allocating all costs and revenue between the HO and the PE while Article 7(4) provides for the “indirect method” of allocating only the net profits using keys such as sales, revenues, expenses, number of employees, capital structure or a combination of these factors. In Norway, the “indirect method” is in practice. This is practical because the accounts do not permit individual items of income and expenditure to be identified for allocation purposes and also because it gives a result which is in accordance with the arm’s length principle. While under Article 7(2), a two-step procedure has to be adopted by first determining a commercial remuneration for Dell AS and then a commercial profit for other functions performed by the PE, under Article 7(4) it is sufficient that the result to a reasonable degree corresponds to the arm’s length principle and requires that the PE should be allocated revenues in accordance with its functions, risk and assets used. On facts, the value creation occurred through sales made by Dell AS and it was “the major value driver”. Dell Products’ functions and contribution to the value creation was limited compared to the activity of Dell AS. Consequently, allocating 60% of Dell Products’ profits from sales in Norway to the PE was reasonable (over & above the assessment of commission in the agent’s hands). Dell Products v. Tax East (Norway Court of Appeal) www.itatonline.org

Software License income is assessable as “Royalty”.International Business Machines Corporation & IBM World Trade Corporation (IBM), both US companies, entered into a “Software License Agreement” with IBM Australia, an Australian company, under which they granted the latter “the non-exclusive rights (i) to license and distribute copies of IBM Programs for their ultimate use by customers, (ii) to use such IBM Programs in revenue producing activities, (iii) to use such IBM Programs internally, (iv) to make or have made copies for the purposes described above, for distribution to affiliated companies etc“. In consideration, IBM Australia agreed to pay IBM a fee of 40% of the revenue billed for each copy of an IBM program distributed to a third party. IBM Australia initially withheld tax on the payments on the basis that it constituted “royalty” under Article 12(4) of the Australia-USA DTAA though it later sought a refund on the basis that the whole payment was not royalty which was rejected by the Department. IBM filed an application for a declaration that the whole of the amounts received was not assessable as “royalty“. HELD dismissing the application:

(i) Under Article 12(4) of the Treaty, “royalty” is defined to mean “consideration for…the right to use any copyright, patent, design or model, plan, secret formula or process, trademark or other like property or right” (Article 12(4)(a)(i)) or “…. the supply of technical … or commercial knowledge or information” or for “the supply of any assistance of an ancillary and subsidiary nature” to enable the application of the rights


referred to in Article 12(4)(a)(i) or the knowledge/information referred to in Article 12(4)(b)(i) (Article 12(4)(b)(ii));

(ii) On facts, the argument that the SLA is in essence a distributorship agreement for the marketing of IBM computer programs and that the IP licenses granted to IBMA is only to enable it to carry on the function of a distributor is not acceptable. The SLA is not a distribution agreement which confers distribution rights independently of the grant of IP rights. There is no reference in the SLA to the payments being for the exercise of general distributorship rights. Rather, the payments are described as being for the acquisition of the stated IP rights. The detail of the SLA concerns the definition of IP and IP rights. There is no such detail with respect to distribution rights. The rights/content granted by the SLA are, in each case, rights/content of a kind contemplated by Article 12(4) and so the whole of the consideration is assessable as “royalty”. International Business Machines Corp v. Comm. of Taxation (Federal Court of Australia) www.itatonline.org

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