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Recent Decisions


Commissioner of Income Tax Vs Shreyans Industries Ltd.

IT Appeal Nos.277 of 2004 & 215 of 2007 Dated 15.11.2013

Business expenditure – Capital or revenue expenditure – Construction of drainage for disposal of effluents – Any expenditure incurred in complying with statutory requirements particularly where the asset concerned would endure to the benefit of the assessee from year to year, would necessarily be an asset of enduring nature and, therefore, categorised as capital expenditure – Mere fact that the land is not owned by the assessee, is irrelevant as by excavating the drain through forest land on the basis of approval granted by the Forest Department, the assessee has been able to overcome statutory requirements for release of effluents as prescribed under the Pollution Control Act, the rules and notifications etc. issued thereunder, thereby conferring benefit of an enduring nature that would be available to the assessee from year to year – Fact that the assessee has transferred land to the Forest Department or has paid money for compensatory forestry does not denude the assessee’s rights vis-à-vis the asset created.

Techno Shares & Stocks vs. CIT (Supreme Court)
BSE Card is an “intangible asset” and eligible for depreciation u/s 32(1)(ii)
S. 32 (1), as amended w.e.f. 1.4.1998 allows depreciation on “intangible assets” being, inter alia, “licenses … or any other business or commercial rights of similar nature”. The Tribunal took the view that a BSE card was an “intangible asset” eligible for depreciation. On appeal by the Revenue, the High Court (323 ITR 69) reversed the Tribunal on the ground that it was not a “license” and the words “business or commercial rights” relate to intellectual properties and not all categories of business or commercial rights. On appeal by the assessee, HELD reversing the High Court:

 (iii) Under Rule 5 of the BSE Rules, membership is a personal permission from the Exchange which is nothing but a “licence” which enables the member to exercise rights and privileges attached thereto. It is this licence which enables the member to trade on the floor of the Exchange and to participate in the trading session on the floor of the Exchange. It is this licence which enables the member to access the market. Therefore, the right of membership, which includes right of nomination, is a “licence” or “akin to a licence” which is one of the items which falls in s. 32(1)(ii). The right to participate in the market has an economic and money value. It is an expense incurred by the assessee which satisfies the test of being a “licence” or “any other business or commercial right of similar nature” in terms of s. 32(1)(ii).

Vodafone International Holdings B.V. vs. UOI (Bombay High Court)

The purchase of shares of a foreign company by one non-resident from another non-resident attracts Indian tax if the object was to acquire the Indian assets held by the foreign company.

A Cayman Island company called CGP Investments held 52% of the share capital of Hutchison Essar Ltd, an Indian company engaged in the mobile telecom business in India. The shares of CGP Investments were in turn held by another Cayman Island company called Hutchison Telecommunications. The assessee, a Dutch company, acquired from the second Cayman Islands company, the shares in CGP Investments for a total consideration of US $ 11.08 billion. The AO issued a show-cause notice u/s 201 in which he took the view that as the ultimate asset acquired by the assessee were shares in an Indian company, the assessee ought to have deducted tax at source u/s 195 while making payment to the vendor. This notice was challenged by a Writ Petition but was dismissed by the Bombay High Court. In appeal, the Supreme Court remanded the matter to the AO to first pass a preliminary order of jurisdiction which the AO did. This order was challenged by the assessee by a Writ Petition on the ground that as one non-resident had acquired shares of a foreign company from another non-resident, s. 195 had no application. HELD dismissing the Petition (vii) On facts, the argument that the transaction involved merely a sale of a share of a foreign company by one non-resident to another is not acceptable. It would be simplistic to assume that the entire transaction between the non-residents was fulfilled merely upon the transfer of a single share of the Cayman Islands company. The commercial and business understanding between the parties postulated that what was being transferred from one non-resident to the other was the controlling interest in Hutchison Essar, an Indian company. The object and intent of the parties was to achieve the transfer of control over the Indian company and the transfer of the solitary share of the Cayman Islands company was put into place as a mode of effectuating the goal.
CERC vs. National Hydroelectric Power Corp (Supreme Court)
Tech-savvy Supreme Court directs Service by E-Mail to avoid delay
HELD vide order dated 26th July 2010:
In various Courts, the statistical data indicates that, on account of delay in process serving, arrears keep on mounting. In Delhi itself, the input indicates that fifty per cent of the arrears in Courts particularly in commercial cases is on account of delay in process serving.
For the above reasons, the following directions, as mentioned here in below, are given:

[i] In addition to normal mode of service, service of Notice(s) may be effected by E-Mail for which the advocate(s) on-record will, at the time of filing of petition/appeal, furnish to the filing counter a soft copy of the entire petition/appeal in PDF format;
[ii] The advocate(s) on-record shall also simultaneously submit E-Mail addresses of the respondent(s) Companies/Corporation(s) to the filing counter of the Registry. This will be in addition to the hard copy of the petition/appeal;
[iii] If the Court issues notice, then, in that event alone, the Registry will send such an additional notice at the E-Mail addresses of the respondent(s) Companies/Corporation(s) via E-Mail;
[iv] The Registry will also send Notice at the E-Mail address of the advocate(s) for respondent(s) Companies/Corporation(s), who have filed caveat. Advocate(s) on-record filing caveat shall provide his/her E-Mail address for effecting service; and
[v] Within two weeks from today, Cabinet Secretariat shall also provide centralized E-Mail addresses of various Ministries/Departments/ Regulatory Authorities along with the names of the Nodal Officers, if already appointed, for the purposes of service.
Clarification: The above facility is being extended in addition to the modes of service mentioned in the existing Supreme Court Rules. This facility, for the time being, is extended to commercial litigation and to those cases where the advocate(s) on-record seeks urgent interim relief.

CIT vs. Kalpataru Colours and Chemicals (Bombay High Court)
DEPB sale proceeds cannot be bifurcated into “profits” and “face value”. The entire amount is “profits” for s. 80HHC r.w.s. 28(iiid) 
S. 28 (iiid) provides that “any profit on the transfer” of the DEPB shall be business profits. Under Explanation (baa) to s. 80HHC, 90% of “the sum referred to in s. 28(iiid)” has to be reduced from the business profits. Under the third Proviso to s. 80HHC (3), in the case of an assessee having an export turnover exceeding Rs. 10 crores, the profits referred to in s. 80HHC (3) can be increased by 90% of “the sum referred to in s. 28 (iiid)” only if two conditions are satisfied. If the said conditions are not satisfied, no relief on account of DEPB can be granted u/s 80HHC. In Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) the Special Bench of the Tribunal held that “the sum referred to in s. 28(iiid)” meant only the “profits” on transfer of the DEPB and not the entire sale proceeds. The Tribunal held that the amount received on account of DEPB had to be bifurcated into the “face value” of the DEPB and the “profit” and that while the “face value” was assessable u/s 28(iiib), the “profit” was assessable u/s 28(iiid). The consequence was that only the “profit” suffered the rigors of the third Proviso to s. 80HHC (3) and not the “face value“. On appeal by the Department, HELD reversing the Special Bench:
The argument that s. 28(iiid) covers only the “profit” (difference between sale consideration and face value of the DEPB credit) and that the “face value” is assessable u/s 28(iiib) is not correct. The entire amount received on transfer of the DEPB credit is “profits” and falls under s. 28(iiid). There was no basis or justification for the Tribunal to hold that the face value of the DEPB credit can be reduced from the sale consideration. It is not permissible to bifurcate the proceeds of the DEPB into “face value” and “excess of face value”. The approach of the Tribunal is misconceived and unsustainable. As the assessee had an export turnover exceeding Rs.10 crores and did not fulfill the conditions set out in the third proviso to s. 80HHC (3), it was not entitled to a deduction u/s 80HHC on the amount received on transfer of DEPB.

Kanchanganga Sea Foods vs. CIT (Supreme Court)
For s. 5(2), income receivable in kind, received at place where goods delivered 
The assessee, a fishing company, obtained two fishing vessels on charter from a foreign company based in Hong-Kong. The charter fee of $ 600,000 was payable from the earning from the sale of fish and for that purpose 85% of the gross earnings from the sale of fish was to be paid to the foreign company. The trawlers were delivered to the assessee at Chennai Port. Actual fishing operations were done outside the territorial waters of India but within the EEZ. The voyage commenced and concluded at Chennai Port. The catch made at high seas were brought to Chennai where its value for assessed for local taxes. The assessee thereafter arranged Customs clearance for the export of the fish and the Trawlers carried the fish to the destination chosen by non-resident company. The Trawlers reported back to Chennai Port after delivering fishes to the destination and commenced another voyage. The AO took the view that the assessee ought to have deducted tax at source u/s 195 whilst making payment to the foreign company. He treated the assessee as in-default u/s 201. The CIT (A), ITAT & High Court decided against the assessee. On appeal to the Supreme Court, HELD dismissing the appeal: 
(i) The argument that the income of the non-resident had not been received in India is not acceptable. The agreement provided that the charter fee of $600,000 was “payable by way of 85% of gross earning from the fish-sales“. The chartered vessels with the entire catch were brought to the Indian Port, the catch was certified for human consumption, valued, and after customs and port clearance and the non-resident received 85% of the catch. So long the catch was not apportioned the entire catch was the property of the assessee and not of non-resident company as the latter did not have any control over the catch. It is after the non-resident company was given share of its 85% of the catch it did come within its control. It is trite to say that to constitute income the recipient must have control over it. As the apportionment was in India, the non-resident effectively received the charter-fee in India. This being the first receipt in the eye of law and being in India was chargeable to tax u/s 5(2). 
(iii) The said catch was in sum and substance, the receipt of value of money. Had it not been so, the value of the catch ought to have been the price for which the non-resident sold at the destination chosen by it. (Toshoku 125 ITR 525 (SC) distinguished on the ground that there mere entries had been made in India and that was held not to be a receipt in India; Ishikawajima 288 ITR 408 (SC) distinguished on the ground that the entire transaction was completed on high seas);
(iii) Accordingly, the assessee was liable to deduct tax u/s 195 and was rightly held to be in default u/s 201.

Special Bench judgement in Topman Exports reversed
In Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) the Special Bench held that for purposes of s. 80HHC only the “profit” on sale of DEPB entitlements (i.e. the sale value less the face value) was required to be considered. In an appeal by the department, this judgement has been reversed by the Bombay High Court today, 29th June 2010.

DCIT vs. Times Guaranty (ITAT Mumbai Special Bench)
Unabsorbed depreciation of AYs 1997-98 to 2001-02 not eligible for relief granted by amended s. 32(2) in AY 2002-03
Till AY 1996-97 unabsorbed depreciation could be set off against income under any head. From AY 1997-98 to 2001-2002 unabsorbed depreciation could be set off only against business income. From AY 2002-2003 onwards unabsorbed depreciation could again be set off against income under any head of income. The question before the Special Bench was whether in AY 2003-04, the unabsorbed depreciation relating to AY 1997-1998 to 1999-2000 could be set off against non-business income. The assessee claimed that law prevailing in the year of set-off should apply and as in AY 2002-03 unabsorbed depreciation is permitted to be set-off against non-business income, that should apply to the earlier years’ brought forward depreciation as well. HELD rejecting the claim:
(i) The amendment made to s. 32(2) w.e.f AY 2002-03 is substantive. A substantive amendment is normally prospective in operation. S. 32(2) is a deeming provision which by legal fiction provides that the unabsorbed depreciation allowance u/s 32(1) is deemed to be depreciation allowance for the succeeding year(s). A deeming provision has to be strictly interpreted and cannot extend beyond the purpose for which it is intended. S. 32(1) deals with depreciation allowance for the current year and s. 32(2) uses the present tense to refer to allowance to which effect `cannot be’ and `has not been’ given. This indicates that s. 32(2) speaks of depreciation allowance u/s 32(1) for the current year starting from AY 2002-03. Brought forward unabsorbed depreciation of earlier years cannot be included within the scope of s. 32(2). If the intention of the legislature had been to allow such b/fd unabsorbed depreciation of earlier years at par with current depreciation for the year u/s 32(1), s. 32(2) would have used past or past prefect tense and not the present tense. Further, the unabsorbed depreciation for the period from AY 1997-1998 to 1999-2000 has been referred to as “unabsorbed depreciation allowance” and given a special name and cannot fall within s. 32(1) in AY 2002-03.
(ii) The substitution of s. 32(2) w.e.f AY 2002-03 is a limited repeal of the old s. 32(2) and its effect is that unabsorbed depreciation of the earlier period is allowable under the new provision but has to be dealt with in accordance with the old provision and is subject to the limitation of being eligible for set-off only against business income and for 8 years.
(iii) The argument that the department having taken a stand in Jai Ushin cannot argue to the contrary is not acceptable. Such limitation if placed on the revenue will also have to apply to assessees. Further, as a Special Bench is constituted to resolve conflict of opinion amongst different Benches it will be too harsh to stop the assessees or the Revenue from arguing the case in the way they like.
(iv) The principle that if two interpretations are possible then the view in favour of the assessee should be adopted cannot be applied in a loose manner so as to debar a superior authority from examining the legal validity of conflicting views expressed by lower authorities. This rule is applicable where the provision in question is such which is capable of two equally convincing interpretations and not otherwise.
Hindalco Industries vs. DCIT (ITAT Mumbai)
Despite TDS u/s 195, payer is liable as “agent” u/s 163. However, if payee is assessed, payer cannot be assessed as “representative assessee”
 The assessee purchased shares of an Indian company from Alcan Inc, Canada. Alcan filed an application u/s 197(1) for issue of a TDS certificate on the basis that the capital gains was Rs. 317.71 crores and tax at 10% was chargeable. The AO issued a certificate directing the assessee to withhold Rs. 40 crores on a provisional basis subject to regular assessment. The assessee complied with the same. During the pendency of the assessment proceedings against Alcan, the AO issued an order u/s 163 treating the assessee as Agent of Alcan in respect of the capital gains. Thereafter, on 15.3.2004, the AO passed an order assessing the capital gains in the hands of the assessee as agent of Alcan in which the rate of tax was taken at 20%. On 16.3.2004, an assessment order was passed in the case of Alcan itself assessing the capital gains in its hands at the rate of 20%. Alcan’s appeal was allowed by the Tribunal (Alcan Inc vs. DDIT 110 ITD 15 (Mum)) and the rate of tax was held to be 10%. The assessee filed an appeal on the point that (a) as it had deducted tax u/s 195, it could not be treated as an “agent” u/s 163; (b) As more than 2 years had passed after the remittance, the assessee could not be treated as an “agent” as it was not in the position to exercise its rights u/s 162(1) and retain funds and (c) as the department had assessed Alcan, the assessee could not be assessed as representative assessee. HELD:
(a) The contention that the assessee having duly deducted tax u/s 195 cannot be treated as an Agent of Alcan u/s 163 is not acceptable because s. 163 is merely intended to ensure that a person can be regarded as a representative assessee if certain conditions are fulfilled. The s. 163 order does not fasten liability on the representative assessee. Therefore, the fact that the Agent has deducted tax u/s 195 is not a bar to treat him as an Agent u/s 163;
(b) The contention that there has been a delay in initiating proceedings u/s 163 which has resulted in prejudice to the Agent is also not acceptable as the law does not contemplate any time limit for initiating proceedings u/s 163. The proceedings for assessing income of the principal were also not barred by time;
 (c) However, while the department has the option u/s 166 to assess either the non-resident principal or the representative assessee, once the choice is made and the income is brought to tax in the hands of the principal, the same income cannot be again assessed in t

CCE vs. Bharat Petroleum Corporation (Supreme Court) Supreme Court doubts law requiring PSUs to obtain COD approval; directs review 
In ONGC vs. CCE 104 CTR (SC) 31, the Supreme Court directed the Central Government to set up a ‘Committee on Disputes’ to monitor disputes between the Government and Public Sector Enterprises and give clearance for litigation. It was held the no litigation could be proceeded with in the absence of COD approval. This was followed in ONGC vs. CIDCO(2007) 7 SCC 39 and it was held that even disputes between PSUs and State Governments would require COD approval. HELD doubting the correctness of this law and referring the matter to a larger bench for reconsideration:
“In our experience, the working of the COD has failed. Numerous difficulties are experienced by the COD which are expressed in the letter of the Cabinet Secretary, dated 9th March, 2010. Apart from the said letter, we find in numerous matters concerning public sector companies that different views are expressed by COD which results not only in delay in filing of matters but also results into further litigation.
In the circumstances, we find merit in the submission advanced before us by learned Attorney General that time has come to revisit the orders passed by the three Judge Bench of this Court in the case of Oil & Natural Gas Commission vs. Collector of Central Excise (supra)”.

Dedicated Health Care Services TPA vs. ACIT (Bombay High Court)

S. 194J applies to payments made to non-professionals such as hospitals. CBDT Circular on TPA liability is valid except for view on penalty
The assessee, a Third Party Administrator (TPA), provided services such as hospitalization services, cashless access services and services in connection with the processing and settlement of claims and making payment to hospitals to holders of health insurance policies issued by insurance companies. All claims payable by the insurance company to the policyholder were paid through the TPA from a Claim Float Account (CFA) provided by the insurance company. In order to facilitate cashless hospitalization, the TPA entered into a memorandum of understanding with individual hospitals and medical aid providers. The AO took the view that in making payments to hospitals TPAs were required to deduct tax at source u/s 194J. The assessee filed a writ Petition to contend that s. 194J applied only to payments made to individuals carrying on the medical profession and not hospitals. HELD rejecting the claim:
(i) S. 194J requires tax to be deducted at source when payment of any sum is made to a “resident” by way of “fees for professional services”. The term “professional services” is defined in Explanation (a) to mean services rendered by a person inter alia in the course of carrying on medical profession. The term “resident” is not confined to a natural person. The argument that the medical profession can only be carried on by an individual and that consequently a hospital cannot be regarded as carrying on the medical profession and hence payments made by TPAs to a hospital cannot be treated as fees for professional services is not correct because in defining the expression “professional services” Parliament has not confined it to mean services rendered by an individual who carries on the medical profession. If Parliament intended to restrict the ambit of s. 194J only to fees received by an individual, it was open to Parliament to use words that would be indicative of that position. In fact, in defining the character of the person who is to make the payment, Parliament has excluded from the ambit of the expression “any person” an individual and a HUF. However,in defining the character of the payee, Parliament has used the wider expression “resident”. Further, the words “services rendered by a person in the course of carrying on” in the definition include services which are incidental to the carrying out of the medical profession;
(ii) Though a hospital by itself, being an artificial entity, is not a “medical professional”, yet it provides medical services by engaging the services of doctors and qualified medical professionals.These are services rendered in the course of the carrying on of the medical profession. The fact that the services are institutionalized at a hospital which provides medical services makes no difference to the applicability of s. 194J;
(iii) No exception can be taken to the view expressed by the CBDT in Circular No. 8/2009 dated 24.11.2009 that payments made by TPAs to hospitals fall within the purview of s. 194J. However, the determination made by the CBDT that a failure to deduct tax on payments made by TPAs to hospitals u/s 194J will necessarily attract a penalty u/s 271C interferes with the quasi judicial discretion of the AO and appellate authorities, forecloses the defense of “reasonable cause” u/s 273B and is in violation of the restraints imposed by s. 119 (1). To that extent the circular is set aside. Also clarified that in making assessments and passing appellate orders the AO and CIT (A) shall do so independently and not regard the exercise of their quasi judicial powers as being foreclosed by the issuance of the circular.
Larsen & Toubro Ltd vs. ACIT (Bombay High Court) S. 197 TDS: High Court censures Dept for cavalier approach

JCIT vs. Saheli Leasing & Industries (Supreme Court)
S. 271(1)(c) Penalty: Supreme Court chides High Court for “casual” order. Guidelines laid down as to how judgements should be written. Correctness of Gold Coin 304 ITR 308 (SC) reiterated
The assessee filed a Nil return after claiming depreciation. The AO disallowed depreciation but still assessed the total income at Rs. Nil. Penalty u/s 271(1)(c) was levied on the disallowance which was deleted by the Tribunal on the ground that as the returned income and the assessed income was Nil, penalty could not be levied. The department filed an appeal before the High Court which was dismissed on the basis that no penalty u/s 271(1)(c) could be levied where the returned and assessed income were Nil. On further appeal by the Revenue, HELD allowing the same:
(i) The High Court has dealt with the appeal in a most casual manner. The order is not only cryptic but does not even remotely deal with the arguments projected by the Revenue before it. It is unfortunate that the guidelines issued by the Supreme Court from time to time as to how judgments/orders are to be written are not being adhered to. It is true that brevity is an art but brevity without clarity is likely to enter into the realm of absurdity, which is impermissible. This is reflected in the impugned order. Detailed guidelines laid down as to how judgements should be written;
(ii) On merits, in view of CIT vs. Gold Coin Health 304 ITR 308 (SC) (which overruledVirtual Soft Systems 289 ITR 83 SC), penalty u/s 271(1)(c) is leviable even if the assessment is at a loss;
(iii) At first glance, it appeared that Gold Coin Health required reconsideration by a larger Bench in view of CIT vs. Elphinstone Spinning and Weaving Mills Co 40 ITR 142 (which was followed in Virtual Soft) but it is not so because of distinguishing features between Gold Coin and Elphinstone Spinning;
(iv) In order to enable the Court to refer any case to a larger Bench for reconsideration, it is necessary to point out that particular provision of law having a bearing over the issue involved was not taken note of or there is an error apparent on its face or that a particular earlier decision was not noticed, which has a direct bearing or has taken a contrary view. This is not the case herein and so a reference to a larger Bench is not necessary.
The Prudential Assurance Company vs. DIT (Bombay High Court)

AAR rulings are binding despite contrary rulings of AAR. Assessment order following binding precedent is not amenable to s. 263 revision

CIT vs. Shah Originals (Bombay High Court)
EEFC A/c foreign exchange fluctuation and interest not eligible u/s 80HHC
The assessee, an exporter, claimed deduction u/s 80HHC on account of foreign exchange fluctuation and interest in the EEFC account on the ground that it was part of business income and arose from exports. The AO & CIT (A) rejected the claim though the Tribunal allowed it. On appeal by the Revenue, HELD reversing the Tribunal:
(i) S. 80HHC allows a deduction in respect of the profits “derived” from exports. The term ‘derived’ is of a narrower connotation than the term ‘attributable to’ and postulates the existence of a direct and proximate nexus with the export activity. Pandian Chemicals 262 ITR 278 (SC) and Ravindranathan Nair 295 ITR 228 (SC) followed;
 (ii) An exporter is not obliged to maintain the export proceeds in the EEFC Account but, this is a facility made available by the RBI. The transaction of export is complete in all respects upon repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC Account. The exchange fluctuation arises after the export transaction is complete and payment has been received by the exporter. It does not bear a proximate and direct nexus with the export transaction so as to be “derived” from exports for s. 80HHC. Interest on EEFC deposits isnot “business income” but is “income from other sources” and not eligible for deduction u/s 80HHC.

Genuineness of NRE gifts
In the case of: Deputy Commissioner of Income Tax Vs. Alok Gautam, Decided by: ITAT, LUCKNOW , Assessment Year: 1994-95, Decision Date: 23rd January, 2009

Gist of decision: The facts argued in favour of the gifts being genuine are : (i) gifts were transferred through banking channels; (ii) existence of NRE accounts from which gifts were given are not disputed; (iii) the credits into NRE accounts came from outside India; (iv) Identity of donors is established through NRE accounts; (v) creditworthiness of the donors is established because no one else could deposit money into NRE account; (vi) there is no evidence that it is the assessee\’s money which is routed through NRE accounts by way of hawala or otherwise; (vii) there is a relationship between assessee and the donors in as much as S was a composer contractor and he taught the assessee the art of composing and further that when assessee visited Saudi Arabia , arrangements for stay in Jeddah was made by S. These facts are not enough to establish either the identity of the donors or their creditworthiness. The question of holding that transactions are genuine is too remote to be given even a thought of acceptance. In spite of repeated requests by the AO to produce the donors for examination, the assessee failed to do so. If the donors had any acquaintance with the assessee, or they had any semblance of love or affection with the assessee, which was claimed to be existing as they have given a sum of Rs. 6 lakhs or Rs. 7,40,000 to the assessee by way of gift, they could have come forward to bail out the assessee by producing themselves before the AO in support of alleged transaction of gifts. So far as identity of donors is concerned, it is not proved as to who has given gifts to the assessee. Copies of their passports which could have been used to verify the signatures of the donors on the letters of gift were not produced. It was also not explained as to how the money into the NRE accounts claimed to be belonging to the donors was transferred and whether such transfer was actually done by the alleged donors as the linkage between transfer from the accounts of donors to the NRE account in India was not established. The claim of the assessee that in the NRE account of the donors only the donors can deposit money is not acceptable because at the direction of any third party, money can be credited into a NRE account operated by owner\’s representatives. It is not for the AO to prove that money into NRE account had come from a third source and not from the donors. It is for the assessee to show that money in the NRE account which is maintained and operated through Authorised Representatives in India , had actually come from the alleged donors. The claim of the assessee that merely because money had come into NRE account of donors, it must have actually been transferred by the donors cannot be upheld. It is necessary to establish the nexus between money deposited in NRE accounts and the donors, which the assessee has failed to do so. Assessee having failed to prove the identity of the non-resident donors who are said to have gifted substantial amounts to him from their NRE accounts by producing them personally or copies of their passports and also failed to prove the creditworthiness of the said donors, the alleged gifts cannot be treated as genuine, more so since the assessee had no direct relationship with the donors, there was no occasion for making the gifts, and there was no contact between the parties for almost ten years before the time of said gifts.

S. 80HHC Netting Not Allowed: Bombay High Court

Explanation (baa) to s. 80HHC provides that 90% of interest, rent etc has to be reduced from the “Profits & gains” for purposes of s. 80HHC. In Lalsons Enterprises 89 ITD 25, the Special Bench of the Tribunal held that in computing the said interest, rent etc, the assessee was permitted to net off the interest receipt against the interest expenditure (having a nexus with the receipt) and only the balance could be reduced. This view was affirmed by the Delhi High Court in Shri Ram Honda Power Equipment 289 ITR 475 (Delhi). 
In an oral judgement delivered today (19th March 2010) in CIT vs. Asian Star Co Ltd ITA No. 200 OF 2009 and other cases, the Bombay High Court has dissented from the judgement of the Delhi High Court and held that the language of Expl. (baa) to s. 80HHC did not permit such netting off. It held that the Special Bench had traversed the limits of interpretation and virtually legislated in giving the deduction. It held that merely because s. 80HHC was an incentive provision was no ground for giving more deduction that what the statute permitted. It held that for purposes of Expl. (baa) to s. 80HHC, 90% of gross interest has to be reduced from business profits.
Rallis India vs. ACIT (Bombay High Court) Validity of s. 147 reopening has to be determined on the basis of law prevailing on date of issue of s. 148 notice and not on retrospectively amended law

CIT vs. Earnest Exports (Bombay High Court)

ITAT has no power u/s 254 (2) to re-evaluate correctness on merits of earlier decision.
The assessee claimed deduction u/s 80HHC which was allowed to the extent of Rs. 32.17 crs by the AO. The claim included DEPB license sale proceeds. The CIT revised the assessment u/s 263 on the ground that s. 28 (iiia) did not apply to a DEPB license and its proceeds were not eligible for deduction u/s 80HHC. The assessee filed an appeal before the Tribunal where it relied on the judgements in Pratibha Syntex Ltd vs. JCIT 81 ITD 118 and Pink Star vs. DCIT 27 ITD 137 to argue that the DEPB license would form part of the incentive and had to be considered for s. 80HHC deduction. However, the Tribunal held that these judgements were distinguishable and dismissed the appeal. The assessee thereafter filed a MA u/s 254(2) for rectification. The Tribunal allowed the application and recalled its order. The Tribunal further allowed the assessee’s appeal and set aside the CIT’s s. 263 revisional order. The Tribunal relied on Pratibha Syntex and Pink Star to hold that when the assessment order was passed, there was no dispute as to whether export incentives by way of a DEPB license were eligible for deduction u/s 80HHC. The department filed an appeal where it argued that the Tribunal’s MA order was a review of the earlier order and that it had no jurisdiction to do so u/s 254 (2). HELD allowing the appeal:
(i) S. 254(2) empowers the Tribunal to rectify a mistake apparent from the record. In Honda Siel Power Products 295 ITR 466 (SC) it was held that s. 254(2) is based on the fundamental principle that a party appearing before the Tribunal should not suffer on account of a mistake committed by the Tribunal. It was held that the Tribunal would be regarded as having committed a mistake in not considering the material which is already on record;
(ii) However, in the present case the Tribunal in the original order specifically dealt with the decisions in Pratibha Syntex and Pink Star and held them to be distinguishable. However, in the s. 254(2) order, the Tribunal virtually reconsidered the entire matter and came to the conclusion that in view of Pratibha Syntex and Pink Star a DEPB license was eligible for deduction u/s 80HHC. This amounted to a re-appreciation of the correctness of the earlier decision on merits. This was impermissible. Re-evaluating the correctness on merits of an earlier decision lies beyond the scope of the power conferred u/s 254(2).
(iii) The power u/s 254(2) is confined to a rectification of a mistake apparent on record. S. 254(2) is not a carte blanche for the Tribunal to change its own view by substituting a view which it believes should have been taken in the first instance. S. 254(2) is not a mandate to unsettle decisions taken after due reflection. It is not an avenue to revive a proceeding by recourse to a disingenuous argument nor does it contemplate a fresh look at a decision recorded on merits, however appealing an alternate view may seem. Unless a sense of restraint is observed, judicial discipline would be the casualty. That is not what Parliament envisaged.
Note: In Chem Amit 272 ITR 397 (Bom) and Visvas Promoters 30 DTR (Mad) 65 it was held that an appeal u/s 260A cannot be filed against an order u/s 254 (2). However, this principle may not apply where the s. 254 (2) order also deals with the appeal. For the merits whether DEPB license profits are eligible u/s 80HHC see Topman Exports 318 ITR 87 (Mum) (SB).

CIT vs. Lokmat Newspapers (Bombay High Court) Speculation loss can be set off against delivery based profits

ACIT vs. Elecon Engineering (Supreme Court)

Roll-over charges for foreign currency contracts have to be capitalized u/s 43A
The assessee procured a foreign currency loan for expansion of its existing business. To ensure availability of foreign currency, the assessee booked forward contracts with a bank. The contract was for the entire amount and delivery of foreign currency was obtained from the bank for the installment due from time to time. The balance value of the contract was rolled over for a further period up to the date of the next installment. The assessee paid “roll over premium charges” for the same. The AO disallowed the said charges on the ground that as it were incurred for purchase of plant & machinery, it was capital expenditure. The CIT (A) reversed the AO on the ground that the charges were expenditure for raising a loan and was consequently revenue in nature. The Tribunal reversed the CIT (A) on the ground that u/s 43A the expenditure had to be capitalized. The High Court reversed the Tribunal on the ground that the charges were in the nature of interest or commitment charges and allowable u/s 36(1) (iii). On appeal, HELD reversing the High Court:  (a) Exchange differences are required to be capitalized if the liabilities are incurred for acquiring fixed assets like plant and machinery. It is the purpose for which the loan is raised that is of prime significance. Whether the purpose of the loan is to finance the fixed asset or working capital is the question which one needs to answer;  (b) The cost for carrying forward the contracted foreign currency not immediately required for repayment is called the roll over charge(s). The argument that s. 43A applies only to cases where there is a fluctuation in the rate of exchange and that since roll over charges are paid to avoid increase or reduction in liability on account of such fluctuation, s. 43A does not apply has no merit because s. 43A applies to the entire liability remaining outstanding at the year end and is not restricted merely to the installments actually paid during the year. Therefore the year-end liability of the assessee has to be looked into. Further, it cannot be said that roll over charge has nothing to do with the fluctuation in the rate of exchange. Roll over charges represent the difference arising on account of change in foreign exchange rates. Roll over charges paid/ received in respect of liabilities relating to the acquisition of fixed assets should be debited/ credited to the asset in respect of which liability was incurred. However, roll over charges not relating to fixed assets should be charged to the Profit & Loss Account.  Note: This matter best exemplifies the uncertainties of litigation. The AO was reversed by the CIT (A). The CIT (A) was reversed by the ITAT. The ITAT was reversed by the High Court and finally the High Court was reversed by the Supreme Court. As a great jurist lamented “Those who enter this labyrinth find exit by different paths“. Dynamic Orthopedics vs. CIT (Supreme Court)Issue whether MAT companies can provide depreciation as per Income-tax Rules while computing s. 115J book profits referred to Larger Bench. The assessee, a private limited company, provided for depreciation in its Profit & loss account by adopting the rates specified in the Income-tax Rules and computed its “book profits” u/s 115J on that basis. The AO recomputed the book profits by adopting the depreciation rates as per Schedule XIV to the Companies Act as those were lower than the income-tax rates. The CIT (A) & Tribunal upheld the stand of the assessee on the ground that Schedule XIV was not applicable to a private limited company though the High Court took the view that s. 205 of the Companies Act stood incorporated into s. 115J and consequently depreciation had to be provided at the rates specified in Schedule XIV and not in terms of the Income-tax Rules. On appeal by the assessee, HELD doubting its own judgement in Malayala Manorama 300 ITR 251: (i) The law laid down in Malayala Manorama 300 ITR 251 {that (i) Schedule VI does not create any obligation to provide for any depreciation much less for depreciation at Schedule XIV rates, (ii) As per the Company Law Board Circular the rates in Schedule XIV are the minimum rates and a company can provide for higher rates and (iii) Schedule XIV itself contemplates that depreciation can be provided at rates different from the Schedule rates} needs re-consideration because s. 115J by a deeming fiction legislatively only incorporates provisions of Parts II and III of Schedule VI of the Companies Act and not sections 205, 350 or 355. Once a company, whether private or public, falls within the ambit of it being a MAT company, s. 115J applies and is required to prepare its Profit & loss account only in terms of Parts II and III of Schedule VI. By the Companies (Amendment) Act, 1988, the linkage between depreciation as per Rule 5 and the Companies Act have been expressly de-linked and the rates are also different.   (ii) If the judgement in Malayala Manorama is to be accepted, the very purpose of enacting s. 115J would stand defeated particularly when the said section does not make any distinction between public and private limited companies.  (iii) Accordingly, the matter needs re-consideration by a larger Bench of the Court.  Note: In Malayala Manorama, all that was said was that a company was entitled to provide for depreciation at the income-tax rates because the rates specified in Schedule XIV were the minimum rates. It was emphasized that Schedule XIV itself permitted different & higher rates to be provided. Further, the Bench followed Apollo Tyres 255 ITR 273 (3 Judges) where it was laid that the AO could not recompute “book profits” by excluding provisions made for arrears of depreciation.Patel Engineering Ltd vs. ACIT(Bombay High Court)S. 80IA (4) validity challenged in the Bombay High CourtA writ Petition challenging the constitutional validity of the Explanation inserted by the Finance No.2 Act 2009 to section 80IA (4) of the Act with retrospective effect from 1.4.2000 has been admitted today (16.2.2010) by the Bombay High Court in Patel Engineering Ltd vs. ACIT W. P. No. 219 of 2010.  Section 80IA (4) inserted w.e.f. AY 1996-97 allows a deduction of 100%/30% of profits derived by undertakings engaged in developing, maintaining and operating infrastructure facilities. It is the case of the Petitioner that there was no distinction between undertakings developing etc infrastructure facilities on their own accord or as a works contractor and that this has been the consistent understanding of the income-tax authorities as well. It is argued that by the Explanation, the scope of the main substantive section has been restricted and that the effect of the retrospective amendment is to take away a vested right, both of which are not permissible under the law.  The Writ Petition has been fixed for final hearing on 15.3.2010.All those having matters relating to interpretation of section 80IA (4) which are pending before the High Court are requested to give the Appeal/Writ Nos. to the Associate for grouping matters. Note: A similar challenge to the Explanation to s. 80IA (4) is pending before the Gujarat High Court in Ketan Construction vs. UOI. In B.T. Patil v ACIT 32 DTR (Mum.) it was held by the larger Bench of the Tribunal that even without the amendment, a contractor is not a “developer” and is not eligible for deduction u/s 80IA (4).ACIT vs. Hotel Blue Moon (Supreme Court)Issue of s. 143 (2) notice is mandatory for block assessment proceedings. Disclosed items cannot be assessed in block assessment. Circulars are binding on the revenue.  Chapter XIV-B provides that where a search u/s 132 is conducted, the AO shall determine the undisclosed income for the block period. S. 158 BC(b) provides that in making the block assessment the provisions of s. 143 (2) shall “so far as may be, apply”. The Supreme Court had to consider whether a block assessment order passed without service of notice on the assessee u/s 143(2) within the prescribed period of time was valid. HELD, deciding in favour of the assessee:  (i) While notice u/s 143 (2) is not necessary if the AO accepts the return as filed, the notice within the prescribed time is mandatory if the AO proposes to make an assessment u/s 158BC r.w.s143 (3). Omission to issue notice u/s 143(2) is not a procedural irregularity and the same is not curable and, the requirement of notice u/s 143(2) cannot be dispensed with. If the intention of the legislature was to exclude the provisions of s. 143 (2), the legislature would have indicated that. (ii) In Circular No.717 dated 14.8.1995 the CBDT has directed that the AO “shall proceed to determine the undisclosed income of the block period and the provisions of s. 142, sub-s (2) and (3) of s. 143 and s. 144 shall apply accordingly”. This circular clarifies the requirement of law in respect of service of notice u/s 143 (2). The circular is binding on the department though not on the Court. (iii) A search is the sine qua non for a block assessment under Ch. XIV-B. A block assessment is in addition to regular assessments proceedings and not in substitution thereof. The scope and ambit of a block assessment is limited to materials unearthed during search and can only be done on the basis of evidence found as a result of search or requisition.  Note: The judgements in Bandana Gogoi 289 ITR 28 (Gau), Pawan Gupta 181 TM 299 (Del) & Mudra Nanavati (Bom) are impliedly approved while that of the Special Bench in Nawal Kishore & Sons 87 ITD 407 (Luck) (SB) is impliedly overruled. On the scope of a block assessment, Vikram Doshi 256 ITR 129 & Shaw Wallace 238 ITR 13 (Cal) are impliedly approved. S. 292BB inserted w.e.f 1.4.2008 provides that despite non-service etc of notice, the proceedings shall be valid if the assessee has co-operated and not raised an objection before completion of the proceeding. This has been held not to be retrospective in Kuber Tobacco 119 ITD 273 (SB) (Del)The Totgars’ Cooperative vs. ITO (Supreme Court)Interest on surplus funds is “other income” and not eligible for dedn u/s 80P The assessee, a co-op credit society, was engaged in providing credit facilities to its members and also marketing the agricultural produce of its members. The assessee had surplus funds which it invested in short-term deposits with banks and govt securities. The question arose whether the said interest earned on the said deposits was “business profits” and eligible for deduction u/s 80P(2)(a)(i). The assessee argued that its activity of providing credit facilities to its members was an “eligible activity” u/s 80P(2)(a)(i) and that as the investments were made as per statutory requirement, the benefit was allowable from the gross total income. HELD deciding against the assessee:  (i) S. 80P(2)(a)(i) allows a deduction in the case of a co-op society engaged in carrying on the business of providing credit facilities to its members of the whole of the amount of profits and gains of business attributable to such activity. The words “profits and gains of business” means “business profits” and not “Income from other sources”;  (ii)The interest on surplus invested in short-term deposits, not being attributable to the business of providing credit facilities to the members or marketing of agricultural produce of the members, is assessable as “other income” and not as “business profits”;  (iii) The words “the whole of the amount of profits and gains of business” attributable to one of the activities specified in s. 80P (2)(a) mean that the source of income is relevant and that the income must be “operational income”. Scientific Atlanta vs. ACIT (ITAT Chennai Special Bench)S. 10A deduction allowable without set off of losses of non-eligible units In respect of AY 2003-04, the assessee had an unit in Chennai which was engaged in software development and whose profits were eligible for deduction u/s 10A. The assessee had another unit in Delhi which was engaged in trading and had suffered a loss. The assessee claimed that it was eligible for a deduction u/s 10A on the whole of the profits of the Chennai unit without it being reduced by the losses of the Delhi unit. The AO and CIT (A) rejected the claim on the ground that after the amendment of s. 10A w.e.f. 1.4.2001, a deduction is allowed from the “total income” and consequently the losses have to be taken into account. On a reference to the Special Bench, HELD deciding in favour of the assessee: (i) S. 10A allows a deduction of the “profits and gains derived by the undertaking from the export of computer software” “from the total income of the assessee”. The effect is that the deduction has to be made at the stage of computing the income under head “Profits & gains” and not at the stage of computing the gross total income; (ii) S. 80AB is confined to deductions granted under Chapter VI-A. As s. 10A does not fall in Ch. VI-A, s. 80AB has no application; (iii) S. 10A grants a deduction to the “profits of the undertaking” and not to the “profits of the assessee”. There is a well known distinction between the “undertaking” and the “assessee” as also noted by the CBDT in Circular F. No. 15/563 dated 13.12.1963. The deduction u/s 10A attaches to the undertaking and not to the assessee; (iv) Consequently, the losses of a non-eligible unit cannot be set off against the profits of an eligible unit and are eligible to be set-off against other income or to be carried forward. The position of a losses of an eligible unit may be on a different footing.  Note: The judgements in Yokogawa India Ltd 111 TTJ 548 (Bang) & Changepond Technologies 22 SOT 220 (Mad) are impliedly approved. In Global Vantage (ITAT Del) it was held that the brought forward unabsorbed business losses and unabsorbed depreciation of the eligible unit had to be set off before allowing deduction u/s 10A. BBC Worldwide vs. DDIT (ITAT Delhi) Foreign Co not liable to tax in India if Indian agent is paid on arms’ length basis Perot Systems TSI vs. DCIT (ITAT Delhi)Notional interest on interest-free loans is assessable under transfer pricing lawThe assessee, an Indian company, advanced interest-free loans to its 100% foreign subsidiaries. The subsidiaries used those funds to make investments in other step-down subsidiaries. On the question whether notional interest on the said loans could be assessed in the hands of the assessee under the transfer pricing provisions of Chapter X, the assessee argued that the said “loans” were in fact “quasi-equity” and made out of commercial expediency. It was also argued that notional income could not be assessed to tax. HELD rejecting both arguments: (i) The argument that the loans were in reality not loans but were quasi-capital cannot be accepted because the agreements show them to be loans and there is no special feature in the contract to treat them otherwise. There is also no reason why the loans were not contributed as capital if they were actually meant to be a capital contribution

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