Recent Judicial Rulings with Special Emphasis on Corporate Taxation · Recent Judicial Rulings with...

Recent Judicial RulingsBCAS

Recent Judicial Rulings with Special Emphasis on Corporate Taxation

Rajan Vora

26 April 2012


Sr. No. Particulars

1. Issues arising in section 14A

2. Issues under section 80IB(10)

3. Issues under section 80HHC

4. Taxability of Royalty under the Act and Treaty

5. Issues under section 40(a)(ia)

6. Allowability of Depreciation on intangibles, etc.

7. Taxability of capital gain – Section 45 and Section 54EC,

including non-compete

8. Reopening under section 147

9. Revision under section 263

INDEX

Issues arising in section 14A


Godrej & Boyce Mfg. Co. Ltd.[(2010) 328 ITR 81 (Bom HC)]

► Section 14A and Rule 8D are constitutionally valid

► Proximate relationship required between expenditure (direct and indirect) to

invoke disallowance under section 14A

► Rule 8D cannot be invoked mechanically by the Tax Authority. The

procedural provisions requires satisfaction of the Tax Authority having regard

to the accounts of the taxpayer that the claim made by the taxpayer is not

correct. Such satisfaction must be an objective satisfaction arrived at in good

faith and on relevant consideration of all facts and circumstances. Also, the

Tax Authority must record reasons for non-satisfaction with the claim of the

taxpayer [Also upheld in the decision of Delhi ITAT in the case of Jindal

Photo Limited – ITA No.4539/Del./2010 dt 7 January 2011]

► The Section is framed on well-settled principle of taxation to tax the net

income that is to say, gross income minus the expenditure. Hence, the literal

interpretation of the Section does not result in any absurdity

► Rule 8D will apply from AY 2008-09. For earlier years, the tax authority has

to apply reasonable method for quantifying section 14A expenditure


Interest expenditure cannot be disallowed under Section 14A where investment is made out of interest-free funds

Hero Cycles Ltd. - Punjab & Haryana High Court

[323 ITR 518]

► Issue of disallowance under Section 14A of the Income Tax Act of the expenditure incurred in relationto exempt income.

► The HC held that the provisions of the Section cannot be invoked to disallow interest expenditure,where it is factually found that no interest bearing funds are utilized for making investments which giverise to exempt dividend income.

► It further held that no substantial question of law arose where the Income Tax Appellate Tribunal(ITAT) deleted the disallowance, based on such factual finding.

Issue under section 14A


Position after Godrej & Boyce, decisions following

► Bunge Agribusiness (India) (P) LTD - (2011) 132 ITD 549 (Mumbai)

► Sudhir Genset Ltd (2010) 134 TTJ (Del)(UO) 78

► Digital Electronics LTD (2011) 135 TTJ (Mumbai) 419

► Delite Enterprises (P) LTD. (2011) 135 TTJ (Mumbai) 663

► J.P. Morgan India (P) Ltd. (2011) 46 SOT 250 (Mumbai)

► Yatish trading co. (P) ltd. (2011) 50 DTR (Mumbai)(Trib) 158

► Jindal Photo Ltd. (ITA No. 4539/D/10) AY 2007-08 dated 22 December 2010

(Del)

► Multi Commodity Exchange of (India) Limited (ITA No. 1050/M/10) AY 2008-

09 dated 5 August 2011

► Jindal Photo Ltd. (ITA No. 814/D/11) AY 2008-09 dated 23 September 2011

(Del)




Issue 1 - Whether Rule 8D is applicable in case of investments held as stock-in-

trade?

► Yes, as held in the case of ITO v. Daga Capital (312 ITR 1)

► Yes, as held in the case of Cheminvest Ltd. v. ITO (121 ITD 318)

► No, as held in the case of CIT v. Leena Ramchandran (235 CTR 512)

Karnataka High Court (HC) (ITA No. 359 of 2011 dt: 28 February 2012) in the

case of CCI Ltd - On the issue of disallowance of expenditure incurred in

relation to exempt income by way of dividend on shares held as „stock-in-trade‟.

The HC held that when no expenditure is incurred by a taxpayer in earning

dividend income, notional expenditure cannot be disallowed under Section 14A.

The Section cannot be applied to disallow expenditure incurred on shares

purchased for trading purposes from interest-free funds merely because such

shares give rise to incidental exempt dividend income.



The Karnataka HC, in this ruling, has taken a view in favor of taxpayer and held

that the rigor of the Section cannot be applied to expenditure incurred on shares

purchased for trading purposes merely because such shares give rise to

incidental exempt dividend income.

However, the issue is highly controversial. On a similar issue, the Delhi HC (in

the case of Maxopp - 203 Taxmann 364) and Karnataka HC (in the case of

Catholic Syrian Bank - 237 CTR 164) have held in favor of the Tax Authority.

These contra rulings do not appear to have been cited or considered by

Karnataka High Court.

Issue 2 - Whether while computing interest disallowance, interest earned can be

reduced?

► Yes, as held by Mumbai Tribunal in the case of Morgan Stanley India

Securities Private Limited. [ITA No.5072/Mum/2005 dt: 13 April 2011]



Issue 3 - Whether there can be disallowance of interest if mix funds are available

and it can be demonstrated that surplus funds were utilized for making

investment in tax free source?

► No, as held in the following decisions:

► Reliance Utilities & Power Limited ( 313 ITR 340) (Bom HC)

► International Nederlanden Bank (ITA No. 5098 & 5099 / Mum 2004)

► Punjab State Co-operative and Marketing Fed. Ltd. v. ACIT (ITA No.

579/Chd/2011) (Chandigarh ITAT)



Issue 4 - Sec 14A disallowance on interest expense not attracted since interest

income exceeded interest expense

► Kolkata ITAT - Trade Apartment Ltd [ITA No. 1277/Kol/2011

dt.:28/9/2011] - Sec 14A disallowance on interest expense not attracted

since interest income exceeded interest expense; Disallowance under

section 14A read with Rule 8D not to exceed actual expenditure incurred

in relation to exempt income

► Recently, a Delhi Bench of ITAT in Gillette Group [ITA No.

267/Del/2012 dt.: 4/11/2011] had taken a similar view that Sec 14A

disallowance (read with Rule 8D) could not exceed actual expenditure

incurred in relation to exempt income.

► On the other hand, a Chennai bench of ITAT in Lakshmi Ring

Travellers [ITA No. 2083/CHNY/2011. dt.: 9/12/2011] )] held that Sec

14A is a deeming provision for presumptive disallowance. Thus, Sec 14A

disallowance would be attracted by the force of statute even when the

taxpayer claims that no expenditure incurred in relation to exempt income.



Issue 5 - Rule 8D cannot be invoked while computing book profit under section

115JB of the Act, since there ia already adjustment permissible in section 115JB

► Yes, Goetze (India) Ltd [32 SOT 101 (Del)]

In computing book profits under section 115JA/JB, if actual expenditure to earn

tax-free income not debited in P&L A/c, s. 14A cannot apply

► Quippo Telecom Infrastructure Ltd vs. ACIT (ITA No. 4931/Del/2010 dt:

29/06/2011) (ITAT Delhi)

► Mumbai Tribunal in the case of M/s Varun Shipping Company Ltd., (Taxpayer)

[ITA No. 5576/Mum/2011 dt.: 30 November 2011], where the issues before the

tribunal were about applicability of s.14A of the Income Tax Act to tonnage tax

companies and computation of book profit of shipping business for exclusion from

taxation under section 115JB.

On the first issue, the Tribunal held that provisions of s.14A are not applicable to

tonnage tax companies which are covered by presumptive taxation. On the second

issue, the Tribunal held that exclusion of book profits related to shipping business

should be with respect to same amount of book profit as computed in accordance with

provisions of s.115JB of the Act.



Issue 6 - Disallowance of administration expenditure

If expenses incurred cannot be identified, can formula as per Rule 8D be used?

Can disallowance as worked out exceed actual expenditure?

► Vatican Commercial Ltd. (ITA No. 880/Kol/2011) dated 30 August 2011

(Kolkata Tribunal)

► M/s Philips Carbon Black (ITA No. 566/Kol/2009) dated 10 June 2011

(Kolkata Tribunal Third Member)

► Zensar Technologies (ITA No. 4538/M/2005) dated 15 December 2010

(Mumbai Tribunal)



Issue 7 – Even while setting aside the matter by appellate authority,

disallowance cannot exceed, the disallowance originally proposed by AO?

Top Star Mercantile (Bom HC) [334 ITR 374]

As the AO had not made any disallowance under section 14A, the tribunal

could not have not touched the question of 14A and made observations

prejudicial to the Assessee while remanding the matter. It had no jurisdiction

to issue directions to the AO decide afresh on the touchstone of section 14A

and Daga Capital Management Pvt. Ltd.. Accordingly, the order of tribunal to

the extent it directed consideration of section 14A was quashed & set aside.

Issues under section 80IB(10)

Recent Judicial Rulings


Section 80-IB(10): Multiple Housing Projects On 1 Acre Plot Permissible

M/s. Vandana Properties (Bombay High Court)

[ITA No.3633 of 2009 dt 28 March 2012]

The High Court considered the following questions on interpretation of section 80-IB(10):

(i) What is a ‚housing project‛ under section 80-IB(10)?,

(ii) Whether if approval for construction of ‘E’ building was granted by the local authority subject to the conditions set out in the first approval granted on 12.5.1993 for construction of A and B building, construction of ‘E’ building is an ‚extension‛ of the earlier housing project for which approval was granted prior to 1.10.1998 and, therefore, benefit of section 80IB (10) cannot be granted?,

(iii) Whether the housing project must be on a vacant plot of land which has minimum area of one acre and if there are multiple buildings and the proportionate area for each building is less than one acre, section 80-IB(10) can be denied?, whether the merger of two flats into one so as to exceed the maximum size of 1000 sq feet violates the condition set out in section 80IB (10)?



The High Court held:

► As the expression ‘housing project’ is not defined, it must have the common parlance meaning and means constructing a building or group of buildings consisting of several residential units. The approval granted to a building plan constitutes approval granted to a housing project. Construction of even one building with several residential units of the size not exceeding 1000 square feet would constitute a ‘housing project’ under section 80IB (10);

► ‘E’ building is an independent housing project and not an extension of the housing project already existing on the plot because when the earlier plans were approved, ‘E’ building was not even contemplated and came into existence much later. The fact that the approval was granted on the same terms as that granted to the other buildings does not make it an ‚extension‛;

► Section 80IB (10)(b) specifies the size of the plot of land but not the size of the housing project. While the plot must have a minimum area of one acre, it need not be a vacant plot. The object of s. 80IB (10) is to boost the stock of houses. There can be multiple housing projects on a plot of land having minimum area of one acre;

► On facts, as there was no merger of flats and no application was made to the local authority seeking merger of two flats, there was no violation.



S.80IB(10):Deduction – Undertaking Developing and building Housing Project Eligible even if developer not ‚owner‛ of land.

Radhe Developers ( 2012) 204 Taxman 543(Guj.)(High Court)

► The taxpayer entered into a ‘development agreement’ with the owner of the land pursuant to which it agreedto develop the land. Deduction under section 80‐IB(10) in respect of the profits arising from the saidactivity was claimed on the ground that it was ‚derived from the business of undertaking developing andbuilding housing project approved by the local authority‛. The Assessing Officer & CIT(A) rejected the claimon the ground that the taxpayer was not the ‚owner‛ of the land and that the approval of the local authorityto, and the completion certificate of, the ‚housing project‛ was given to the owner and not to the taxpayer.However, the Tribunal allowed the claim.

► On appeal by the department to the High Court, HELD dismissing the appeal:

► Section80IB(10) allows deduction to an undertaking engaged in the business of developing and constructinghousing projects. There is no requirement that the land must be owned by the taxpayer seeking thededuction



► Under the development agreement, the taxpayer had undertaken the development of housing project at its own risk and cost. The land owner had accepted the full price of the land and had no responsibility. The entire risk of investment and expenditure was that of the taxpayer. Resultantly, profit and loss also accrued to the taxpayer alone. The taxpayer had total and complete control over the land and could put the land to the agreed use. It had full authority and responsibility to develop the housing project by not only putting up the construction but by carrying out various other activities including enrolling members, accepting members, carrying out modifications engaging professional agencies and so on. The risk element was entirely that of the taxpayer. The taxpayer was a ‚developer‛ in common parlance as well as legal parlance and could not be regarded as only a ‚works contractor‛. The Explanation to section 80IB inserted

► w.r.e.f. 1.4.2001 has no application as the project is not a ‚works contract‛. Further, as the taxpayer was, in part performance of the agreement to sell the land, given possession and had also carried

► out the construction work for development of the housing project, it had to be deemed to be the ‚owner‛ under section 2(47)(v) r.w.s. 53A of the TOP Act even though formal title had not passed



S. 80IB(10) Once the project is approved by the local authorities, then deduction has to be allowed on

the whole of the project

Harsh Construction (Mum Tribunal)

[ITA No.7050/Mum/2010 dt 12 March 2012]

Clause (d) inserted in section 801B[10) with effect from April 1, 2005, is prospective and not retrospective andhence could not be applied for the period prior to April 1, 2005. Since deduction under section 801B[1Oj were onthe profits derived from the housing projects approved by the local authority as a whole. ITAT held that once theproject is approved by the local authorities, then deduction has to be allowed on the whole of the project.

Followed Brahma Associates – Bombay High Court [ 51 DTR 298]

Wherein it was held that upto 31st March, 2005, deduction under s. 80-IB(10) is allowable to housing projects approved by the local authority having residential units with commercial user to the extent permitted under the DC Rules/Regulations framed by the respective local authority irrespective of the fact that the project is approved as ‘housing project’ or ‘residential plus commercial’



Tribunal was not justified in holding that upto 31st March, 2005, deduction under s. 80-IB(10) would be allowable to the projects approved by the local authority having residential building with commercial user upto 10 per cent of the total built-up area of the plot; cl. (d) inserted in s. 80-IB(10) w.e.f. 1st April, 2005 is prospective and not retrospective



Amendment and insertion of clause (d) is prospective in nature

► Bombay High Court’s decision in case of Saroj Sales Organisation approving the Mumbai Tribunal’s reported at 3 DTR 494/ 115 TTJ 485 (Mum)

► H.D. Enterprises ITA No. 5712/M/08 dated 6 August 2009

► M/s. Pathare & Associates (ITA No. 993/Mum/09)

► Hiranandani Akruti JV Vs. DCIT 39 SOT 498 (Mum)

► Raviraj Construction (Royal) (ITA No. 6356/M/08) dated 30 September 2010 (Mum Trib)

► Anik Development Corporation (ITA No. 3175/M/09) dated 30 September 2010 (Mum Trib)

► Pramukh Enterprises (ITA No. 6055/M/09) dated 26 Nov 2010

► Shree Ashapura Construction (ITA No. 179/M/09 dated 28.01.2011

► Chedda Construction ITA NO. 2764/M/09 dated 27 April 2011

► Shree Ashapura Construction (ITA No. 370/M/10 dated 13 May 2011

► Bhumiraj Homes Limited,(ITA. No.506/Mum/2009) dated 20 May 2011



Even single building qualifies as housing project, eligible for Sec 80IB benefit

Rahul Construction Co. [TS-227-ITAT-2012(PUN)]

Date of approval of building plan, and not date of approval of project, relevant for determining period of project completion u/s 80IB; Even single building satisfying conditions u/s 80IB qualifies as 'housing project'; Sec 80IB deduction allowed on buildings forming part of project & completed within prescribed time limit; Mumbai ITAT decisions in Vandana Properties and Mudhit Madanlal Gupta relied

Calculation of Build Up Area (‘BUA’) and Amendment in 80IB(14) is prospective in nature by Finance Act 2004

► Bombay High Court’s decision in case of Sheth Developers approving the Mumbai Tribunal’s reported at 33 SOT 277 (Mum)

► Anriya Project Management Services Pvt Ltd (ITA No. 138 of 2010 dated 29 February 2012) (Karnataka High Court)



Deduction to be allowed if building constructed on existing building

► Ganga Developers ITA No. 1089 of 2009 (Bom) dated 9 September 2009

► Ganga Developers Vs. DCIT ITA No. 9136/M/04 (Mum) dated 28 June 2007

► CBDT letter dated 04.05.2001 (F No. 205/3/2001/ITA.II)

► Khyati Finacial Services (Mum) (Trib)

Amendment in 80IB(10) by Finance Act 2010 to not to sell the flat to the related person is prospective

► Emgeen Holdings P. Ltd v. DCIT [ TS-409-ITAT-2011(Mum)]



Even if some of the flats have area exceeding 1500 sq. ft. proportionate deduction is to be allowed

► Brahma Associates 30 SOT 155(SB)(Pune) , approved by Brahma Associates – Bombay High

Court [ 51 DTR 298]

► Air Developers 25 DTR 287 (Nag)

► Bridage Enterprises (P) Ltd. 119 TTJ 269 (Bang)

► Bengal Ambuja Housing Development Ltd. ITA No.1595/Kol/2005,dated 24 March 2006 (Affirmed by the Kolkata High Court)

► Sheth Developers 33 SOT 277(Mum)

► Bridage Enterprises P. Ltd. 14 DTR 371 (Bang)

► G.V. Corporation 38 SOT 174 (Mum)

► KZK Developers 130 TTJ 57 (Cut) 9. SJR Builders Vs. ACIT 3 ITR 569 (Bang)



Pravin Kumar Bhogilal Shah (2012) 66 DTR 236 (Guj.)(High Court)

Vinayak Construction (2012) 66 DTR 233 (Guj.)(High Court)

► S. 147 : Reassessment, beyond four years for housing project. Reassessment held to be invalid only on the basis of retrospective amendment as there is no failure to disclose fully and truly all material facts. [S. 80IB(10)]

► taxpayer claimed the deduction under section 80(IB)(10) after enquiry the deduction was allowed. The amendment was introduced by Finance Act, 2009, inserting Explanation with retrospective effect from 1st April, 2001 which denied benefit of deduction under section 80IB(10) to works contractors execution housing project. The only reason for issuing the notice, was amendment brought in the statute book with retrospective effect. The said notice was challenged before the High Court. High Court quashed the notice and held that reopening only on the basis of retrospective amendment of law is not justified.

Ganesh Housing Corporation Ltd.(Guj)(High Court)[special civil

application no. 15067 of 2011. dt.: 12/3/2012]

► S. 147 : Reopening, even within 4 years, on basis of retrospective amendment to section 80IB(10) is held to be invalid.

Taxability under section 80HHC


Sr. No. Case name of Special Bench

High Court (HC) Supreme Court (SC)

1

Issue

Topman Exports [124 ITD 1 ( Mumbai SB)]

Reversed by Bombay HC in case

of Kalpataru Colours and

Chemicals [328 ITR 451

(Bom)]

Date: 29 June 2010

Decision of Special bench

upheld and Bombay HC

reversed. Topman Exports

(SC)[ 342 ITR 49]

Date : 8 February 2012

Whether entire sale proceeds or only profit on transfer of Duty Entitlement Pass Book (DEPB) would be eligible for export profit deduction.

Ruling SC held that DEPB has an inherent cost and, hence, the excess

over face value of DEPB alone represents „profit‟. The face value of

DEPB will qualify as „cash assistance‟.

Export profit deduction is, inter alia, available in respect of export

incentives in the form of cash assistance and profit on transfer of

DEPB.


Sr. No. Case name of Special Bench

High Court (HC) Supreme Court (SC)

2

Issue

Lalson Enterprises [89 ITD 25 ( Delhi SB)]

Reversed by the Bombay HC in case of Asian Star [326 ITR 56 (Bom) (HC)]Date : 19 March 2010

Decision of Special bench upheld and Bombay HC reversed.ACG Associated Capsules Pvt. Ltd vs. CIT (SC) [ 247 CTR 372]Date: 8 February 2012

Whether, while determining export profits deduction under the Income Tax Act (the Act), exclusion for non-export receipts is to be made with respect to net amount or gross receipts.

Ruling The SC held that, given that the exclusion is from „profits‟ and not gross

receipts, reduction of non-export receipts should be made with respect to

net amount. This SC ruling settles the long-drawn controversy on the

scope of exclusion of non-export receipts while computing export profits

deduction. The SC ruled that, while computing export profits deduction,

the exclusion of non-export receipts is to be made at net amount.


Al-Kabeer Exports Ltd - Supreme Court

[Petition(s) for Special Leave to Appeal (Civil) No(s).32274/2010 dt: 3

February 2012]

► In computing “book profits” under section 155JA & 115JB, the taxpayer

claimed that the deduction admissible thereunder under section 80HHC had to

be computed on the basis of the “book profits” and not on the basis of the

income computed under the normal provisions of the Act. This claim was

upheld by the Tribunal by relying on the judgement of the Special Bench in

Syncome Formulations [106 ITD 193]. On appeal by the Revenue, the High

Court (233 CTR 443 (Bom)) reversed the Tribunal.

► On appeal by the taxpayer, HELD reversing the High Court:

► In view of this Court‟s Order in the case of Bhari Information Technology

Systems [328 ITR 380] upholding the judgment of the Special Bench of

Tribunal in Syncome Formulations (I) Ltd, the impugned judgment of the

High Court is set aside and the judgments of the ITAT in these cases stand

affirmed.

For section 115JA/JB, section 80HHC deduction to be computed as per P&L Profits and not normal provisions


Asian Star Co – Bombay High Court

[ (2010) 326 ITR 56]

As per Expln. (baa) to s. 80HHC, 90 per cent of the gross interest received by

the assessee has to be reduced from the profits and gains of the business for

the purposes of computing the deduction under s. 80HHC and not the net

interest.

Section 80HHC deduction


Bhari Information Technology Systems (P) Ltd – Supreme Court (SC)

[340 ITR 593]

► The SC ruled that while making downward adjustment to „book profit‟ in

respect of export profits, the basis of adjustment should be the net profit as

per Profit and Loss Account (book profit base) and not the taxable income

computed as per normal provisions of the ITL. Accordingly, even if the taxable

income is Nil under normal provisions, the taxpayer will still be eligible for

deduction of export profits computed on book profit base for MAT purposes.

► The SC ruling settles the controversy over the basis of export incentive

deduction for MAT purposes in favor of taxpayers and effectively overrules

some High Court rulings which had taken a contrary view.

► The Finance Act 2011 carried out a retrospective amendment with effect from

tax year 2004-05 withdrawing the deductions available for export profits under

MAT provisions. Thus, the impact of the present decision will be restricted to

pending matters upto tax year 2003-04.

Issue of deductibility of export profits from the net profit while computing ‘book profit’ for determining (MAT) liability

Taxability of Royalty


Samsung Electronics Co. Ltd. (Karnataka High Court)

[64 DTR 178]

► Issue of whether payment for purchase of shrink-wrapped computer program

would be in the nature of „royalty‟, under the provisions of the Indian Tax Laws

(ITL) and the applicable Double Taxation Avoidance Agreements (DTAAs).

► As the end-users of the computer program were granted a license to make

copies of the computer program for back-up or archival purpose, the HC was

of the view the end users were granted a copyright under the Indian Copyright

Act 1957 (ICA) , in the absence of which, making such a copy would have

been an infringement of the ICA.

► Accordingly, the HC held that the payment was for right to use a copyright and

would be characterized as royalty under the ITL as well as under the DTAAs.

Payment for purchase of shrink-wrapped computer program characterized as royalty


Ericsson Radio Systems AB - Delhi High Court

[204 Taxman 192]

► The two main issues were that were before the High Court were:

(i) whether sale of telecommunication equipment to cellular operators in India

constituted a business connection under the provisions of the Indian Tax Laws

(ITL) and

(ii) whether payments received for software that was sold as part of the

telecommunication equipment is taxable as royalty under the ITL and the

India-Sweden Double Taxation Avoidance Agreement (Sweden DTAA).

► On the first issue, the HC ruled that as the sale of the telecommunication

equipment took place outside India and title in goods also passed outside

India, the Taxpayer did not have a business connection in India.

► On the second issue, the HC ruled that the consideration paid by the cellular

operators can be treated as royalty only if the cellular operators had obtained

all or any of the copyright rights in such software that is protected in India as a

literary work. A distinction also needs to be made between acquisition of a

„copyright right‟ and a „copyrighted article

Tax treatment of payments for software bundled with hardware


Ericsson Radio Systems AB - Delhi High Court

[204 Taxman 192]

► In the present case, the software was embodied in the telecommunication

equipment that was supplied and software could not be used independently.

Hence, as the software merely facilitated the functioning of the

telecommunication equipment and formed an integral part it, no part of the

payment could be classified as payment towards royalty.

Tax treatment of payments for software bundled with hardware


Comparative summary of Samsung and EricssonSerial

Number

Particulars Karnataka HC in

Samsung

Delhi HC in

Ericsson

1 Taxable as royalty under

section 9(1)(vi)

Yes Does not amount to

„royalty‟

2 Taxable as Royalty under DTAA Yes Does not amount to

„royalty‟

3 Copyright or copyrighted article Copyright Copyrighted Article

4 Providing software amounts to

use of „Process‟

Yes Not discussed.

discussed in Asia

Satellite

Telecommunications

Co Ltd 332 ITR 340

(Del)

5 Whether software is a literary

work?

Separate from other

literary works

Yes

6 Reliance on SC‟s ruling in TCS

on sales tax

TCS cannot be

relied

TCS relied on

7 Reliance on OECD

Commentary

OECD cannot be

relied on

OECD relied on


Solid Works Corporation - Mumbai Tribunal

(ITA No. 3219/M/2010) dated 8 January 2012

► The taxpayer sold “shrink-wrap application software” called “Solid works 2003″

to customers in India and claimed that the same was “business profits” and

not assessable to tax as it did not a PE in India.

► The AO held that the income was assessable to tax as “royalty” under section

9(1)(vi)/ Article 12(3) though the Tribunal (for an earlier year) reversed it on

the ground that the product was a “copyrighted article” and not “copyright“.

► Tribunal held that consideration paid merely for right to use cannot be held to

be royalty and the ratio would also apply when “shrink wrap” software is sold.

Where two views are possible, the view in favour of the taxpayer has to be

preferred.

Tax characterization of shrink wrapped computer software


People Interactive (I) P. Ltd. – Mumbai Tribunal

(ITA No 2180/M/2009) dated 29 February 2012

► The taxpayer had availed 'advanced dedicated hosting solution services of

Rackspace Inc USA, a non resident, to host and run its matrimonial site.

► The certificate under section 195 stated that the amount paid was business

income for Rackspace and Rackspace had no Permanent Establishment in

India. Hence, under Article 7 of India- USA DTAA the payments were not

taxable in India.

► The issue before Tribunal was whether website hosting charges paid to

Rackspace US by Shaadi.com not 'royalty' under section 9(vi) or India-USA

DTAA.

► Website hosting charges paid to Rackspace US by Shaadi.com not 'royalty'

under section 9(vi) or India-USA DTAA

► Taxpayer has no physical access or right to operate equipment situated

outside India and payment is not for use of equipment but for hosting services

Taxability of website hosting charges


Allianz AG - Pune Tribunal

(ITA No. 1569/PN/08) dated 14 March 2012

► The taxpayer entered into a software license agreement with Bajaj Allianz life

Insurance and Bajaj Allianz General General Insurance whereby the latter

companies were granted right to use software for internal purpose. The AO

held that the license income was assessable to tax as “royalty” under section

9(1)(vi).

► Whether the license charges earned by the taxpayer for granting right to use

the software, pursuant to software license agreement is liable to be taxed as

Royalty under the Income tax Act, 1961 and under the DTAA between India

and Germany.

► The Tribunal had held that what has been transacted in the license agreement

is only the grant of user right in the copyrighted software and not the use of

copyright itself and concluded in favour of the Taxpayer, that license charges

earned by the taxpayer was not liable to be taxed as royalty.

Taxability of software payments


► The FB seeks to retrospectively tax payments towards software payments as

„royalty‟ through insertion of new explanations to Section 9(1)(vi), which are as

under:

► Explanation 4 to Section 9(1)(vi) clarifies that the consideration for use or

right to use of computer software is royalty by clarifying that transfer of all

or any rights in respect of any right, property or information as mentioned in

Explanation 2, includes and has always included transfer of all or any right for

use or right to use a computer software (including granting of a license)

irrespective of the medium through which such right is transferred.

► Explanation 5 to Section 9(1)(vi) clarifies that royalty includes and has

always included consideration in respect of any right, property or information,

whether or not

(a) the possession or control of such right, property or information is with

the payer;

(b) such right, property or information is used directly by the payer;

(c) the location of such right, property or information is in India.

Implications of the proposed amendments by

Finance Bill 2012 (FB)


► Explanation 6 to Section 9(1)(vi) is inserted to bring to tax the payments

made for uplinking, downlinking signals transmitted by satellite or other

similar technology, Thus payments made for use of process whether secret

or not would be taxable as royalty.

These amendments will take effect retrospectively from 1st June, 1976 and

will accordingly apply in relation to the assessment year 1977-78 and

subsequent assessment years.

Implications of the proposed amendments by

Finance Bill 2012 (FB)

For further insight on taxability of software payments as royalty, refer

Article published in BCA Journal on April 2012 edition on the topic

"Controversy on Taxability of Cross-Border Software Payments"


► Issue: Whether Share brokers eligible for bad debts claim on un-recovered

balances of share transactions carried on behalf of clients?

► Shreyas Morakhia - Bombay High Court [342 ITR 285]

► Share brokers eligible for bad debts claim on un-recovered balances of share

transactions carried on behalf of clients

► Brokerage as well as value of the shares due from clients constitute „debt‟;

Conditions of Sec 36(2)(i) fulfilled as part of debt being brokerage taxed as

income;

► ITAT Special Bench (40 SOT 432) ruling upheld

Bad Debts

Disallowance under Section 40(a)(ia)


M/s. Alpha Projects Society P. Ltd - Ahmedabad Tribunal

[ITA No.2869/Ahd/2011 dated 23 March 2012]

S. 40(a)(ia): Special Bench verdict cannot be followed in view of High Court verdict

In AY 2005-06, the assessee made payments to contractors & for professionals &

technical services. Though TDS was deducted, it was paid after the end of the FY but

before filing the ROI. The assessee pleaded that s. 40(a)(ia), as amended by the FA

2010 w.e.f. 1.4.2010 to provide that no disallowance should be made if the TDS was

paid before the due date of filing the ROI should be held to be retrospective. However,

the AO & CIT (A), rejected the claim by relying on Bharati Shipyard Ltd 132 ITD 53

(Mum) (SB). On appeal to the Tribunal, HELD allowing the appeal:

The issue involved has now been decided by the Calcutta High Court in Virgin Creators

against the Revenue. However, it is noteworthy that the Special Bench of ITAT Mumbai

in the case of Bharati Shipyard Ltd has taken a view that the amendment is prospective

in nature and would apply accordingly. Respectfully following the decision of Virgin

Creators the order of the CIT(A) is not sustainable and the assessee's appeal is

allowed.

The same view has been taken in Rajamahendri Shipping (ITAT Vizag) and Piyush

Mehta (ITAT Mumbai)

Retrospective amendment in Section 40(a)(ia)


Rajamahendri Shipping & Oil Field Services Ltd - Vizag Tribunal

(ITA No. 352/Vizag/2008) dated 13 April 2012.

► For AY 2005-06, the AO disallowed Rs. 47.26 lakhs u/s 40(a)(ia) on the

ground that the TDS had not been paid in time. The assessee claimed that the

amendment to s. 40(a)(ia) by the Finance Act 2010 w.e.f. 1.4.2010 to provide

that no disallowance could be made if the TDS was paid on or before the due

date specified in s. 139(1) was retrospective in nature as held in CIT vs.

Virgin Creations and that the contrary ruling of the Special Bench in Bharti

Shipyard Ltd vs. DCIT 132 ITD 53 (Mum) could not be followed.

► HELD by the Tribunal:

► In Virgin Creations the Calcutta High Court has passed a reasoned order

and held that the amendment to s. 40(a)(ia) is retrospective in nature.


http://itatonline.org/archives/index.php/cit-vs-ms-virgin-creations-calcutta-high-court-s-40aia-amendment-by-fa-2010-is-retrospective/








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Rajamahendri Shipping & Oil Field Services Ltd - Vizag Tribunal

(ITA No. 352/Vizag/2008) dated 13 April 2012.

► The binding nature of the decision of the Special Bench when a lone decision

of non-jurisdictional High Court is available on the very same issue was

examined in the Third Member decision in Kanel Oil & Export Ltd 121 ITD

596 where it was held that where there is only a judgment of the non-

jurisdictional High Court prevails over an order of the Special Bench

even though it is from the jurisdictional Bench (of the Tribunal).

► As the Calcutta High Court‟s decision is the lone one on the issue whether s.

40(a)(ia) is retrospective, it has to be followed in preference to the decision of

the Special Bench of the Tribunal in Bharti Shipyard Ltd. Consequently,

amounts in respect of which TDS is paid on or before the due date of filing the

ROI is eligible for deduction.



Also refer the following decisions where it is held that, the only decision of non-jurisdictional high court will be binding decision:

► Prasad Production [37 DTR 418 (Che)(SB)]

► Saurashtra Kutch [ 305 ITR 227 (SC)}

► Thane Electricity [ 206 ITR 727 (Bom High Court)]

► Sanghvi & Doshi [ 131 ITD 151 (Che)(TM)]

Binding nature of decision


► Piyush C. Mehta (ITA No 1321/M/2009) dated 11 April 2009

► For AY 2005-06, the AO made a disallowance of expenditure incurred by the

assessee on the ground that the assessee had made the TDS payments u/s

194C after the end of the year.

► Before the Tribunal, the assessee claimed that as the TDS had been paid

before the due date of filing the ROI, no disallowance could be made as per s.

40(a)(ia) amended by the FA 2010 w.e.f. 1.4.2010.

► The Tribunal followed Calcutta High Courts order in case of Virgin Creations

and held that the amendment to s. 40(a)(ia) is retrospective from 1.4.2005 and

any payment of TDS on or before the due date for filing the ROI is sufficient.

► Hence, the Assessee‟s appeal allowed.

Note: Similar view is taken by Vizag Tribunal in case of Rajamahendri

Shipping & Oil Field Services Ltd vs. ACIT (ITA No. 352/Vizag/2008) dated

13 April 2012.



M/s Virgin Creations - Calcutta High Court

(ITA No 302 of 2011) dated 23 November 2011

► The taxpayer deducted tax at source from paid charges between the period

1.4.2005 & 28.4.2006 though it paid the TDS in July and August 2006. The

TDS was deposited after the end of the FY though before the due date of filing

of the return of income. The AO invoked s. 40(a)(ia) and held that as the TDS

had not been paid on or before the last day of the previous year, the deduction

was not admissible. The Tribunal allowed the taxpayer‟s claim.

► On appeal by the department, the High Court had to consider whether the

amendment to s. 40(a)(ia) by the FA 2010 w.e.f. 1.4.2010 to provide that the

TDS has to be paid on or before the due date for filing the ROI was

prospective or retrospective.

► The HC followed Allied Motors 224 ITR 677 & Alom Extrusions 319 ITR 306

where the Supreme Court held that a provision which was inserted the remedy

to make a provision workable requires to be treated with retrospective

operation so that reasonable deduction can be given to the section as well

and dismissed the appeal.


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Merilyn Shipping & Transports - Special Bench (SB) of the Vishakhapatnam, ITA No. 477/M/2008) dated 9 April 2012

► The taxpayer incurred brokerage expenses of Rs.38.75 lakhs and commission

of Rs.2.43 lakhs without deducting TDS. Of this only Rs. 1.78 lakhs was

payable and the rest was paid. The AO disallowed the entire expenditure

under section 40(a)(ia).

► Taxpayer argued that disallowance under section 40(a)(ia) could be made

only of the amount “payable” and not of that which had already been “paid”.In

sec. 40(a)(ia), which was inserted by the Finance Bill 2004, there was a

difference in the language of the Bill and the Act.

► The Tribunal held that the change in language between the Bill and the Act is

conscious and with a purpose. The legislative intent is clear that only the

outstanding amount or the provision for expense (and not the amount already

paid) is liable for disallowance if TDS is not deducted. Consequently, s.

40(a)(ia) can apply only to expenditure which is “payable” as of 31st March

and does not apply to expenditure which has been already paid during the

year.

Disallowance for withholding tax default where

expenses are ‘paid’ during the year


DICGC Ltd. - Mumbai Tribunal

(ITA No 2361 & 2524/M/2011) dated 13 February 2012

► For AY 2007-08 & 08-09, the taxpayer paid VSAT & transaction charges without

deduction of TDS. The AO held the payment to be “fees for technical services” &

disallowed the payment under section 40(a)(ia) for want of TDS under section

194J.

► Before the Tribunal, the taxpayer argued that the deduction had to be allowed

because s. 40(a)(ia) was not a „tax-levying‟ provision but was merely to ensure that

tax was paid by either the payer or the payee. As the payee had already paid the

taxes, the bar in s. 40(a)(i) did not apply in line with Hindustan Coca Cola

Beverage 293 ITR 226 (SC).

► The Tribunal held ,the argument that since the payee has already paid due tax on

the income, s. 40(a)(ia) cannot be invoked is not correct. The law in Hindustan

Coca Cola Beverage 293 ITR 226 (SC) that if the payee is assessed, the tax

cannot be recovered from the payer was in the context of s.201 and pursuant to

Circular No.275/201/95-IT dated 29-1-1997. In the absence of such circular in

case of disallowance under section 40(a)(ia), the principle laid down cannot be

adopted for s. 40(a)(ia).

Taxes paid by payee, no ground for avoidance of

disallowance under section 40(a)(ia)


S K Tekriwal - Kolkata Tribunal

(ITA No 1135/Kol/2010) dated 21 October 2011

► The taxpayer paid Rs. 3.37 crores as “machine hire charges” on which it

deducted TDS under section 194C at 1%.

► The AO held that the payment was “rent” and TDS ought to have been

deducted at 10% under section 194-I. He disallowed the expenditure under

section 40(a)(ia). This was reversed by the CIT (A).

► The tribunal held that 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 taxpayer 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 taxpayer may be treated as a defaulter

under section 201 but no disallowance can be made under section 40(a)(ia).

Allowability of deduction of expense under section

40(a)(ia) on account of alleged short withholding of tax


Issue of disallowance under section 40(a)(ia) in case of short deduction of

TDS.

Favorable view - no proportionate disallowance

In case of Chandabhoy & Jassobhoy (ITA No. 20/M/10) dated 8 July

2011, the Hon'ble Tribunal expressed a view that "so we are of the

opinion that provisions of section 40(a)(ia) also do not apply as the said

provision can be invoked only in the event of non deduction of tax but not

for lesser deduction of tax."

Against view - proportionate disallowance

However in case of Beekaylon Synthetics Ltd. (ITA No. 6506/M/08)

dated 15 July 2011, the Hon'ble Tribunal held that the disallowance under

section 40(a)(ia) of the Act is to be restricted to the extent of expenses

attributable to the amount of TDS not paid by the Assessee

Allowability of deduction under section 40(a)(ia)


Also refer following decisions, wherein no disallowance if view

prevailing in past that receipt is not taxable in hands of recepient:

► Kotak Securities Ltd [ 340 ITR 333] Bom High Court

► Dynamic Vertical Software India (P) Ltd. [ 332 ITR 222] Delhi High

Court

Allowability of deduction under section 40(a)(ia)

Allowability of Depreciation

Techno Shares & Stocks - Supreme Court

[327 ITR 323]

► Issue of whether cost of membership rights of Bombay Stock Exchange (BSE)

card is an intangible asset, eligible for depreciation.

► The SC held that the BSE card gives a non-defaulting member a right of

membership and a consequential right to participate in the trading session on

the floor of BSE. Such right has an economic and monetary value and is a

„license‟ or „akin to a license„ or a „business or commercial right‟ of similar

nature and, hence, qualifies for depreciation as an intangible asset.

Depreciation on intangibles

Sino Securities Pvt. Ltd - Mumbai Tribunal

(2012) 134 ITD 321]

► Wherein it is held that post demutualization and corporatization (collectively

„corporatization‟) of Bombay Stock Exchange (BSE) in the tax year 2005-06,

no depreciation is allowable on the BSE membership card held by the

Taxpayer prior to the corporatization.

► It further held that the ratio of Supreme Court‟s ruling in the case of Techno

Shares & Stocks Ltd. v. CIT [327 ITR 323] (Techno Shares ruling) allowing

depreciation on the BSE membership card is valid only for the period prior to

the corporatization of BSE.

Depreciation on Intangibles

Areva T & D India LTD - Delhi High Court

[ITA No.315/2010 dt 30 March 2012]

► Intangible rights such as business information, contracts, skilled employees

acquired upon slump sale are covered by the definition of “business or

commercial rights of similar nature” under section 32. Depreciation available

even though described as „goodwill‟ in the agreement, Legislature intended

depreciation on other categories of intangible assets which were neither

feasible nor possible to exhaustively enumerate. SC ruling in Techno Shares

[327 ITR 323] relied upon

Depreciation on intangibles

Sr. No Intangible assets on which

depreciation is allowed

Decisions

1Licenses/Approvals/Registrations for

operation of hotels

Piem Hotels Ltd

[135 TTJ (Mum) 228]

2 Business Brand and Commercial Equity B Co. Ltd. [Mumbai ITAT]

3Licenses and other business/ commercial

rights of similar nature

OSRAM India Pvt Ltd

[51 DTR (Del)(Trib) 297]

4 Non-Compete Fees

Real Image Tech Pvt Ltd

[120 TTJ (Chn) 983]

Medicorp Technologies India Ltd

[30 SOT (Chn) 506]

Serum Institute of India Ltd -

Pune Tribunal

5 Brand received on amalgamationKEC International Ltd

[41 SOT 43 (Mum)]

6Commercial rights for exploration of mineral

oil

ONGC Videsh Ltd

[37 SOT (Del) 97]

7 Toll Collection RightsAshoka Info (P) Ltd

[123 TTJ (Pune) 77]

Other decisions on allowability of Depreciation on intangibles

If Non compete is held to be capital in nature, depreciation is to be granted

on Non compete Fees

► Medicorp Technologies India Ltd. 122 TTJ 394 (Chennai)

► Real Image Tech (P) Ltd. 120 TTJ 983 (Chennai)

► Schott Glass India Pvt. Ltd. (ITA No. 1698/M/2003 dated 7 September

2011)(Mum.)

► Bunge Agribusiness (India) P. Ltd. 132 ITD 549 (Mum.)

Depreciation vs. Revenue expenditure

Serum Institute of India Ltd - Pune Tribunal

[ITA No 948/PN/2005 dt.:18 January 2012]

► Where one of the issues before ITAT was whether payment for non compete

fee is a capital expenditure eligible for depreciation.

► The ITAT upheld Taxpayer's claim by relying on Chennai ITAT ruling in the

case of ACIT vs Real Image Tech (P) Ltd (120 TTJ 983), and held that

payment of non compete fee constituted capital expenditure eligible for

depreciation as an intangible asset.

► The issue of allowability of depreciation on non-compete fee payment of

capital nature is subject matter of conflicting rulings of different benches of

ITAT. Though a view favouring the taxpayer has been taken in case of Real

Image (supra) and ITO vs Medicorp Technologies India Ltd (30 SOT

506)(Chennai), there also exists contra rulings in the case of Srivatsan

Surveyors (P) Ltd vs ITO (32 SOT 268)(Chennai) and Sharp Business

Systems Ltd vs DCIT (59 DTR 385)(Del)(Trib).

Non-compete fee – whether allowable?

Late Dr. B V Raju - Hyderabad Tribunal Special Bench

[ ITA No. 1034/Hyd/2004] dated 13 February 2012

► In A.Y. 2000-01, the taxpayer received Rs.11 crores pursuant to a non-

compete agreement which was for 5 years.

► The Assessing Officer (AO) held that there was a “transfer” by way of

relinquishment of the taxpayer‟s “right to manufacture” and that the same was

chargeable to capital gains by taking Nil cost under section 55(2)(a).

► This was reversed by the Commissioner of Income Tax (Appeals) [CIT(A)] on

the ground that the personal skills of the taxpayer were placed under restraint

and as the said personal skills were not a “capital asset”, capital gains was

not chargeable to tax.

► On appeal to the Tribunal, the matter was referred to the Special Bench in

view of conflicting decisions on the issue. The Special Bench held as under:

► Taxpayer, being promoter of company, was not 'carrying out business' of

manufacturing cement but was 'associated with manufacturing companies' in

various capacities.

Taxability of non-compete fee

► The Tribunal observed that the terms „right to manufacture‟ and „right to carry

on business‟ appearing in section 55 of the Act have different connotations.

► Non-compete agreement entered into by taxpayer clearly fell under the latter

category.

► Since, agreement was entered into in 1999, fees received is not taxable,

being capital receipt as per the ratio laid down by Supreme Court ruling in

case of Guffic Chem Ltd 332 ITR 602.

► Note: On the related issue also refer Delhi High Court decision in case of

Pitney Bowes India Pvt Ltd. ITA No. 784 of 2011 dt.: 30 November 2011,

wherein it was held that non-compete fee paid for a period of five years was

held to be capital in nature


Savita N. Mandhana - Mumbai Tribunal

[ITA No. 3900/Mum/2010 dated 07/10/2011]

► Issue of taxation of receipt towards non-compete covenants. The Taxpayer

transferred shares held by her as nominal shareholder in a company and agreed

for a non-compete obligation alongwith other shareholders.

► There was no separate consideration specified for the non-compete obligation

and a composite consideration was agreed for sale of shares and non- compete

obligation. The Tribunal held that, in the facts of the case where

► The Taxpayer was not carrying on any business and transferred the shares,

the composite consideration for transfer of shares could not be split up into

two components viz., transfer of shares and non-compete obligation, so as

to separately tax the component attributable to the non-compete obligation.

► The Tribunal held that the non-compete provision is attracted only if a taxpayer is

carrying on business, not applicable if company, where she is shareholder is

carrying on the business and agrees for a non-compete obligation for a separate

consideration.


Also refer decision of Mumbai Tribunal in case of Hami Aspi Balasara

[30 DTR 576]

► Taxpayer having sold the shares only and no consideration was assigned

towards non-compete fees in the share purchase agreement, s. 28(va) could

not be invoked by AO by determining the book value of shares and treating

the difference between the sale price of shares and book value as

consideration towards non-compete fees; it was s. 55(2)(a) which could be

applied, if at all, and not s. 28(va)


Ramesh D. Tainwala – Mumbai Tribunal

[ 48 SOT 324]

► Taxpayer transferred shares held by them as promoters in a company and

agreed for a non-compete obligation

► The consideration for the non-compete obligation was separately stated in

addition to the consideration for sale of shares.

► The Tribunal held that, the receipt towards non-compete obligation was

independent of the transfer of shares, although included in the same

agreement, and that it was liable to tax as business income in terms of the

specific non-compete receipt taxation provision in the Income tax Act. It held

that the receipt was not for transfer of right to carry on business and, hence,

the amount was not chargeable as capital gains.

► The Tribunal ruling provides guidance that a separate consideration received

towards non-compete covenant is assessable as business income in terms of

the specific provisions of the Act if it is not accompanied by transfer of right to

carry on business.


Taxability of Capital Gain – Section 48 and

Section 54EC


Arun Shungloo Trust – Delhi High Court(ITA No 116 of 2011) dated 13 February 2012

► The settlor acquired property before 1.4.1981 and he settled in on trust on 5.1.1996.

The taxpayer-trust sold the property and computed the indexed cost of acquisition on

the basis that it “held” the property from the time the settlor had held it.

► The AO accepted that the settlor‟s cost of acquisition had to be treated as the

taxpayer‟s cost of acquisition but held that the settlor‟s period of holding could not be

treated as the taxpayer‟s period of holding.

► The HC held that there is no reason why the legislature would want to deny or deprive

an taxpayer the benefit of the previous holding for computing “indexed cost of

acquisition” while allowing the said benefit for computing “indexed cost of improvement”.

► The benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital

gain tax on the “real” or actual “gain” and not on the increase in the capital value of the

property due to inflation. The term “held by the taxpayer” should be interpreted to

include the period during which the property was held by the previous owner. The HC

reversed the Tribunal‟s decision and allowed taxpayer‟s appeal.

In case of transfer by gift, will, trust, etc indexed cost to be

determined with reference to holding by previous owner


Manjula Shah – Bombay High Court

(ITA No 3378 of 2010) dated 11 October 2011

► The taxpayer‟s daughter purchased a flat on 29.1.1993 at a cost of Rs.50.48 lakhs. She

gifted the flat to the taxpayer on 1.2.2003. The taxpayer sold the flat on 30.6.2003 for

Rs. 1.10 crores. In computing LTCG, the taxpayer took the indexed cost of acquisition

under Explanation (iii) to s. 48 on the basis that she “held” the flat since 29.1.1993.

► The AO held that as the taxpayer had “held” the flat from 1.2.2003, the cost inflation

index for 2002-03 would be applicable.

► The HC held that under explanation 1(i)(b) to s. 2(42A), in determining the period for

which any asset is held by an taxpayer under a gift, the period for which the said asset

was held by the previous owner has to be included.

► 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 taxpayer.

► Hence, the department‟s appeal dismissed.

Indexation benefit for gifted asset from year of

acquisition by previous owner


Aspi Ginwala - Ahmedabad Tribunal

(ITA No 3226/Ahd/2011) dated 30 March 2012

► The taxpayer sold property on 22.10.2007 and computed long-term capital

gains. The taxpayer invested Rs. 50 lakhs in REC bonds on 31.12.2007 (FY

2007-08, within the 6 M time limit) and Rs. 50 lakhs in NHAI bonds on

26.5.2008 (FY 2008-09, beyond the 6 M time limit) and claimed a deduction of

Rs. 1 crore.

► The taxpayer claimed that no eligible scheme was available for subscription

from 1.4.2008 to 28.5.2008 and that he applied in the NHAI bonds as soon as

it opened and that he was prevented by sufficient cause from investing within

the time period of 6 months. The AO & CIT (A) rejected the claim for

exemption of Rs. 50 lakhs in respect of the NHAI bonds on the ground that (i)

it exceeded the monetary limit of Rs. 50 lakhs prescribed in s. 54EC and (ii) it

was made beyond the time limit of 6 months.

S. 54EC exemption for investments over two financial

years aggregating to INR 1 Crore allowable


► The Tribunal held that if the taxpayer transfers his capital asset after 30th

September of the financial year he gets an opportunity to make an investment

of Rs.50 lakhs each in two different financial years and is able to claim

exemption upto Rs.1 crore under section 54EC.

► Since, no bonds were available for subscription between 1.4.2008 to

28.5.2008 and the investment was made as soon as the subscription opened

on 26.5.2008.

► The taxpayer was accordingly prevented by sufficient cause which was

beyond his control in making investment in these Bonds within the time

prescribed. Exemption should be granted in cases where there is a delay in

making investment due to non-availability of the bonds

► Hence, the taxpayer‟s appeal allowed.

► The Tribunal ruling is without considering or distinguishing the contra decision

of Jaipur Tribunal in the case of Raj Kumar Jain & Sons (HUF)


years aggregating to INR 1 Crore allowable


Raj Kumar Jain & Sons - Jaipur Tribunal

(ITA No 648/JP/2011) dated 31 January 2012

► In AY 2008-09, the taxpayer sold property for Rs. 2.47 crores and disclosed

capital gain of Rs. 1.14 crores. To overcome the restriction in the Proviso to s.

54EC that the investment made in the specified asset “during any financial

year” should not exceed Rs. 50 lakhs, the taxpayer, within the prescribed

period of 6 months, invested Rs. 50 lakhs on 31.03.2008 (FY 2007-08) &

10.06.2008 (FY 2008-09) and claimed a deduction of Rs. 1 crore.

► The AO rejected the claim though the CIT (A) allowed it.

► The Tribunal held that the object of the proviso to section 54EC is to provide a

ceiling of Rs. 50 lakhs on investment by an taxpayer in the long term specified

assets.Accordingly, the investment has to be linked to the financial year in

which transfer has taken place and the claim for deduction cannot exceed Rs.

50 lakhs.

► Hence, the tribunal held in favor of revenve.


years not to exceed INR 50 lakhs


Chanchal Kumar Sircar - Kolkata Tribunal

(ITA No 1146/Kol/2011) dated 21 February 2012

► The taxpayer entered into an agreement and handed over possession to the

buyer which constituted a “transfer”. The consideration received from the

buyer was invested by the taxpayer in s. 54EC Bonds beyond 6 months from

the date of transfer though within 6 months from the date of receipt of the

consideration.

► The Tribunal had to consider whether in view of the language of s. 54EC that

the consideration had to be invested in the specified bonds within 6 months of

the date of transfer, the relief could be allowed.

► The Tribunal held that in a case where the consideration for the transfer was

received several months after the date of transfer, the period of 6 months for

making deposit under section 54EC should be reckoned from the date of

actual receipt of the consideration.

► Also, s. 54EC requires the “consideration” to be invested. If the consideration

is not received, there is no question of investing it. Hence, the taxpayer‟s

appeal allowed.

S. 54EC investment time limit begins from date

of receipt of consideration

Reopening under section 147


No reassessments on mere ‘change of opinion’

Kelvinator of India Ltd. – Supreme Court (SC)

[320 ITR 561]

► Issue of whether, under the Income Tax Act, the Tax Authority is empowered

to reassess an already assessed income on a mere „change of opinion‟ that

income has escaped assessment.

► The SC held that income cannot be reassessed on a mere change of opinion,

as that would imply conferring arbitrary powers on the Tax Authority. It is only

when there is a „tangible material‟ to believe that income has escaped

assessment that the power of reassessment can be exercised and the

reasons for reassessment must have a live link with the formation of the

belief.

The question of whether there is "change of opinion" if AO does not

specifically apply his mind referred to Full Bench, in view of recent

Delhi High Court decision in case of Usha International [ ITA No.

2026/2010 dated 23 April 2012]


Whether AO can initiate reassessment proceedings for invoking section 14A?Honda Siel Power Products Ltd - Supreme Court

[W.P No.9036 of 2007 (Del HC) upheld by the SC vide SLP No.19085 of 2011]

► 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

finalityIn the facts of the case, there was a failure on the part of the Assessee

to fully disclose the material facts

[In the aforesaid decision - regular assessment was completed,

reassessment was initiated beyond 4 years and the AO had also resorted to

rectification under section 154 of the Act; But there was nothing on record to

show that in the original assessment, the Assessee had disclosed and the

then AO has applied his mind]


Whether AO can initiate reassessment proceedings for invoking section 14A?

Proviso to section 14A restrict only AO for invoking reassessment

proceedings however CIT(A) and Tribunal are empowered to apply 14A in

appeal pending before them

► Aquarius Travel - Delhi Special bench [301 ITR 111]

On pure mistake, reopening cannot be done- only recourse

available is rectification under section 154

► Titanor Components Ltd [ 243 CTR 520] Bom High Court

► Hindustan Unilever [ 325 ITR 102] Bom High Court


Reassessment/ Reopening

Areva T&D (Delhi HC)

► The order passed u/s 197 is interim in nature as the scope of Section 197 is limited.

► On a conjoint reading of Sections 195 and 197 of the Act, if any opinion is expressed at

the time of grant of certificate it is tentative or provisional or interim in nature and the

same would not debar the AO from initiating a proceeding under Section 147 of the Act

on the ground that there has been a change of opinion.

Jet Airways (I) Ltd. 331 ITR 236 (Bom)

► Only when the AO assesses or reassesses the escaped income, which was the basis

of the formation of belief, he can also assess or reassess any other income which has

escaped assessment which comes to his notice during the course of the proceedings

► If after issuing a notice under section 148, the AO is satisfied that there is no

escapement of income which initially formed the reasons to issue notice u/s 148, it is

not open to him to independently assess some other income

► If he intends to assess some other income, a fresh notice under s. 148 would be

necessary, the legality of which would be tested in the event of a challenge by the

Taxpayer


Reopening

Retrospective amendment in a section cannot be basis for reopening

► Ganesh Housing Corporation Ltd (Gujarat High Court) Special Civil

Application No. 15067 of 2011. dt.: 12 March 2012

► Doshion Ltd (Gujarat High Court) [342 ITR 6]

► M/s K. Mohan & Co. (Exports) (Bombay High Court) [ITA No.2347 of 2010

and 1263 of 2011. dt.: 1 july 2011]

Audit objection

► Cadila Healthcare Ltd (Gujarat High Court) [Special Civil Application no.

15566 of 2011 . dt: 14 December 2011]- 147: If AO disputes Audit objection,

she cannot use that as “reason to believe”

Others

► Alpine Electronics Asia Pte Ltd (Delhi High Court) [WRIT PETITION (CIVIL)

NO. 7932/2010. dt.: 24 January 2012] - Section 147/292BB: Delay in issue of

section 143 (2) notice renders assessment invalid


Assessment, though under section 143(1), cannot be reopened under section 147 in absence of ‚new material‛

HV Transmissions Ltd - Mumbai Tribunal

[I.T.A. No. 2230/Mum/2010.] dated 7 October 2011

► The Assessing Officer (AO) accepted the return of income filed by the

taxpayer under section 143(1) of the Act. He thereafter issued a notice under

section 148 on the ground that the taxpayer had claimed a deduction for

ERP software and that although only 20% of the said expenses was debited

to the Profit & Loss Account, the entire amount was claimed as a deduction.

► The taxpayer claimed that the reopening was not valid as there was no “new

material” in the AO‟s possession.

► On appeal to the Tribunal, it held that;

► Though the assessment was originally under section 143(1), it is clearly

evident from the recorded reasons that there was no new material coming to

the possession of the AO on the basis of which section 143(1) assessment

was reopened.


Assessment, though under section 143(1), cannot be reopened under section 147 in absence of ‚new material‛

► In Telco Dadaji Dhackjee Ltd, the Third Member held, after considering

Rajesh Jhaveri Stock Brokers 291 ITR 500 & Kelvinator of India 320 ITR 561

(SC), that a section 143(1) assessment could not be reopened under section

147 without there being any new material coming to the possession of the AO.

► As the AO had reopened the section 143(1) assessment on the basis of the

material which was already on record, the reopening was not valid.

Note: The same view had been taken earlier in Aipita Marketing 21 SOT 302

after considering Rajesh Jhaveri 291 ITR 500 (SC)


Assessment, even under section 143(1), cannot be reopened under section 147 in absence of ‚new material‛

Balkrishna Hiralal Wani vs ITO and Ors – Bombay High Court

[321 ITR 519]

► Validity of: Re-assessment

► Sub Topic Irrelevant reasons, Non-existing reasons, No failure to disclose

primary facts - Disclosure in Note to Return

► Summary AY 2004-2005. The assessee disclose the sum received on

retirement from firm and attached a note stating that the amount was not

taxable, since the amount was received on mandatory retirement on

reaching the age of superannuation. The issue of notice under s.148 to

apply S.28(iv) was not valid, since there were no reasons to believe that any

income escaped assessment.


Assessment, even under section 143(1), cannot be reopened under section 147 in absence of ‚new material‛

Prashant S. Joshi and Dattaram Shridhar Bhosale vs ITO and UOI - Bom

High Court[324 ITR 154]

Topic Validity of: Re-assessment

Summary AY 2005-2006 and 2006-2007. The assessee was partner in a firm.

On retirement he received Rs. 50 lakhs in addition to his credit balance in final

settlement. It was not offered for tax on the ground it was capital receipt. The

amount received was not taxable either under s.28(iv) or under s.28(v) or

under s.45(4). There were no reasons to form a belief. That income escaped

asstt. The notice under s.148 was invalid.

S.147 of the Income Tax Act 1961

Expln. 2(b) of s.148 of the Income Tax Act 1961


Reopening

Sr. No Within 4 years Beyond 4 years

1 Kelvinator of India Ltd

320 ITR 561 (SC)

Grindwell Norton Ltd

267 ITR 673 (Bom)

2 German Remedies Ltd

285 ITR 26 (Bom)

Hindustan Lever Ltd

268 ITR 339 (Bom)

3 Siemens Information Systems Ltd

295 ITR 333 (Bom)

German Remedies

287 ITR 494 (Bom)

4 Cartini India Limited

314 ITR 275 (Bom)

Cartini India Ltd

291 ITR 0355 (Bom)

5 Asteroids Trading and Investment P Ltd 308

ITR 190 (Bom)

Sesa Goa Ltd

294 ITR 101 (Bom)

6 Asian Paints Ltd

308 ITR 195 (Bom)


Key Take-Aways

►Check for reasons for reopening, object if reasons not justifiable , AO cannot

start reassessment without disposing of objections

►Evaluate whether and at what stage reopening to be challenged or fight out in

normal course

Revision under section 263


Not application of mind to relevant material or an incorrect assumption of facts or

an incorrect application of law will satisfy the requirement of order being

erroneous, hence, revision held to be valid.

Jawahar Bhattacharjee (Gauhati High Court Full Bench)

[(2012) 341 ITR 434(Gauhati)(High Court)(FB)]

The taxpayer bought shares on 21.4.2000 for Rs.19,536 and sold them on 2.5.2001

for Rs.6,36,640. A gain of more than 30 times was made in one year. The AO

accepted the LTCG and allowed s. 54F relief. The CIT passed an order under section

263 in which he held the order to be `erroneous and prejudicial to the interest of the

revenue' on the ground that the AO had not made any enquiry to determine the

genuineness of the transaction though the circumstances warranted the same. On

appeal of the taxpayer, the Tribunal relied on B & A Plantation 290 ITR 395 (Gau) and

held that as the order of the AO was not without jurisdiction, it could not be held to be

`erroneous' for purposes of s. 263.

On appeal by the department, the issue was referred by the Full Bench as to the

supposed conflict between various judgements of the Court on the subject:

Jurisdiction under Section 263 can be exercised whenever it is found that the order of

assessment was erroneous and prejudicial to the interest of the Revenue



Not holding such inquiry as is normal and not applying mind to relevant

material would make the assessment `erroneous' warranting exercise of

revisional jurisdiction. An incorrect assumption of facts or an incorrect

application of law will satisfy the requirement of the order being `erroneous'.

Non application of mind and omission to follow natural justice is in same

category. Daga Entrade 327 ITR 467 (Gau) lays down the correct law and is

not in conflict with Rajendra Singh 1979 STC 10 (Gau).

► Ashoka Buildcon Ltd. (Bom) (HC) Section 263

► The High Court observed that the bar of limitations arises because the

revisional jurisdiction u/s 263 is sought to be exercised in respect of the

issues which did not form the subject matter of reassessment proceedings.

► Accordingly, the High Court held that the time limit for revision u/s 263 should

be reckoned from the original order.



S. 263 : Revision of orders prejudicial to revenue - Revision of order on the

ground that the Institute was carrying on business of coaching against charge of

fee held to be not valid.

The Institute of Chartered Accountants of India (2012) 67 DTR 67

Delhi)(High Court)

The Assessing Officer has passed the order under section 143(3) and allowed the

exemption under section 10(23C)(iv). Commissioner revised the order under section

263 on the ground that the assessee was carrying on business of coaching against

charges of fee and separate books of account were not maintained. High Court in

appeal quashed the order passed under section 263 of the Income-tax Act, 1961 and

held that Institute cannot be said to be carrying on business. (A. Y. 2005-06).



► Infosys Technologies Ltd. (No 2) (2012) 341 ITR 293(Karn.)(High Court)

► Issue 1 - S. 263 : Revision of orders prejudicial to revenue - Reasoned order

- Double taxation relief – India-Canada - As the computation was not clearly

indicated in the assessment order the revision was held to be valid. (Art. 23)

► Assessee while filing the return of income, claimed relief under DTAA relief in

respect of Canada and Thailand. Assessing Officer has allowed the claim

under section 143(3). The Commissioner passed the order under section 263,

and directed the Assessing Officer to examine the enactment of both the

countries and to ascertain the exact relief that the assessee can claim under

Article 23(2) with Canada and Article 23(3) of the DTAA of Thailand .

► Tribunal set aside the order of Commissioner and restored the order of the

Assessing Officer. On further appeal to High Court by the revenue the court

held that as the Assessing Officer has not clearly indicated the computation

with the relevant Articles of DTAA and the basis, can be construed as an

orderboth erroneous and prejudicial to the interest of revenue hence the

revision order was justified.(A. Ys. 1995-96 & 1996-97).



► Infosys Technologies Ltd. (No 2) (2012) 341 ITR 293(Karn.)(High Court)

► Issue 2 -S. 263 : Revision of orders prejudicial to revenue – Limitation - Order

giving effect of order of Commissioner (Appeals) - Revision of orders beyond

the period of two years held to be bad in law.

► Assessment order was passed on 27th Feb., 1997. The assessment order

was subject matter of appeal, while giving effect the Assessing Authority had

passed an order dated on 31st March, 1999. The Commissioner has passed

the revision order on 31st March, 1999. The Tribunal set aside the order of

Commissioner.

► On appeal to High Court by revenue the High Court held that the order

passed by the Commissioner in exercise of the revisional jurisdiction beyond

two years of assessment order was clearly barred by limitation and confirmed

the order of Tribunal. (A. Y. 1994-95).


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