S.2(14): Capital asset–Agricultural land-Municipality–Local authority Hyderabad
Airport Development Authority- Sale of land beyond 8 Kms of Municipality limits is not liable to capital gain tax. [S.10 (20), Constitution of India –Art 243 P(e), 243R, General Clauses Act. S.3(21)g]
The assessee sold the agricultural land. The assessee claimed that the capital gain tax is not leviable. The Assessing Officer held that the land is within the limits of HADA which is Government notified local authority and was a municipality within the meaning of section 2(14)(iii)(a),therefore ,the land sold by the assessee was non-agricultural land. The Government of Andhra Pradesh issued a land acquisition notification dated 16-5-2007 for the acquisition of the above land of the assessee to develop in to an integrated township. On appeal the Tribunal held that the Hyderabad Airport Development Authority had been constituted under provisions of Andhra Pradesh Urban Areas (Development) Act, 1975 as a Special Area Development Authority by State Government, it cannot be treated as a municipality for purposes of provisions of section 2(14) of the Act. In the revenue records the land is classified as agricultural land and has not been changed from agricultural land to non agricultural land at the time when the land was sold by the assessee. The land in question is brought in special Zone cannot be a determining factor by itself to say that the land was converted in to use for non-agricultural purposes. As the agricultural land of assessee is outside the municipality and also 8 kms away from the outer limits of the Municipality, assessee's land does not come within the purview of section 2 (14)(iii) either under clause (a) or (b) , hence cannot be considered as 'capital asset' within the meaning section , hence capital gain tax cannot be charged on sale of the said land. (A.Y. 2008-09)
T. Urmila(Smt) v. ITO (2013) 57 SOT 90(URO) (Hyd.)(Trib.)
S.2(15): Charitable purpose–Object of general public utility–Control of game of cricket is business activities –Cancellation of registration was justified. [S. 12AA]
Since the assessee was carrying on revenue earning exercise by arranging international matches, IPL matches, etc. in such a way that maximum advertisement revenue was derived from any type of match, its activities did not come within conceptual framework of charity vis-à-vis activity of general public utility envisaged in s. 2(15).Cancellation of registration was justified. (A.Y.2009-10)
Tamil Nadu Cricket Association v. DIT (2013) 57 SOT 439 (Chennai)(Trib.)
S.2(22)(e): Dividend-Deemed dividend-Advance to Director for purchase of land on behalf of company-Provision does not attract.
Advance granted to the director to purchase land in the name of the director but in which the company would be having beneficial interest does not attract section 2(22)(e).(A.Y.2006-07) (ITA no 447 dt.26-12-2012)
ACIT v. C.V. Reddy (2013) –TIOL-168 (Bang.)(Trib.)
S.4: Charge of income-tax-Income-Subsidy-Deferred sales tax scheme-Capital receipt.[S.2(24)]
To determine the character of subsidy in hands of recipient, whether revenue or capital, the purpose of the subsidy is to be considered and the source of fund and mechanism of giving subsidy are immaterial. Incentive, in form of sales tax waiver/deferment was not meant to give any benefit on day-to-day functioning of business or to make it more profitable; but was principally aimed to cover capital outlay of assessee for undertaking modernization of existing industry, it was capital in nature, and thus, not taxable. (A.Y.1992-93)
CIT v. Birla VXL Ltd. (2013) 215 Taxman 117 (Guj.)(HC)
S.5: Scope of total income–Retention money–Accrual.
In view of decision of Gujarat High Court in case of Anup Engineering Ltd. v. CIT [2001] 247 ITR 457/114 Taxman 584 retention money could not be said to have accrued to assessee and therefore, this amount did not represent assessee's accrued income. (A.Y. 2002-03)
DIT v. Ballast Nedam International (2013) 215 Taxman 254 (Guj) (HC)
S.9(1)(i): Income deemed to accrue or arise in India–Set off of branch losses – Taxability-DTAA-India-Sweden .[ Art.7]
The assessee set off its loss from Sweden branch against its other business income taxable in India. Revenue's case was that as per Article 7, profits attributable to Sweden branch was taxable in Sweden and, therefore, losses incurred by Sweden branch could not be set off against other income. Following its decision rendered in earlier assessment years with respect to India-Japan DTAA, the Tribunal allowed the claim of the assessee. Since nothing had been brought on record to show that clauses of DTAA between India-Sweden were different from that in DTAA between India-Japan in respect of present issue, the Tribunal's order was justified. (A.Y. 2002-03)
CIT v. Patni Computer Systems Ltd. (2013) 215 Taxman 108 (Bom.) (HC)
Editorial: Arising out of order in Patni Computer Systems Ltd v. Dy.CIT (2012) 135 ITD 398(Pune)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India-Short term capital gain-Forward exchange contract/hedging mechanism-DTAA- India-Spain-Additional evidence-Matter set aside. [Art. 14, 23]
The assessee-company was a resident of Spain and registered as FII with SEBI. It claimed the profit on foreign exchange transactions as short-term capital gain and hence exempt under India-Spain DTAA. Since the assessee filed additional evidence before the Tribunal, the matter was to be restored to the Assessing Officer for fresh decision. (A.Y. 2005-06)
Merrill Lynch Capital Markets Espana SA v. DCIT (2013) 57 SOT 435 (Mum.)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India–Capital gains–DTAA-India-UAE. [Art.4, 13]
The assessee is held to be not entitled to the benefit of India-UAE DTAA and income from capital gains was charged to tax, on the ground that individuals are not taxable in UAE. The Tribunal in assessee's own case in immediately preceding year held that assessee was entitled to benefits of DTAA thereby granting exemption from capital gain. Since the facts of the instant appeal were similar to those of immediately preceding year, the benefit of the DTAA was to be granted.(A.Y. 2008-09)
ITO v. Chandersen Jatwani (2013) 57 SOT 437 (Mum.)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India–Interest– Income-tax refund-DTAA-India-Denmark [Art.9(4), 12(6)]
Interest on income-tax refund was taxable in India as per Article 12(6) of DTAA between India and Denmark. Interest cannot be considered as business income. (A.Y. 2005-06)
A.P. Moller Maersk v. DCIT (2013) 57 SOT 267 (Mum.)(Trib.)
S.9(1)(vi): Income deemed to accrue or arise in India–Royalty-Fees for technical services-Shipping business-DTAA-India-Denmark. [S.9(1)(vii), Art. 9, 13 ]
Amounts received by shipping company on account of shared cost of global tracking system was linked to shipping income as per Article 9(1) of DTAA between India and Denmark and was not taxable in India. (A.Y. 2005-06)
A.P. Moller Maersk v. DCIT (2013) 57 SOT 267 (Mum)( Trib.)
S.10(38): Exempt income – Long term capital gains from equities - Scheme of sale of land through sale of shares of shell company is valid.
The assessee held 98.73% shares in Bhoruka Financial Services Limited (BFSL). In AY 2005-06 BFSL purchased a plot of land from a group sick company called Bhoruka Steels Ltd for Rs.3.75 crores which was accepted to be the prevailing market price u/s 50C. BFSL was a shell company with no assets other than the said land. In AY 2006-07 the assessee sold its shareholding in BFSL to DLF Commercial Developers Ltd for a net consideration of Rs. 20 crore. As the sale of shares was executed through the Magadh Stock Exchange and STT was paid, the assessee claimed that the gain on sale of shares was exempt u/s 10 (38). The AO, CIT(A) and Tribunal rejected the assessee's claim on the basis that the assessee, BFSL and Bhoruka Steels were all controlled by common shareholders and that the scheme to first sell the land to BFSL and then to sell the shares of BFSL was devised with the sole purpose of avoiding tax on the capital gains which would have arisen if the land had been sold directly. It was held that the formalities of the transaction and the legal nature of the corporate bodies had to be ignored by lifting the corporate veil and the transaction had to be taxed as a sale of the land. On appeal by the assessee to the High Court, HELD allowing the appeal:
Though BFSL was a shell company with no asset other than the land and by buying the shares of BFSL, DLF in effect purchased the land, the transaction cannot be said to a sham or an unreal one. In coming to the conclusion that the transaction is a colourable device, the authorities have been carried away by the fact that the assessee was able to avoid payment of income tax. The assessee did resort to tax planning and took advantage of the law/ loopholes in the law. After seeing how the loophole was exploited within the four corners of the law, it is open to Parliament to amend the law plugging the loophole. However it cannot be done by judicial interpretation. S.10(38) of the Act is unambiguous. If the share holder chooses to transfer the lands through a transfer of the shares of the company owning the land, it would be a valid legal transaction in law and cannot be said to be a colourable devise or a sham merely because tax is avoided thereby (McDowell & Co. v. CIT (1985) 154 ITR 148 (SC), UOI & Anr. v Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC) & Vodafone International Holding B.V. v. UOI& Anr. (2012) 341 ITR 1 (SC) referred)( ITA No. 120 of 2011, dt. 09/04/2013)
Bhoruka Engineering Inds. Ltd. v. Dy. CIT (Karn.)(HC) www.itatonline.org
S.10A: Free trade zone–Software developed transmitted to foreign countries through internet cannot treated as bogus transaction.
The assessee started new venture of software development and claimed profit of software division under section 10A. The Assessing Officer was not convinced from contemporaneous record that software was developed by assessee or that same was transmitted to foreign countries through internet and rejected the claim of the assessee treating the said transaction as bogus and sham. The Commissioner (Appeals) and the Tribunal, taking into consideration report of audit, agreement with STPI, certificate in respect of custom, boarding arrangement of assessee and payment received from various parties through channel of banks, concluded that transaction was genuine, allowed the assessee's claim. Held, since the order passed by the appellate authorities was based on appreciation of material on record, no substantial question of law arose there from.(A.Y. 2003-04)
CIT v. Nova Petrochemicals Ltd. (2013) 215 Taxman 82(Mag.) (Guj.)(HC)
S.10A: Free trade zone-New unit- Approval letter issued by authority of Software Technology Park.
The assessee established three units and claimed deduction u/s 10A. The Revenue denied the deduction on basis of approval letter issued by authority of Software Technology Park stating that, these units were to be considered as part of existing units. On other hand, Tribunal found that all three units had fulfilled conditions u/s.10A, and therefore, allowed deduction holding those units as separate and independent production units, and not as mere expansion of existing unit. Since the decision of the Tribunal was based on finding of fact, no interference was required. (A.Y. 2002-03)
CIT v. Patni Computer Systems Ltd. (2013) 215 Taxman 108 (Bom.)(HC)
Editorial: Arising out of order in Patni Computer Systems Ltd v. Dy.CIT (2012) 135 ITD 398(Pune)(Trib.)
S.10A: Free trade zone-Consistency-Computation-Export turnover-Expenditure do not pertain to delivery of goods out of India are not deductible from export turnover.
Where the assessee followed head count method of accounting for computing deduction u/s 10A, which had been accepted by revenue in earlier years, it could not be disallowed in relevant assessment year. The expenditure towards insurance, freight and communication incurred in foreign exchange, which do not pertain to delivery of goods out of India and satellite link charges and technical service fee are not deductible from export turnover. (A.Y. 2007-08)
Willis Processing Services (I) (P) Ltd. DY. CIT (2013) 57 SOT 339 (Mum.)(Trib.)
S.10A: Free trade zone-Newly established undertakings-Deemed export is not eligible for exemption.
The assessee software company carried out deemed exports by raising bills on local parties and received sale proceeds in convertible foreign exchange thereby claimed deduction on same under section 10A. On ground that deemed exports are exports as per EXIM policy. On appeal Tribunal held that that deduction under section 10A is to be allowed only when foreign exchange is received on export of software and EXIM policy cannot overrule Income-tax Act which is a separate code in itself. In view of same claim of assessee could not be allowed. (A.Y. 2005-06)
Wipro Ltd. v. Dy.CIT (2013) 143 ITD 1 (Bang.)(Trib.)
S.10A: Free Trade Zone-Newly established undertakings-Export turnover-Total turnover-Foreign tax (VAT/GST) collected from customers is to be excluded.
Assessing Officer excluded foreign tax (VAT/GST) collected from customers from export turnover as well as from total turnover, thereby, granting lower deduction under section 10A to assessee a STP unit, on ground that tax collected was subsequently remitted to government. the Tribunal held that once this sum is not included in export turnover then the same cannot be included in the total turnover. (A.Y.2005 -06)
Wipro Ltd. v. Dy.CIT (2013) 143 ITD 1 (Bang.)(Trib.)
S.10A: Free trade zone-Computation-Export turnover-Total turnover- Parity between numerator and denominator.
Expenses reduced from export turnover were also to be reduced from total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A. (A.Y. 2007-08)
Bearing Point Business Consulting (P.) Ltd. v. DCIT (2013) 57 SOT 244 (Bang.)(Trib.)
S.10B: Exempt income-Export oriented undertaking-Initial year- Assessee has to prove its eligibility in initial year of production only and not in every year of claim.
The Assessing Officer rejected the assessee's claim holding that the assessee had employed used machinery value of which exceeded 20% of total value of machinery employed by assessee. It was noted from records that the claim u/s 10B was allowed in the past and the year under consideration was found to be 5th year of claim. There was no evidence on record establishing that assessee had purchased used machinery during relevant assessment year. Held in order to claim exemption u/s 10B, assessee has to prove its eligibility in initial year of production only and not in every year of claim. (A.Y. 2003-04 to 2004-05)
DCIT v. Tyco Valves & Control India (P.) Ltd. (2013) 57 SOT 138(URO)(Ahd.)(Trib.)
S.12AA: Procedure for registration–Period of six months–Directory.
There is no automatic or deemed registration if the application filed under section 12AA is not disposed of within the stipulated period of six months as the time frame fixed under the provision is only directory. Matter remitted to the Commissioner for consideration of the matter a fresh.
CIT v. Sheela Christian Charitable Trust (2013) 354 ITR 478 (Mad.)(HC)
S.12AA: Procedure for registration–Order lodging the application–Not sustainable-Deemed registration-Time to be reckoned from the end of month in which the application was filed-Matter remanded to Commissioner.
The assessee filed an application before the Commissioner on 28th January, 2009 for seeking registration under section 12AA and for grant of approval under section 80G. The Commissioner held that the activities of the assessee could not be called charitable. Accordingly he lodged the application of assessee. On appeal Tribunal held that since the application was filed by the assessee on 28th January, 2009 and the Commissioner passed the order on July 31, 2009, by virtue of section 12AA, the six month period has expired and therefore application should be deemed to have been granted recognizing the status of assessee as 'Charitable Trust'. Tribunal also held that sale of books, hiring of utensils and rental income would not make the activities of the assessee a commercial venture. On appeal the court held that the application was dated January 28, 2009 and calculating the six months' period from the end of the said month, it could not be said that the six months' period would expire by July 31, 2009. Therefore, the order passed by the Commissioner on July 31, 2009, could not be held to have been passed in violation of section 12AA. The conclusion of the Tribunal that the registration was deemed to have been granted, could not be sustained, inasmuch it was found that the order of the Director of Income-tax was passed within a period of six months stipulated in section 12AA(2). However, it was held that the Commissioner should have either granted or rejected the application and was not expected to merely lodge the application, which would only leave the assessee in a suspended animation. There could not be any order in between like lodging the application. Thus, the matter was remitted to the Commissioner for fresh disposal on the merits.
DIT (Exemption) v. Anjuman-e-Khyrkhah-e-Aam (2013) 354 ITR 474 (Mad.)(HC)
S.12AA: Procedure for registration-Religious purpose-Denial of exemption was held to be not justified. [S.13(1)(b)]
The Commissioner rejected assessee's application on the ground that the object clause of trust deed included an object of religious nature. The only prohibition in this regard was contained in S.13(1)(b), which excludes a trust or institution created or established for benefit of any particular religious community or caste. Since the aforesaid prohibition did not apply to assessee's case, impugned order denying registration to assessee-trust was to be set aside.
Radhika Seva Sansthan v. CIT (2013) 57 SOT 121(URO) (Jaipur) (Trib.)
S.12AA: Procedure for registration-Trust or institution-Promotion of sports- Charitable purpose-Registration is entitled. [S.2(15)]
The Assessee-society is registered under the Society Registration Act, 1860. The founder-members of the society were professional golfers. The assessee filed an application seeking registration under section 12AA. The Commissioner rejected the application of registration. The Tribunal held that Society's Object are charitable in nature, all the object and aims of the assessee are contained in clause (3) of its Memorandum of Association, Promotion of sports and games has to be considered as 'charitable purpose' within meaning of section 2(15). Assessee society formed to promote interest in game of golf in general and professional golfers in particular was entitled to registration under section 12AA of the Act.
Professional Golf Tour of India v. CIT (2013) 143 ITD 165/155 TTJ 17(UO)(Chandigarh)(Trib.)
S.14A: Disallowance of expenditure–Exempt income-Sufficient interest free funds–Presumption.
Where the assessee had sufficient interest free funds to meet its tax free investments yielding exempt income, it could be presumed that such investments were made from interest free funds and not loaned funds and, thus no disallowance u/s.14A being warranted. Ratio in case of CIT v. Reliance Utilities & Power Ltd (2009) 313 ITR 340 (Bom.)(HC) is followed. (A.Y. 2003-04)
CIT v. UTI Bank Ltd. (2013) 215 Taxman 8(Mag.) (Guj.)(HC)
S.14A: Disallowance of expenditure–Exempt income- Dividend from foreign subsidiaries–Interest free funds.
Where investment was made by the assessee in foreign subsidiaries, disallowance of interest expenditure under section 14A was not justified since dividend income from foreign subsidiaries, is taxable in India. Also, where the assessee had own interest free funds many times over the investment made in Indian subsidiaries and further, there was no direct nexus between interest bearing borrowed funds and such investment, no disallowance of interest expenditure could be made under section 14A.
CIT v. Suzlon Energy Ltd. (2013) 215 Taxman 272 (Guj.) (HC)
S.14A: Disallowance of expenditure-Exempt income-Disallowance under section 14A cannot be made if satisfaction not recorded with reference to A/cs. Under Rule 8D(2)(ii) loans for specific business purposes cannot be included. Under Rule 8D(2)(ii) & (iii) investments which have not yielded income cannot be included. [Income–tax Rules, 1962, Rule 8D]
In AY 2008-09, the assessee invested Rs.103 crores in shares on which it earned tax-free dividends of Rs. 1.3 lakhs. The assessee claimed that though its borrowings had increased by Rs. 122 crores, the said investments were funded out of own funds like capital and profits. It claimed that no expenditure had been incurred to earn the dividends and no disallowance u/s 14A could be made. The Assessing Officer applied Rule 8D and computed the disallowance at Rs. 4 crore. On appeal by the assessee, the Commissioner (Appeals) reduced the disallowance to Rs. 26 lakh. On cross appeals, HELD by the Tribunal:
(i) When the Assessing Officer does not accept the assessee's claim regarding the non-applicability/ quantum of disallowance u/s 14A, he has to record satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It has is to be done with regard to the accounts of the assessee. On facts, as there is no satisfaction by the Assessing Officer, no disallowance u/s 14A can be made [Balarampur Chini Mills Ltd. v. Dy. CIT (2011) 140 TTJ 73(Kol.)(Trib.)] followed;
(ii) Rule 8D(2)(ii) is a computation provision in respect of expenditure incurred by way of interest which is not directly attributable to any particular income or receipt. This clearly means that interest expenditure which is directly relatable to any particular income or receipt is not to be considered under rule 8D(2)(ii). The AO has to show that the interest is not directly attributable to any particular income or receipt. In the assessee's case, the interest has been paid on loans taken from banks for business purpose. There is no allegation that the loan funds have been diverted for making investment in shares or for non-business purposes. The loans are for specific business purposes and no bank would permit the loan given for one purpose to be used for making any investment in shares. Also, the assessee has substantial capital & reserves. Accordingly, the interest on the loans cannot be included in Rule 8D(2)(ii);
(iii) Further, in Rule 8D(2)(ii), the words used in numerator B are "the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year". The Assessing Officer was wrong in taking taken into consideration the investment of Rs.103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term "average of the value of investment" is used to take care of cases where there is the issue of dividend striping;
(iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in rule 8D(2)(ii). Thus, not all investments become the subject-matter of consideration when computing disallowance u/s 14A read with rule 8D. The disallowance u/s 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A. Y. 2008-09) ( ITA No. 1331/Kol/2011, dt. 29/07/2011)
REI Agro Ltd v. DCIT (Kol.)(Trib.).www.itatonline.org
S.14A: Disallowance of expenditure–Exempt income-Reasonable basis.
For periods prior to AY 2008-09, disallowance of expenses relating to exempt income, u/s 14A, is to be computed on a reasonable basis and not as per rule 8D.(A.Y. 2004-05)
Forever Diamonds (P.) Ltd. v. DCIT (2013) 57 SOT 113 (URO)(Mum.)(Trib.)
S.14A: Disallowance of expenditure-Exempt income-Rule 8D does not apply to short-term investments, gains from which is taxable. [Income-tax Rules,1962-Rule 8D]
Some of the investments made by the assessee are short term. Since assessee is paying capital gains tax on short term investments, Rule 8D will not apply on them and the Assessing Officer is directed to re compute disallowance u/s 14A read with Rule 8D after excluding short term investments ( A. Y. 2008-09, ITA No. 1774/Mds/2012, dt.19 July,2013)
Sundaram Asset Management Co. Ltd v. DCIT (Chennai)(Trib.) www.itatonline.org
S.14A: Disallowance of expenditure – Exempt income-Interest on loans for specified purposes to be excluded [Income-tax Rules, 1962-Rule 8D]
The assessee contended that in computing the disallowance to be made under section 14A and rule 8D(2)(ii) ,the interest on bank loans taken for specific taxable purposes had to be excluded .The Assessing Officer rejected the claim. On appeal Commissioner (Appeals) accepted the claim of assessee. On appeal by revenue the Tribunal held that rule 8D(2)(ii) refers to expenditure by way of interest which is not attributable to any particular income or receipt. If loans have been sanctioned for specified projects /expansion and have been utilized towards the same ,then obvious they could not have been utilized for making any investments having tax-free incomes and have to excluded from the calculation to determine the disallowance under Rule 8D(2)(ii).(Champion Commercial Co. Ltd.) (Kol)(Trib.)(ITA no 644 /Kol/2012 dt 21-09-2012) is followed.(A.Y.2009-10)(ITA No.1603/Mds/2012 dt.16-07-2012)
ACIT v. Best & Cromton Engineering Ltd. (Chennai)(Trib.) www.itatonline.org.
S.14A: Disallowance of expenditure-Exempt income-Onus on assessee to prove that he had not incurred any expenses relating to income not forming part of total income. [Income-tax Rules, 1962, Rule 8D]
Assessing Officer had disallowed a sum of Rs.3,05,423/- by applying provisions of section 14A read with rule 8D. On Appeal the Commissioner (Appeals) reduced the disallowance to Rs 1 lakh on the ground that there is no precise finding given by the Assessing Officer .On appeal Tribunal held that onus lay on assessee to prove that he had not incurred any expenses relating to income not forming part of total income. Since assessee did not file any details of expenditure incurred by him, the order of Commissioner (Appeals) was set aside and that of Assessing Officer restored. (A.Y.2009-10)
ACIT v. Joe Marcelinho Mathias(2013) 143 ITD 132 (Panji)(Trib.)
S.22: Income from house property-Business income-Un sold flat-Rental income from unsold flat is assessable as income from house property. [S.28(i)]
The Court held that rental income from unsold flats in the hands of builder/developer, which are shown as 'business assets' should be assessed under the head Income from house property and not as business income. (ITA Nos. 238, 238 & 240 of 2013 dt.17-05-2013)
New Delhi Hotels Ltd. v. ACIT (2013) The Chamber's Journal –July-P.114 (Delhi)(HC)
S.28(i): Business income–Grant in aid for research activities is capital receipt. [S.41, 263]
The grant in aid for a specific purpose of conducting research in the field of telecommunications, so that the benefit thereof would benefit the Nation and for carrying on day to day business of the assessee was a capital receipt. Order under section 263 was held to be bad in law. The question referred to High Court was on merit. High Court confirmed the order of Tribunal. (A.Y. 1989-90)
CIT v. India Telephone Industries Ltd. (2013) 215 Taxman 82 (Karn.)(HC)
S.28(i): Business loss–In the name of firm-Foreign currency transactions-Not allowable in the assessment of partner. [Partnership Act, 1932 S.13]
The Appellant entered into foreign currency transactions on behalf of firm from its account. Both the assessee–partner and firm claimed such loss as deduction in their respective income. The Tribunal disallowed the claim on the both. On separate order High Court admitted appeal of the partnership firm. In appeal it was contended that the transactions were entered in to without the knowledge of other partners and therefore should be treated as his personal loss. The Court held that section 13 of the Partnership Act provides, inter alia, that subject to the contract between, partnership firm shall indemnify the partner in respect of the payment made and liabilities incurred by firm in the ordinary and proper conduct of business and in doing such act, in an emergency for the purpose of protecting the firm from loss as, would be done by a person of ordinary prudence, in his own case ,under similar circumstances .In the result these transactions resulted in loss and could not be allowed as deduction in individual capacity of assessee-partner, when the same claim is made by firm under examination.(A.Y. 2007-08)
Pravinbhai Mohanbhai Kheni v. ACIT (2013) 215 Taxman 83(Mag.) (Guj.)(HC)
S.28(i): Business income–Share dealings–Capital gains-Purchase and sale on regular basis assessable as business income. [S.45 ]
Board's resolution authorized the assessee-company to set apart a corpus of Rs.100 crores for trading in shares which represented intention to carry out activities of purchase and sale of shares on business lines. Further, the purchase and sale transactions in shares were entered into on regular and systematic basis with profit motive which only constituted business. The long-term capital gain was a small amount as against short-term capital gain which was a strong indicator as to shares being not intended to be held by way of investments. Held, the income had to be taxed as business income. (A.Y. 2007-08)
Mafatlal Fabrics (P.) Ltd. v. Add.CIT (2013) 57 SOT 425 (Mum.)(Trib.)
S.28(va): Business income–Non-compete fees–Taxability-DTAA- India-France [Art.7]
Compensation received from foreign company in lieu of an undertaking by the assessee for not competing with Foreign company in India and for not using trade mark, designs, logo of said foreign collaborator, post settlement would be taxable in India. (A.Y. 2004-05)
Control & Switchgear Contractors Ltd. v. DCIT (2013) 57 SOT 127(URO) (Delhi)(Trib.)
S.31: Repairs and insurance of machinery, plant and furniture–Replacement of crucial components of a machine could not be considered as current repairs. [S. 37(1)]
Replacement of crucial components of a machine which resulted in a new or fresh advantage or obtaining of enduring benefit could not be considered as current repairs expenditure and would not be allowable as deduction u/s 31(1) or u/s 37(1). (A.Y.1999-2000)
DCIT v. Printers (Mysore) (P.) Ltd. (2013) 57 SOT 117(URO) (Bang.)(Trib.)
S.32: Depreciation–Set off –Unabsorbed depreciation-Carry forward and set off permitted till final set off- Reassessment was held to be not valid. [S.147, 148]
Airport Development Authority- Sale of land beyond 8 Kms of Municipality limits is not liable to capital gain tax. [S.10 (20), Constitution of India –Art 243 P(e), 243R, General Clauses Act. S.3(21)g]
The assessee sold the agricultural land. The assessee claimed that the capital gain tax is not leviable. The Assessing Officer held that the land is within the limits of HADA which is Government notified local authority and was a municipality within the meaning of section 2(14)(iii)(a),therefore ,the land sold by the assessee was non-agricultural land. The Government of Andhra Pradesh issued a land acquisition notification dated 16-5-2007 for the acquisition of the above land of the assessee to develop in to an integrated township. On appeal the Tribunal held that the Hyderabad Airport Development Authority had been constituted under provisions of Andhra Pradesh Urban Areas (Development) Act, 1975 as a Special Area Development Authority by State Government, it cannot be treated as a municipality for purposes of provisions of section 2(14) of the Act. In the revenue records the land is classified as agricultural land and has not been changed from agricultural land to non agricultural land at the time when the land was sold by the assessee. The land in question is brought in special Zone cannot be a determining factor by itself to say that the land was converted in to use for non-agricultural purposes. As the agricultural land of assessee is outside the municipality and also 8 kms away from the outer limits of the Municipality, assessee's land does not come within the purview of section 2 (14)(iii) either under clause (a) or (b) , hence cannot be considered as 'capital asset' within the meaning section , hence capital gain tax cannot be charged on sale of the said land. (A.Y. 2008-09)
T. Urmila(Smt) v. ITO (2013) 57 SOT 90(URO) (Hyd.)(Trib.)
S.2(15): Charitable purpose–Object of general public utility–Control of game of cricket is business activities –Cancellation of registration was justified. [S. 12AA]
Since the assessee was carrying on revenue earning exercise by arranging international matches, IPL matches, etc. in such a way that maximum advertisement revenue was derived from any type of match, its activities did not come within conceptual framework of charity vis-à-vis activity of general public utility envisaged in s. 2(15).Cancellation of registration was justified. (A.Y.2009-10)
Tamil Nadu Cricket Association v. DIT (2013) 57 SOT 439 (Chennai)(Trib.)
S.2(22)(e): Dividend-Deemed dividend-Advance to Director for purchase of land on behalf of company-Provision does not attract.
Advance granted to the director to purchase land in the name of the director but in which the company would be having beneficial interest does not attract section 2(22)(e).(A.Y.2006-07) (ITA no 447 dt.26-12-2012)
ACIT v. C.V. Reddy (2013) –TIOL-168 (Bang.)(Trib.)
S.4: Charge of income-tax-Income-Subsidy-Deferred sales tax scheme-Capital receipt.[S.2(24)]
To determine the character of subsidy in hands of recipient, whether revenue or capital, the purpose of the subsidy is to be considered and the source of fund and mechanism of giving subsidy are immaterial. Incentive, in form of sales tax waiver/deferment was not meant to give any benefit on day-to-day functioning of business or to make it more profitable; but was principally aimed to cover capital outlay of assessee for undertaking modernization of existing industry, it was capital in nature, and thus, not taxable. (A.Y.1992-93)
CIT v. Birla VXL Ltd. (2013) 215 Taxman 117 (Guj.)(HC)
S.5: Scope of total income–Retention money–Accrual.
In view of decision of Gujarat High Court in case of Anup Engineering Ltd. v. CIT [2001] 247 ITR 457/114 Taxman 584 retention money could not be said to have accrued to assessee and therefore, this amount did not represent assessee's accrued income. (A.Y. 2002-03)
DIT v. Ballast Nedam International (2013) 215 Taxman 254 (Guj) (HC)
S.9(1)(i): Income deemed to accrue or arise in India–Set off of branch losses – Taxability-DTAA-India-Sweden .[ Art.7]
The assessee set off its loss from Sweden branch against its other business income taxable in India. Revenue's case was that as per Article 7, profits attributable to Sweden branch was taxable in Sweden and, therefore, losses incurred by Sweden branch could not be set off against other income. Following its decision rendered in earlier assessment years with respect to India-Japan DTAA, the Tribunal allowed the claim of the assessee. Since nothing had been brought on record to show that clauses of DTAA between India-Sweden were different from that in DTAA between India-Japan in respect of present issue, the Tribunal's order was justified. (A.Y. 2002-03)
CIT v. Patni Computer Systems Ltd. (2013) 215 Taxman 108 (Bom.) (HC)
Editorial: Arising out of order in Patni Computer Systems Ltd v. Dy.CIT (2012) 135 ITD 398(Pune)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India-Short term capital gain-Forward exchange contract/hedging mechanism-DTAA- India-Spain-Additional evidence-Matter set aside. [Art. 14, 23]
The assessee-company was a resident of Spain and registered as FII with SEBI. It claimed the profit on foreign exchange transactions as short-term capital gain and hence exempt under India-Spain DTAA. Since the assessee filed additional evidence before the Tribunal, the matter was to be restored to the Assessing Officer for fresh decision. (A.Y. 2005-06)
Merrill Lynch Capital Markets Espana SA v. DCIT (2013) 57 SOT 435 (Mum.)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India–Capital gains–DTAA-India-UAE. [Art.4, 13]
The assessee is held to be not entitled to the benefit of India-UAE DTAA and income from capital gains was charged to tax, on the ground that individuals are not taxable in UAE. The Tribunal in assessee's own case in immediately preceding year held that assessee was entitled to benefits of DTAA thereby granting exemption from capital gain. Since the facts of the instant appeal were similar to those of immediately preceding year, the benefit of the DTAA was to be granted.(A.Y. 2008-09)
ITO v. Chandersen Jatwani (2013) 57 SOT 437 (Mum.)(Trib.)
S.9(1)(i): Income deemed to accrue or arise in India–Interest– Income-tax refund-DTAA-India-Denmark [Art.9(4), 12(6)]
Interest on income-tax refund was taxable in India as per Article 12(6) of DTAA between India and Denmark. Interest cannot be considered as business income. (A.Y. 2005-06)
A.P. Moller Maersk v. DCIT (2013) 57 SOT 267 (Mum.)(Trib.)
S.9(1)(vi): Income deemed to accrue or arise in India–Royalty-Fees for technical services-Shipping business-DTAA-India-Denmark. [S.9(1)(vii), Art. 9, 13 ]
Amounts received by shipping company on account of shared cost of global tracking system was linked to shipping income as per Article 9(1) of DTAA between India and Denmark and was not taxable in India. (A.Y. 2005-06)
A.P. Moller Maersk v. DCIT (2013) 57 SOT 267 (Mum)( Trib.)
S.10(38): Exempt income – Long term capital gains from equities - Scheme of sale of land through sale of shares of shell company is valid.
The assessee held 98.73% shares in Bhoruka Financial Services Limited (BFSL). In AY 2005-06 BFSL purchased a plot of land from a group sick company called Bhoruka Steels Ltd for Rs.3.75 crores which was accepted to be the prevailing market price u/s 50C. BFSL was a shell company with no assets other than the said land. In AY 2006-07 the assessee sold its shareholding in BFSL to DLF Commercial Developers Ltd for a net consideration of Rs. 20 crore. As the sale of shares was executed through the Magadh Stock Exchange and STT was paid, the assessee claimed that the gain on sale of shares was exempt u/s 10 (38). The AO, CIT(A) and Tribunal rejected the assessee's claim on the basis that the assessee, BFSL and Bhoruka Steels were all controlled by common shareholders and that the scheme to first sell the land to BFSL and then to sell the shares of BFSL was devised with the sole purpose of avoiding tax on the capital gains which would have arisen if the land had been sold directly. It was held that the formalities of the transaction and the legal nature of the corporate bodies had to be ignored by lifting the corporate veil and the transaction had to be taxed as a sale of the land. On appeal by the assessee to the High Court, HELD allowing the appeal:
Though BFSL was a shell company with no asset other than the land and by buying the shares of BFSL, DLF in effect purchased the land, the transaction cannot be said to a sham or an unreal one. In coming to the conclusion that the transaction is a colourable device, the authorities have been carried away by the fact that the assessee was able to avoid payment of income tax. The assessee did resort to tax planning and took advantage of the law/ loopholes in the law. After seeing how the loophole was exploited within the four corners of the law, it is open to Parliament to amend the law plugging the loophole. However it cannot be done by judicial interpretation. S.10(38) of the Act is unambiguous. If the share holder chooses to transfer the lands through a transfer of the shares of the company owning the land, it would be a valid legal transaction in law and cannot be said to be a colourable devise or a sham merely because tax is avoided thereby (McDowell & Co. v. CIT (1985) 154 ITR 148 (SC), UOI & Anr. v Azadi Bachao Andolan & Anr. (2003) 263 ITR 706 (SC) & Vodafone International Holding B.V. v. UOI& Anr. (2012) 341 ITR 1 (SC) referred)( ITA No. 120 of 2011, dt. 09/04/2013)
Bhoruka Engineering Inds. Ltd. v. Dy. CIT (Karn.)(HC) www.itatonline.org
S.10A: Free trade zone–Software developed transmitted to foreign countries through internet cannot treated as bogus transaction.
The assessee started new venture of software development and claimed profit of software division under section 10A. The Assessing Officer was not convinced from contemporaneous record that software was developed by assessee or that same was transmitted to foreign countries through internet and rejected the claim of the assessee treating the said transaction as bogus and sham. The Commissioner (Appeals) and the Tribunal, taking into consideration report of audit, agreement with STPI, certificate in respect of custom, boarding arrangement of assessee and payment received from various parties through channel of banks, concluded that transaction was genuine, allowed the assessee's claim. Held, since the order passed by the appellate authorities was based on appreciation of material on record, no substantial question of law arose there from.(A.Y. 2003-04)
CIT v. Nova Petrochemicals Ltd. (2013) 215 Taxman 82(Mag.) (Guj.)(HC)
S.10A: Free trade zone-New unit- Approval letter issued by authority of Software Technology Park.
The assessee established three units and claimed deduction u/s 10A. The Revenue denied the deduction on basis of approval letter issued by authority of Software Technology Park stating that, these units were to be considered as part of existing units. On other hand, Tribunal found that all three units had fulfilled conditions u/s.10A, and therefore, allowed deduction holding those units as separate and independent production units, and not as mere expansion of existing unit. Since the decision of the Tribunal was based on finding of fact, no interference was required. (A.Y. 2002-03)
CIT v. Patni Computer Systems Ltd. (2013) 215 Taxman 108 (Bom.)(HC)
Editorial: Arising out of order in Patni Computer Systems Ltd v. Dy.CIT (2012) 135 ITD 398(Pune)(Trib.)
S.10A: Free trade zone-Consistency-Computation-Export turnover-Expenditure do not pertain to delivery of goods out of India are not deductible from export turnover.
Where the assessee followed head count method of accounting for computing deduction u/s 10A, which had been accepted by revenue in earlier years, it could not be disallowed in relevant assessment year. The expenditure towards insurance, freight and communication incurred in foreign exchange, which do not pertain to delivery of goods out of India and satellite link charges and technical service fee are not deductible from export turnover. (A.Y. 2007-08)
Willis Processing Services (I) (P) Ltd. DY. CIT (2013) 57 SOT 339 (Mum.)(Trib.)
S.10A: Free trade zone-Newly established undertakings-Deemed export is not eligible for exemption.
The assessee software company carried out deemed exports by raising bills on local parties and received sale proceeds in convertible foreign exchange thereby claimed deduction on same under section 10A. On ground that deemed exports are exports as per EXIM policy. On appeal Tribunal held that that deduction under section 10A is to be allowed only when foreign exchange is received on export of software and EXIM policy cannot overrule Income-tax Act which is a separate code in itself. In view of same claim of assessee could not be allowed. (A.Y. 2005-06)
Wipro Ltd. v. Dy.CIT (2013) 143 ITD 1 (Bang.)(Trib.)
S.10A: Free Trade Zone-Newly established undertakings-Export turnover-Total turnover-Foreign tax (VAT/GST) collected from customers is to be excluded.
Assessing Officer excluded foreign tax (VAT/GST) collected from customers from export turnover as well as from total turnover, thereby, granting lower deduction under section 10A to assessee a STP unit, on ground that tax collected was subsequently remitted to government. the Tribunal held that once this sum is not included in export turnover then the same cannot be included in the total turnover. (A.Y.2005 -06)
Wipro Ltd. v. Dy.CIT (2013) 143 ITD 1 (Bang.)(Trib.)
S.10A: Free trade zone-Computation-Export turnover-Total turnover- Parity between numerator and denominator.
Expenses reduced from export turnover were also to be reduced from total turnover to maintain parity between numerator and denominator while calculating deduction u/s 10A. (A.Y. 2007-08)
Bearing Point Business Consulting (P.) Ltd. v. DCIT (2013) 57 SOT 244 (Bang.)(Trib.)
S.10B: Exempt income-Export oriented undertaking-Initial year- Assessee has to prove its eligibility in initial year of production only and not in every year of claim.
The Assessing Officer rejected the assessee's claim holding that the assessee had employed used machinery value of which exceeded 20% of total value of machinery employed by assessee. It was noted from records that the claim u/s 10B was allowed in the past and the year under consideration was found to be 5th year of claim. There was no evidence on record establishing that assessee had purchased used machinery during relevant assessment year. Held in order to claim exemption u/s 10B, assessee has to prove its eligibility in initial year of production only and not in every year of claim. (A.Y. 2003-04 to 2004-05)
DCIT v. Tyco Valves & Control India (P.) Ltd. (2013) 57 SOT 138(URO)(Ahd.)(Trib.)
S.12AA: Procedure for registration–Period of six months–Directory.
There is no automatic or deemed registration if the application filed under section 12AA is not disposed of within the stipulated period of six months as the time frame fixed under the provision is only directory. Matter remitted to the Commissioner for consideration of the matter a fresh.
CIT v. Sheela Christian Charitable Trust (2013) 354 ITR 478 (Mad.)(HC)
S.12AA: Procedure for registration–Order lodging the application–Not sustainable-Deemed registration-Time to be reckoned from the end of month in which the application was filed-Matter remanded to Commissioner.
The assessee filed an application before the Commissioner on 28th January, 2009 for seeking registration under section 12AA and for grant of approval under section 80G. The Commissioner held that the activities of the assessee could not be called charitable. Accordingly he lodged the application of assessee. On appeal Tribunal held that since the application was filed by the assessee on 28th January, 2009 and the Commissioner passed the order on July 31, 2009, by virtue of section 12AA, the six month period has expired and therefore application should be deemed to have been granted recognizing the status of assessee as 'Charitable Trust'. Tribunal also held that sale of books, hiring of utensils and rental income would not make the activities of the assessee a commercial venture. On appeal the court held that the application was dated January 28, 2009 and calculating the six months' period from the end of the said month, it could not be said that the six months' period would expire by July 31, 2009. Therefore, the order passed by the Commissioner on July 31, 2009, could not be held to have been passed in violation of section 12AA. The conclusion of the Tribunal that the registration was deemed to have been granted, could not be sustained, inasmuch it was found that the order of the Director of Income-tax was passed within a period of six months stipulated in section 12AA(2). However, it was held that the Commissioner should have either granted or rejected the application and was not expected to merely lodge the application, which would only leave the assessee in a suspended animation. There could not be any order in between like lodging the application. Thus, the matter was remitted to the Commissioner for fresh disposal on the merits.
DIT (Exemption) v. Anjuman-e-Khyrkhah-e-Aam (2013) 354 ITR 474 (Mad.)(HC)
S.12AA: Procedure for registration-Religious purpose-Denial of exemption was held to be not justified. [S.13(1)(b)]
The Commissioner rejected assessee's application on the ground that the object clause of trust deed included an object of religious nature. The only prohibition in this regard was contained in S.13(1)(b), which excludes a trust or institution created or established for benefit of any particular religious community or caste. Since the aforesaid prohibition did not apply to assessee's case, impugned order denying registration to assessee-trust was to be set aside.
Radhika Seva Sansthan v. CIT (2013) 57 SOT 121(URO) (Jaipur) (Trib.)
S.12AA: Procedure for registration-Trust or institution-Promotion of sports- Charitable purpose-Registration is entitled. [S.2(15)]
The Assessee-society is registered under the Society Registration Act, 1860. The founder-members of the society were professional golfers. The assessee filed an application seeking registration under section 12AA. The Commissioner rejected the application of registration. The Tribunal held that Society's Object are charitable in nature, all the object and aims of the assessee are contained in clause (3) of its Memorandum of Association, Promotion of sports and games has to be considered as 'charitable purpose' within meaning of section 2(15). Assessee society formed to promote interest in game of golf in general and professional golfers in particular was entitled to registration under section 12AA of the Act.
Professional Golf Tour of India v. CIT (2013) 143 ITD 165/155 TTJ 17(UO)(Chandigarh)(Trib.)
S.14A: Disallowance of expenditure–Exempt income-Sufficient interest free funds–Presumption.
Where the assessee had sufficient interest free funds to meet its tax free investments yielding exempt income, it could be presumed that such investments were made from interest free funds and not loaned funds and, thus no disallowance u/s.14A being warranted. Ratio in case of CIT v. Reliance Utilities & Power Ltd (2009) 313 ITR 340 (Bom.)(HC) is followed. (A.Y. 2003-04)
CIT v. UTI Bank Ltd. (2013) 215 Taxman 8(Mag.) (Guj.)(HC)
S.14A: Disallowance of expenditure–Exempt income- Dividend from foreign subsidiaries–Interest free funds.
Where investment was made by the assessee in foreign subsidiaries, disallowance of interest expenditure under section 14A was not justified since dividend income from foreign subsidiaries, is taxable in India. Also, where the assessee had own interest free funds many times over the investment made in Indian subsidiaries and further, there was no direct nexus between interest bearing borrowed funds and such investment, no disallowance of interest expenditure could be made under section 14A.
CIT v. Suzlon Energy Ltd. (2013) 215 Taxman 272 (Guj.) (HC)
S.14A: Disallowance of expenditure-Exempt income-Disallowance under section 14A cannot be made if satisfaction not recorded with reference to A/cs. Under Rule 8D(2)(ii) loans for specific business purposes cannot be included. Under Rule 8D(2)(ii) & (iii) investments which have not yielded income cannot be included. [Income–tax Rules, 1962, Rule 8D]
In AY 2008-09, the assessee invested Rs.103 crores in shares on which it earned tax-free dividends of Rs. 1.3 lakhs. The assessee claimed that though its borrowings had increased by Rs. 122 crores, the said investments were funded out of own funds like capital and profits. It claimed that no expenditure had been incurred to earn the dividends and no disallowance u/s 14A could be made. The Assessing Officer applied Rule 8D and computed the disallowance at Rs. 4 crore. On appeal by the assessee, the Commissioner (Appeals) reduced the disallowance to Rs. 26 lakh. On cross appeals, HELD by the Tribunal:
(i) When the Assessing Officer does not accept the assessee's claim regarding the non-applicability/ quantum of disallowance u/s 14A, he has to record satisfaction on that issue. This satisfaction cannot be a plain satisfaction or a simple note. It has is to be done with regard to the accounts of the assessee. On facts, as there is no satisfaction by the Assessing Officer, no disallowance u/s 14A can be made [Balarampur Chini Mills Ltd. v. Dy. CIT (2011) 140 TTJ 73(Kol.)(Trib.)] followed;
(ii) Rule 8D(2)(ii) is a computation provision in respect of expenditure incurred by way of interest which is not directly attributable to any particular income or receipt. This clearly means that interest expenditure which is directly relatable to any particular income or receipt is not to be considered under rule 8D(2)(ii). The AO has to show that the interest is not directly attributable to any particular income or receipt. In the assessee's case, the interest has been paid on loans taken from banks for business purpose. There is no allegation that the loan funds have been diverted for making investment in shares or for non-business purposes. The loans are for specific business purposes and no bank would permit the loan given for one purpose to be used for making any investment in shares. Also, the assessee has substantial capital & reserves. Accordingly, the interest on the loans cannot be included in Rule 8D(2)(ii);
(iii) Further, in Rule 8D(2)(ii), the words used in numerator B are "the average value of the investment, income from which does not form or shall not form part of the total income as appearing in the balance-sheet as on the first day and in the last day of the previous year". The Assessing Officer was wrong in taking taken into consideration the investment of Rs.103 crores made during the year which has not earned any dividend or exempt income. It is only the average of the value of the investment from which the income has been earned which is not falling within the part of the total income that is to be considered. Thus, it is not the total investment at the beginning of the year and at the end of the year, which is to be considered but it is the average of the value of investments which has given rise to the income which does not form part of the total income which is to be considered. The term "average of the value of investment" is used to take care of cases where there is the issue of dividend striping;
(iv) Under Rule 8D(2)(iii), what is disallowable is an amount equal to ½ percentage of the average value of investment the income from which does not or shall not form part of the total income. Thus, under sub-clause (iii), what is disallowed is ½ percentage of the numerator B in rule 8D(2)(ii). This has to be calculated on the same lines as mentioned earlier in respect of Numerator B in rule 8D(2)(ii). Thus, not all investments become the subject-matter of consideration when computing disallowance u/s 14A read with rule 8D. The disallowance u/s 14A read with rule 8D is to be in relation to the income which does not form part of the total income and this can be done only by taking into consideration the investment which has given rise to this income which does not form part of the total income. (A. Y. 2008-09) ( ITA No. 1331/Kol/2011, dt. 29/07/2011)
REI Agro Ltd v. DCIT (Kol.)(Trib.).www.itatonline.org
S.14A: Disallowance of expenditure–Exempt income-Reasonable basis.
For periods prior to AY 2008-09, disallowance of expenses relating to exempt income, u/s 14A, is to be computed on a reasonable basis and not as per rule 8D.(A.Y. 2004-05)
Forever Diamonds (P.) Ltd. v. DCIT (2013) 57 SOT 113 (URO)(Mum.)(Trib.)
S.14A: Disallowance of expenditure-Exempt income-Rule 8D does not apply to short-term investments, gains from which is taxable. [Income-tax Rules,1962-Rule 8D]
Some of the investments made by the assessee are short term. Since assessee is paying capital gains tax on short term investments, Rule 8D will not apply on them and the Assessing Officer is directed to re compute disallowance u/s 14A read with Rule 8D after excluding short term investments ( A. Y. 2008-09, ITA No. 1774/Mds/2012, dt.19 July,2013)
Sundaram Asset Management Co. Ltd v. DCIT (Chennai)(Trib.) www.itatonline.org
S.14A: Disallowance of expenditure – Exempt income-Interest on loans for specified purposes to be excluded [Income-tax Rules, 1962-Rule 8D]
The assessee contended that in computing the disallowance to be made under section 14A and rule 8D(2)(ii) ,the interest on bank loans taken for specific taxable purposes had to be excluded .The Assessing Officer rejected the claim. On appeal Commissioner (Appeals) accepted the claim of assessee. On appeal by revenue the Tribunal held that rule 8D(2)(ii) refers to expenditure by way of interest which is not attributable to any particular income or receipt. If loans have been sanctioned for specified projects /expansion and have been utilized towards the same ,then obvious they could not have been utilized for making any investments having tax-free incomes and have to excluded from the calculation to determine the disallowance under Rule 8D(2)(ii).(Champion Commercial Co. Ltd.) (Kol)(Trib.)(ITA no 644 /Kol/2012 dt 21-09-2012) is followed.(A.Y.2009-10)(ITA No.1603/Mds/2012 dt.16-07-2012)
ACIT v. Best & Cromton Engineering Ltd. (Chennai)(Trib.) www.itatonline.org.
S.14A: Disallowance of expenditure-Exempt income-Onus on assessee to prove that he had not incurred any expenses relating to income not forming part of total income. [Income-tax Rules, 1962, Rule 8D]
Assessing Officer had disallowed a sum of Rs.3,05,423/- by applying provisions of section 14A read with rule 8D. On Appeal the Commissioner (Appeals) reduced the disallowance to Rs 1 lakh on the ground that there is no precise finding given by the Assessing Officer .On appeal Tribunal held that onus lay on assessee to prove that he had not incurred any expenses relating to income not forming part of total income. Since assessee did not file any details of expenditure incurred by him, the order of Commissioner (Appeals) was set aside and that of Assessing Officer restored. (A.Y.2009-10)
ACIT v. Joe Marcelinho Mathias(2013) 143 ITD 132 (Panji)(Trib.)
S.22: Income from house property-Business income-Un sold flat-Rental income from unsold flat is assessable as income from house property. [S.28(i)]
The Court held that rental income from unsold flats in the hands of builder/developer, which are shown as 'business assets' should be assessed under the head Income from house property and not as business income. (ITA Nos. 238, 238 & 240 of 2013 dt.17-05-2013)
New Delhi Hotels Ltd. v. ACIT (2013) The Chamber's Journal –July-P.114 (Delhi)(HC)
S.28(i): Business income–Grant in aid for research activities is capital receipt. [S.41, 263]
The grant in aid for a specific purpose of conducting research in the field of telecommunications, so that the benefit thereof would benefit the Nation and for carrying on day to day business of the assessee was a capital receipt. Order under section 263 was held to be bad in law. The question referred to High Court was on merit. High Court confirmed the order of Tribunal. (A.Y. 1989-90)
CIT v. India Telephone Industries Ltd. (2013) 215 Taxman 82 (Karn.)(HC)
S.28(i): Business loss–In the name of firm-Foreign currency transactions-Not allowable in the assessment of partner. [Partnership Act, 1932 S.13]
The Appellant entered into foreign currency transactions on behalf of firm from its account. Both the assessee–partner and firm claimed such loss as deduction in their respective income. The Tribunal disallowed the claim on the both. On separate order High Court admitted appeal of the partnership firm. In appeal it was contended that the transactions were entered in to without the knowledge of other partners and therefore should be treated as his personal loss. The Court held that section 13 of the Partnership Act provides, inter alia, that subject to the contract between, partnership firm shall indemnify the partner in respect of the payment made and liabilities incurred by firm in the ordinary and proper conduct of business and in doing such act, in an emergency for the purpose of protecting the firm from loss as, would be done by a person of ordinary prudence, in his own case ,under similar circumstances .In the result these transactions resulted in loss and could not be allowed as deduction in individual capacity of assessee-partner, when the same claim is made by firm under examination.(A.Y. 2007-08)
Pravinbhai Mohanbhai Kheni v. ACIT (2013) 215 Taxman 83(Mag.) (Guj.)(HC)
S.28(i): Business income–Share dealings–Capital gains-Purchase and sale on regular basis assessable as business income. [S.45 ]
Board's resolution authorized the assessee-company to set apart a corpus of Rs.100 crores for trading in shares which represented intention to carry out activities of purchase and sale of shares on business lines. Further, the purchase and sale transactions in shares were entered into on regular and systematic basis with profit motive which only constituted business. The long-term capital gain was a small amount as against short-term capital gain which was a strong indicator as to shares being not intended to be held by way of investments. Held, the income had to be taxed as business income. (A.Y. 2007-08)
Mafatlal Fabrics (P.) Ltd. v. Add.CIT (2013) 57 SOT 425 (Mum.)(Trib.)
S.28(va): Business income–Non-compete fees–Taxability-DTAA- India-France [Art.7]
Compensation received from foreign company in lieu of an undertaking by the assessee for not competing with Foreign company in India and for not using trade mark, designs, logo of said foreign collaborator, post settlement would be taxable in India. (A.Y. 2004-05)
Control & Switchgear Contractors Ltd. v. DCIT (2013) 57 SOT 127(URO) (Delhi)(Trib.)
S.31: Repairs and insurance of machinery, plant and furniture–Replacement of crucial components of a machine could not be considered as current repairs. [S. 37(1)]
Replacement of crucial components of a machine which resulted in a new or fresh advantage or obtaining of enduring benefit could not be considered as current repairs expenditure and would not be allowable as deduction u/s 31(1) or u/s 37(1). (A.Y.1999-2000)
DCIT v. Printers (Mysore) (P.) Ltd. (2013) 57 SOT 117(URO) (Bang.)(Trib.)
S.32: Depreciation–Set off –Unabsorbed depreciation-Carry forward and set off permitted till final set off- Reassessment was held to be not valid. [S.147, 148]
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Posted By Rajkumar to ITR at 8/09/2013 05:00:00 PM --
IT: Deduction under section 10B is to be allowed on profits of current year without setting off unabsorbed depreciation and brought forward business losses
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[2013] 35 taxmann.com 446 (Bombay)
HIGH COURT OF BOMBAY
Commissioner of Income-tax -10, Mumbai
v.
Ganesh Polychem Ltd.*
J.P DEVADHAR AND M.S. SANKLECHA, JJ.
IT APPEAL (L) NO. 261 OF 2013
MARCH 19, 2013
Section 10B of the Income-tax Act, 1961 - Export oriented undertaking [Computation of deduction] - Assessment year 2007-08 - Where deduction under section 10B is to be allowed on profits of current year without setting off unabsorbed depreciation and brought forward business losses - Held, yes [Para 5] [In favour of assessee]
Tejveer Singh for the Appellant.
ORDER
1. Not on board. Mentioned. Taken up for hearing and final disposal by consent.
2. Office objections waived.
3. In this appeal by the Revenue for assessment year 2007-08, following question of law has been proposed for our consideration.
"Whether on the facts and in the circumstances of the case and in law, the Tribunal was right in holding that direct the AO allow deduction under Section 10B on profits of the current year without setting off the unabsorbed depreciation and brought forward business losses ?"
4. Counsel for the Revenue fairly states that the issue raised in the present appeal is concluded in favour of the assessee by the order of this Court dated 25th February, 2013, in Income-tax Appeal (L) No.2083 of 2012 passed in respect of the same respondent - assessee for assessment year 2006-07.
5. In view of the above, we see no reason to entertain the proposed question of law. Accordingly, the appeal is dismissed with no order as to costs.
IT: Exemption under section 10B could not be allowed on training fees received from professionals, who were neither employees nor associated with business of manufacture or production of any article or thing of assessee
■■■
[2013] 35 taxmann.com 442 (Madras)
HIGH COURT OF MADRAS
Penta Media Graphica Ltd.
v.
Assistant Commissioner of Income-tax, Co. Ward V (2)*
MRS. CHITRA VENKATARAMAN AND MS. K.B.K. VASUKI, JJ.
TAX CASE (APPEAL) NOS. 34 OF 2010 AND
332 & 333 OF 2011
M.P. NO. 1 OF 2011
332 & 333 OF 2011
M.P. NO. 1 OF 2011
JUNE 5, 2013
Section 10B of the Income-tax Act, 1961 - Export oriented undertaking [Computation of deduction] - Assessment year 1996-97 - Assessee claimed exemption under section 10B on income received by it by way of training fees - Assessing Officer disallowed claim on ground that training was given to outsiders - Whether exemption under section 10B is available in respect of profit and gains derived by an undertaking which is engaged in manufacture or production of an article or thing - Held, yes - Whether, since training was given to professionals who were not employees and were not associated with business of assessee in any way in production or manufacture of any article or thing, exemption under section 10B could not be allowed on training fees not being profits or gains derived by assessee from manufacture or production of any article or thing - Held, yes [Para 18] [In favour of revenue]
FACTS
| ■ | The assessee company was a 100 per cent export oriented unit. It claimed exemption under section 10B on the income received by it by way of training fees. The Assessing Officer rejected the claim on view that the relationship between the assessee and the trainee was not that of employer and employees and the training was given to outsiders. | |
| ■ | On first appeal, the Commissioner (Appeals) held that the assessee was entitled to 100 per cent exemption on view that training was an integral part of the business of assessee. | |
| ■ | On revenue's appeal, the Tribunal held that the income derived by assessee could not be stated as export income since the assessee had not exported any article or goods or software during the relevant period manufactured by it and training fees received was from importing training to outsiders. | |
| ■ | On assessee's appeal: |
HELD
| ■ | A reading of section 10B shows that till 2001, the provisions contemplated 100 per cent exemption from tax under the Act. The exemption granted related to the profits and gains derived by the assessee which is 100 per cent export oriented unit undertaking. Sub-section (2) specifies among other things that exemption under the section applied to an assessee/undertaking which 'manufacturers or produces any article or thing', that it started producing or manufacturing article or thing on or after 1-4-1994 and that it is not formed by transfer to a new business of machinery or plant primarily used for any purpose, Thus going by the very scheme of the provision, exemption considered under section 10B is related only to those undertakings which are engaged in the manufacture or production of any article or thing and has relevance to the receipts which are out of the activities relating to the profits and gains arising from the manufacture or production of an article or thing. The benefit under section 10B as exemption was available for ten consecutive years. From 2001, section 10B was amended to make the claim a deduction provision. Thus the benefit under section 10B is referable not only with reference to the approved undertaking, but it must also be with reference to profits and gains derived from the export oriented unit fulfilling the conditions specified in the section. [Para 12] | |
| ■ | On the admitted facts of the case herein, that the receipt is related to a fee charged by it, on the training of professionals who are admittedly not its employees and that the profits and gains not being one arising on account of manufacture or production of an article or thing, the benefit under section 10B can have no relevance at all. The activity other than what has been specified or enumerated in the section would be of no relevance for the purpose of considering the exemption under section 10B. Even though the provision is an incentive provision, yet, when the words are unequivocal, the section calls for a restrictive consideration - Refer Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC). As is well laid, taxation under the Act is the rule and exemption, the exception. Thus, unless the assessee shows that the receipts come clearly within the language of the section, it is not possible for this Court to give an elastic interpretation to the clear words based on tax treatment under difference enactments or the schemes formulated for setting up of industries in a particular area or zone. In the background of the above-said provision, if order of the Tribunal is seen it is noted that there is hardly any fallacy, particularly a legal one, which calls for any interference by this Court. [Para 13] | |
| ■ | It is a well settled principle of law that when the provisions of the tax enactment are clear and are beyond any contradiction, no words could be added to understand the scheme of the provisions of the Act. As already seen, a reading of the provision points out that the Act has made its intention very clear that the exemption is available in respect of profits and gains derived by an undertaking which is engaged in the manufacture or production of an article or thing. Since the training is given to the graduates/professionals who are not employees, who are not, in any way, associated with the business of the assessee in the matter of production and manufacture of an article or thing, and the receipts not being profits and gains derived by the undertaking in the manufacture or production of article or thing, there is no justifiable ground to confer benefit of the provision based on the policy decision taken either under the customs enactment, or for that matter, under the Software Technology Park Scheme. It is no doubt true that the objectives of the Software Technology Park Scheme seeks training of professionals as one of the objects; yet, the scheme is one thing and tax treatment is totally another aspect of it. Whatever may be the objectives of the scheme, exemption should be given only in terms of what is provided for under the income-tax provisions. As already pointed out, section 10B being a clear exemption provision, unless the assessee is in a position to show any ambiguity in the provisions of the Act which may possibly be taken advantage of, there can be no liberal interpretation given to the provisions of the Act, for the purpose of granting relief to the assessee. In the circumstances, plea of the assessee is rejected. [Para 18] | |
| ■ | The assessee submitted that after training, some of the trained personnel were employed in the assessee in its business; consequently, this Court should consider liberal interpretation of the provision for grant of relief to the assessee. Whatever be the post event on training as on the date of receipt of income, there existed no relationship between the assessee and the trainees as master and servants, to hold that for the purpose of business, training was given to aid in the business of the assessee. The employment of the trained personnel came only after the training was completed to the satisfaction of the institution. Hence, the plea of the assessee for a proportionate allowance cannot be considered. In the circumstances, so long as the receipt was only for the purpose of training, treating the trainee as a student, no reason is found to accept the plea of the assessees to allow this appeal. Hence, the submissions of the assesses is rejected and dismiss the Tax Case Appeal, thereby confirming the view of the Tribunal. [Para 20] |
CASES REFERRED TO
Sovika Infotek Ltd. v. ITO [2008] 19 SOT 412 (Mum) (para 7) and Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 (SC) (para 13).
Dr. Anita Sumanth for the Appellant. N.V. Balaji for the Respondent.
JUDGMENT
Mrs. Chitra Venkataraman, J. - The assessee is on appeal as against the order of the Income-tax Appellate Tribunal relating to the assessment year 1996-97. The following is the substantial question of law raised by the assessee in this Tax Case Appeal:
"Whether on the facts and in the circumstances of the case, the Income-tax Appellate Tribunal is right in law in holding the appellant as not entitled to relief under Section 10B in respect of a sum of Rs.3,25,88,263/- being income from training?"
2. The assessee herein is a 100% export oriented unit. They claimed exemption under Section 10B of the Income-tax Act on the income received by them as by way of training fees. The claim of the assessee was rejected by the Assessing Officer on the view that the relationship between the assessee and the trainees was not that of employer and employees. Training was not given to the employees of the assessee or on apprenticeship. On the other hand, training fee was charged by the assessee for carrying out training to outsiders and there was no contractual obligation on the part of the assessee company to absorb them. In the absence of any such relationship as employer and employees and the training being given to outsiders, the Assessing Officer viewed that the receipt was not exempt under Section 10B of the Income-tax Act. On appeal, the Commissioner of Income Tax (Appeals) viewed that the nature of business of the assessee, viz., development and sale of software was dependent on the availability of trained manpower. Thus, training being recognised as part of software development in the export oriented units, the receipt from the training programme was exempt under Section 10B of the Income Tax Act. Thus the Commissioner of Income Tax (Appeals) allowed the appeal. On further appeal before the Income-tax Appellate Tribunal by the Revenue in I.T.A.Nos.338/Mds/01, the Tribunal pointed out that having regard to the nature of business of the assessee, it was necessary to see whether the training programme formed an integral part of the business of 100% Export Oriented Unit. There was no sufficient enquiry made in this regard as to whether there existed any contractual relationship between the assessee and the trainees in regard to the joining of service in the assessee company. Hence, it was necessary that the assessment be set aside and the matter be remanded back to the Assessing Officer with a direction to decide the issue de novo in accordance with law after providing adequate opportunity of hearing to the assessee. It further felt, on satisfactory completion of the training, the trainees would be absorbed in the undertaking and the undertaking owed certain obligation for providing job to them. Thus the training programme could be treated as an integral part of the business. In the light of the order of the Tribunal dated 17th February 2006 remanding the matter, once again the issue was taken up for consideration.
3. The Assessing Officer pointed out that the faculty in the training unit were the very employees engaged in software development were also used as a faculty to train the students; by this, the income of the assessee was optimised and ensured efficient utilisation of its assets viz., computers and manpower. In the circumstances, the Officer rejected the submission of the assessee to considers its training as part of the business of the company. The Assessing Officer further pointed out that training was given only on receipt of fixed fee. The training was for a fixed timing for a fixed period. The training was conducted in batches and each batch consisted of fixed number of students. The relationship between the trainee and the faculty was that of a student and teacher. The assessee admitted this fact. In the background of the provisions of Section 10B of the Income Tax Act, the assessment was completed rejecting the claim for exemption.
4. Aggrieved by this, the assessee went on appeal before the Commissioner of Income Tax (Appeals), who agreed with the assessee that training was an integral part of the business of the 100% EOU and consequently, the assessee was entitled to 100% exemption.
5. The Revenue challenged this order on appeal before the Tribunal. There was yet another appeal relating to the same company but on different issues relating to the assessment year 2004-05. By a common order relating to the assessment years 1996-97 and 2004-2005, the Tribunal rejected the plea of the assessee and thereby allowed the appeal on the claim under Section 10B of the Income Tax Act.
6. The Tribunal held that the income derived from the undertaking could not be stated as export income of the assessee. The income falling under Section 10B was earned as fee received by the assessee for imparting training to outsiders by using some infrastructure which might be lying idle as the assessee had not exported any article or goods or software during the period relevant to the assessment year under consideration. We may point out herein the objection of the learned counsel appearing for the assessee that it was an incorrect statement of fact by the Tribunal that the assessee had not exported any article or goods during the relevant period. Learned counsel appearing for the assessee pointed out to the assessment order, wherein it had placed the required details as to the income derived from the cost of software. This incorrectness of fact, however, according to us, does not affect the decision of the Tribunal otherwise on the very wording of Section 10B. Leaving this aspect aside, it may be pointed out that the assessee relied on various circulars to support its claim under Section 10B of the Income Tax Act. The Tribunal held that these circulars were not relevant to the assessment of the export oriented unit in the Income Tax Act. Since the circulars were only as regards the benefits granted under the Customs Act and being an exemption provision under the Income Tax Act, unless the assessee showed that providing of training was part of the business of export of software, its claim could not be sustained. Aggrieved by this, the present appeal by the assessee.
7. Learned counsel appearing for the assessee challenged the order of the Tribunal, principally on the ground that the assessee had had export of software during the relevant period, earning income to the tune of Rs.102,03,10,481/-. Apart from that, it had domestic software sales and service to the tune of Rs.10,66,96,808/-, which means, the domestic sales were 25% and less than that. Thus, according to the assessee, it satisfied the condition stipulated under Section 10B(2) of the Income Tax Act. Learned counsel placed before us the scheme viz., Software Technology Parks (STP) Scheme and given the objectives of the scheme, one of them being to train the employees, the activity of the assessee in training graduates who are professionals, the receipt is part of the exempt income given under Section 10B of the Income Tax Act. Consequently, the Tribunal committed a serious error in ignoring the very scheme while approaching the issue. Laying emphasis on the Circular No.37/95 dated 18.04.1995, Circular No.24/ 97- Cus. dated 07.07.1997 in F.No.305 / 7 / 95 -FTT of the Government of India, Ministry of Finance, Department of Revenue, as well as the letters of Software Technology Park of India, Chennai dated 06.08.1998 (addressed to the Tamil Nadu Electricity Board) and 04.08.2001 respectively, she submitted that the Tribunal ought to have considered the scheme on setting up a Software Technology Park and the Export Oriented Unit and the purpose of granting exemption to consider the case of the assessee in the proper perspective, to grant the relief. She also placed before us the order of the Income Tax Appellate Tribunal, Mumbai 'D' Bench in Sovika Infotek Ltd. v. ITO [2008] 19 SOT 412, wherein, a similar claim was allowed and the Department had also accepted the order of the Tribunal. She further submitted that training of professionals being part of the business of development of software, the provisions have to be interpreted liberally to grant the relief. Being a provision to promote the infrastructure development in the country and the nature of business in the development of software being dependent on the availability of more professionals in the field, the Tribunal ought to have had a proper understanding on the scope of the provision and grant the relief. She also made particular objection to the view of the Tribunal about the infrastructure utilised for training, holding that it was only on account of the idle infrastructure that the assessee had used, to gain unmerited benefit. Considering the wrong view taken and that some of the students were also taken on employment, on facts, she submitted that in the event, this Court does not accept the plea for exemption, it is but necessary that the matter be remitted back for a de novo consideration of the claim for a pro-rata relief.
8. Learned Standing Counsel appearing for the Revenue supported the order of the Tribunal that even eschewing the findings of the Tribunal on the availability of export turnover and that the unit was not lying idle, the facts available clearly point out that the assessee had imparted training, charging fees; that the relationship of the assessee with the trainees was admittedly of a teacher and student nature. Hence, on the facts admitted, Section 10B of the Income Tax Act can have no relevance, it being not related to export of article or things produced or manufactured. He pointed out that irrespective of the compliance of condition given under Section 10B(2), the fact remains that the receipt is not in respect of export of any article or thing manufactured. In the circumstances, the question of grant of exemption does not arise.
9. Heard learned counsel appearing on either side and perused the material placed on record.
10. On the materials placed before this Court and considering the orders of the authorities below, we do not find any justifiable ground to agree with the submissions made by the learned counsel appearing for the appellant. We have no hesitation in rejecting the same and confirming the order of the Tribunal.
11. Before going into the merits of the case, one needs to see the scheme of Scheme of Section 10B as it existed originally. The relevant portion of the provisions under Section 10B of the Income Tax Act, as it existed during the relevant assessment year 1996-97 is as follows:
'10B. Special provision in respect of newly established hundred per cent export-oriented undertakings.-- (1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent. export-oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.
(2) This section applies to any undertaking which fulfils all the following conditions, namely:—
| (i) | it manufactures or produces any article or thing; | |
| | (ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994, its exports of such articles and things are not less than seventy-five per cent. of the total sales thereof during the previous year ; | |
| (ii) | it is not formed by the splitting up, or the reconstruction, of a business already in existence: | |
| Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section; | ||
| (iii) | it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. |
Explanation.—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.
(3) to (7) ...
Explanation.--For the purposes of this section,--
| (i) | "hundred per cent export-oriented undertaking" means an undertaking which has been approved as a hundred per cent. export-oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951), and the rules made under that Act; | |
| (ii) | "relevant assessment years" means the five consecutive assessment years specified by the assessee at his option under sub-section (3) or sub-section (5), as the case may be; | |
| (iii) | "manufacture" includes any-- |
| (a) | process, or | |
| (b) | assembling, or | |
| (c) | recording of programmes on any disc, tape, perforated media or other information storage device. |
| (iv) | "produce", in relation to any article or thing referred to in clause (i) of sub-section (2) includes production of computer programmes.' |
12. A reading of Section 10B of the Income Tax Act shows that till 2001, the provisions contemplated 100% exemption from tax under the Act. The exemption granted related to the profits and gains derived by the assessee which is 100% export oriented unit undertaking. The undertaking is one approved as a hundred percent export oriented undertaking by the Board appointed in this behalf by the Central Government in exercise of the powers conferred by Section 14 of the Industries (Development and Regulation) Act, 1951 (65 of 1951) and the rules made thereunder. Sub Section (2) specifies among other things that exemption under the Section applied to an assessee/undertaking which "manufactures or produces any article or thing", that it started producing or manufacturing article or thing on or after 1.4.1994 and that it is not formed by transfer to a new business of machinery or plant primarily used for any purpose. Thus going by the very scheme of the provision, exemption considered under Section 10B is related only to those undertakings which are engaged in the manufacture or production of any article or thing and has relevance to the receipts which are out of the activities relating to the profits and gains arising from the manufacture or production of an article or thing. The benefit under Section 10B as exemption was available for ten consecutive years. From 2001, Section 10B was amended to make the claim a deduction provision. Thus the benefit under Section 10B is referable not only with reference to the approved undertaking, but it must also be with reference to profits and gains derived from the export oriented unit fulfilling the conditions specified in the Section.
13. On the admitted facts of the case herein, that the receipt is related to a fee charged by it, on the training of professionals who are admittedly not its employees and that the profits and gains not being one arising on account of manufacture or production of an article or thing, the benefit under Section 10B can have no relevance at all. The Section, as already extracted above, clearly points out what "manufacture" is. The said term includes any process or assembling or recording of programmes on any disc, tape, perforated media or other information storage device that are considered for the purpose of applicability of the Section. In other words, the activity other than what has been specified or enumerated in the Section would be of no relevance for the purpose of considering the exemption under Section 10B of the Income Tax Act. Even though the provision is an incentive provision, yet, when the words are unequivocal, the Section calls for a restrictive consideration - Refer Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278/129 Taxman 539 (SC). As is well laid, taxation under the Act is the rule and exemption, the exception. Thus, unless the assessee shows that the receipts come clearly within the language of the Section, it is not possible for this Court to give an elastic interpretation to the clear words based on tax treatment under different enactments or the schemes formulated for setting up of industries in a particular area or zone. In the background of the above-said provision, if we look at the order of the Tribunal, we may note that there is hardly any fallacy, particularly a legal one, which calls for any interference by this Court.
14. It is no doubt true that there are circulars issued by the Central Board of Indirect Taxes, particularly customs charges as regards the duty treatment therein on the import of computers. It is no doubt true that Software Technology Parks Scheme gives the object on setting up of Software Technology Parks:
| (a) | To establish and manage the infrastructural resources such as data communication facilities, core computer facilities, built-up space, common amenities etc. | |
| (b) | To provide services (import certification, software valuation, project approvals, etc.) to the users who undertake software development for export purposes. | |
| (c) | To promote development and export of software and software services through technology assessments, market analysis, marketing segmentation, marketing support etc. | |
| (d) | To train professionals and to encourage design and development in the field of Software Technology and Software Engineering. |
15. In the context of these objectives, it is also not in doubt that in the matter of import of computers, other infrastructure and capital goods, the Government of India, Ministry of Finance, considered the duty liability on the import of 100% export oriented units for training purposes. Circular No. 37/95 dated 18/4/95 in F.No. 305/7/95-FTT reads as under:
"Circular No. 37/95
dated 18/4/95
F.No. 305/7/95-FTT
Government of India
Ministry of Finance
Department of Revenue, New Delhi
Subject : Imports by 100% Export Oriented Unit Software Technology Park units for training purpose.
I am directed to say that the Board is in receipt of a reference from the Department of Electronics that a Software Technology Park (STP) Unit has not been permitted to import certain equipment's meant for utilisation within the unit for training of professionals. In this regard, the Board's attention has been drawn to the Ministry of Commerce Notification No. 33/ (RE)/ 92-97, dated 22.3.1994 which vide para 2.12 allows the use of computer system within the STP units for training purpose subject to the condition that no computer terminal will be installed outside the STP unit for this purpose.
2. The matter has been examined be (sic) the Board. There is no doubt that as a policy any STP unit is permitted to utilise the imported equipment's for purpose of training within the unit itself. However, it is to be appreciated that such STP units are set up with the primary intention of exports and training. Accordingly, if such units set up for export purpose use the equipment also for training there can be no objection. It is clear that in such cases the declared intention at the time of import would be to fulfil the export obligation under the STP scheme and if this is so the customs may have no objection for import of the equipments under the respective notification.
3. In view of the aforesaid facts, I am directed to clarify that imports by STP Units should be permitted by the Customs authorities in terms of the relevant customs notification and if later the equipments are used for training purpose also we may have no objection.
Sd/-
S.M. Bhatnagar
Under Secretary to the Government of India"
16. This is followed by yet another circular dated 07.07.1997 in Circular No.24/97- Cus., which once again pointed out to the treatment meant for customs purpose, particularly in the context of the EXIM Policy, which reads as under:
"Circular No. 24/ 97- Cus.
dated 7/ 7/ 97
F. No. 305/ 7/ 95 -FTT
Government of India
Ministry of Finance
Department of Revenue
Subject : Imports by 100% Export Oriented units Software Technology Parks unit for training purpose.
I am directed to say that the Board is in receipt of a reference from the Department of Electronics that commercial training on computers installed in the bonded premises of STP units be allowed. The EXIM Policy as also provides (paragraph 9.15 (f)) that software units will be allowed to use the computers system for training purposes (including commercial training) subject to the condition that no computer terminal shall be installed outside the bonded premises for the purpose.
2. the matter has been examined by the Board. It is noted that activity of imparting commercial training in an STP unit is totally different from permitting manufacture of goods for domestic market by an EOU. It has also been noted that STP units are set up with the primary intention of developing and exporting software but if they in addition use the equipment for training of the personnel of the units there should be no objection. The same principle can equally be applied to training of persons other than employees of the concerned unit.
3. In view of the aforesaid facts, I am directed to clarify that the STP units should be permitted by the Customs authorities in terms of the relevant provisions even if later on when units have completed their Export Obligations, the equipment's are used for training including commercial training purpose, provided the training is conducted within the bonded premises.
4. The Board's instruction contained in Circular No. 37/ 95 dated 18th April, 1995 issued from F.No. 305/ 7/ 95- FTT deemed to have been modified accordingly.
Sd /-
(O.P. Khanduja)
Senior Technical Officer (FTT)"
17. Considering the difference in the tax treatment granted by the Customs and Central Excise Board in the absence of any such concession contemplated under the provision, or for that matter, by the Central Board of Direct Taxes, we do not find any justifiable legal compulsion to accept the plea of the assessee that similar treatment could be imported under the provisions of the Act.
18. It is a well settled principle of law that when the provisions of the tax enactment are clear and are beyond any contradiction, no words could be added to understand the scheme of the provisions of the Act. As already seen, a reading of the provision points out that the Act has made its intention very clear that the exemption is available in respect of profits and gains derived by an undertaking which is engaged in the manufacture or production of an article or thing. Since the training is given to the graduates/professionals who are not employees, who are not, in any way, associated with the business of the assessee in the matter of production and manufacture of an article or thing, and the receipts not being profits and gains derived by the undertaking in the manufacture or production of article or thing, we do not find any justifiable ground to confer benefit of the provision based on the policy decision taken either under the customs enactment, or for that matter, under the Software Technology Park Scheme. It is no doubt true that the objectives of the Software Technology Park Scheme seeks training of professionals as one of the objects; yet, the scheme is one thing and tax treatment is totally another aspect of it. Whatever may be the objectives of the scheme, exemption should be given only in terms of what is provided for under the income tax provisions. As already pointed out, Section 10B of the Income Tax Act being a clear exemption provision, unless the assessee is in a position to show any ambiguity in the provisions of the Act which may possibly be taken advantage of, there can be no liberal interpretation given to the provisions of the Act, for the purpose of granting relief to the assessee. In the circumstances, we have no hesitation in rejecting the plea of the assessee.
19. As far as the reliance placed on the decision of the Mumbai Bench of the Income Tax Appellate Tribunal in Sovika Infotek Ltd. (supra) is concerned, we do not find that the view taken therein could be of any assistance to the assessee. We do not find any legal justification to take the same view, as had been done by the Mumbai Bench of the Income Tax Appellate Tribunal in the decision referred to above.
20. Learned counsel appearing for the assessee submitted that after training, some of the trained personnel were employed in the assessee in its business; consequently, this Court should consider liberal interpretation of the provision for grant of relief to the assessee. Whatever be the post event on training, as on the date of receipt of income, there existed no relationship between the assessee and the trainees as master and servants, to hold that for the purpose of business, training was given to aid in the business of the assessee. The employment of the trained personnel came only after the training was completed to the satisfaction of the institution. Hence, the plea of the assessee for a proportionate allowance cannot be considered. In the circumstances, so long as the receipt was only for the purpose of training, treating the trainee as a student, we do not find any reason to accept the plea of the assessee to allow this appeal. Hence, we reject the submissions of the learned counsel appearing for the assessee and dismiss the Tax Case Appeal, thereby confirming the view of the Tribunal.
21. As far as the question of remand is concerned, even admitting for a moment that there is an error in the order of the Tribunal as regards the receipt of income on the export of software and local sales upto 25%, yet, going by the reasons already given in the preceding paragraphs and the provision on exemption being that the profits and gains of the undertaking arising from the manufacture or production of an article or thing, we do not find any justifiable ground to remand the matter. The facts herein are clear enough to persuade us to hold that the receipts do not call for any exemption under Section 10B of the Income Tax Act. Hence, Tax Case (Appeal) No.34 of 2010 stands dismissed. No costs.
22. In Tax Case (Appeal) Nos.332 and 333 of 2011 relating to the assessment years 1997-98 and 1999-2000 respectively, the Revenue has raised the following substantial question of law:
"Whether on the facts and circumstances of the case, Tribunal was right in holding that the assessee is entitled for exemption under Section 10B with respect to receipts from training activity of the assessee when no foreign inward remittance has taken place."
The facts herein are no different from the one stated in Tax Case (Appeal) No.34 of 2010.
23. It is seen from the order of the Tribunal that it referred to the order passed in respect of the assessment year 1996-97 and the appeal pending before this Court. Yet, it however allowed the appeals of the assessee, subject to the condition that the order passed in respect of the assessment years 1997-98 and 1999-2000 would stand amended in conformity with the order in respect of the assessment year 1996-97. Even though learned counsel appearing for the assessee placed heavy reliance on the order of the Commissioner of Income Tax (Appeals), yet, we do not find any ground that persuades us to take a different view. In the circumstances, having regard to the order passed in Tax Case (Appeal) No.34 of 2010, we set aside the order of the Tribunal and allow Tax Case (Appeal) Nos.332 and 333 of 2011. No costs. Connected M.P.No.1 of 2011 stands closed.
I-T - Whether any expenses incurred towards performance of duty as Development Officer for generating business on behalf of employer is a permissible deduction - NO: Supreme Court
-- By TIOL News Service
NEW DELHI, AUG 08, 2013: THE issues before the Bench are - Whether incentive bonus received from employer prior to 01.04.1989 is a taxable receipt and Whether any expenses incurred towards performance of duty as Development Officer for generating business on behalf of the employer is a permissible deduction. And the verdict goes against the assessee.
Facts of the case
The assessee, T.K. Ginarajan, Development Officer in the LIC, claimed deduction of 40% of the incentive bonus paid to him in the Return of Income-Tax for the various years prior to 01.04.1989 on the ground that he had incurred expenditure to the extent of 40% of the incentive bonus for canvassing business. LIC of India had requested the Central Board of Direct Taxes for a clarification on deduction explaining that the Development Officers had actually incurred some expenditure in the performance of their duty, to the tune of at least 40% of the incentive bonus paid to them. However, the CBDT affirmed that the incentive bonus paid by the LIC to the Development Officers formed part of their income towards salary. However, with effect from 01.04.1989, the LIC itself issued a clarification to the effect that the Development Officers would be entitled to claim reimbursement to the extent of 30% of the incentive bonus granted to them. Thus, the dispute was confined only to the period prior to 01.04.1989 and, thereafter, the Development Officers were entitled to the reimbursement of actual expenses incurred by them, to the extent of 30%. In other words, after 01.04.1989, only that part of the incentive bonus after reimbursing the expenses to the extent of 30% will appear in the salary certificate. What was the fate of the incentive bonus to the Development Officers in LIC prior to 01.04.1989 for the purpose of income-tax was the question to be considered in this case.
The claim for exclusion of 40% of the incentive bonus towards the expenditure was declined by the Assistant Income-Tax Officer. The Commissioner of Income-Tax (Appeals) dismissed the appeal. However, the Income-Tax Appellate Tribunal held in favour of the assessee. But the High Court was in favour of the Revenue and, thus, the Civil Appeal.
Having heard the parties, the Bench held that,
++ income towards salary is explained under Section 15 of the Income- Tax Act, 1961. Permissible deductions are provided under Section 16. The inclusive definition of 'salary', 'perquisite' and 'profits' in lieu of salary is given under Section 17 of the Act. It is now trite law that the Income-Tax Act, 1961 is a complete code as far as tax on income is concerned. 'Income' is defined under Section 2(24) of the Act and the computation of income is provided under Chapter-III of the Act (starting with Section 10). In the case of salaried persons, the only permissible deduction is under Section 16 of the Act. Section 17 has clearly provided for the details of income by way of salary. There is no serious dispute in this case that the incentive bonus paid to the employee by the employer is nothing but salary and there cannot be any dispute either since such payments are covered by the exhaustive definition of 'salary' under Section 17(1);
++ the Full Bench of the High Court of Karnataka in Commissioner of Income-Tax vs. M.D. Patil took the view that incentive bonus earned by the Development Officers of the LIC of India is nothing but salary and no deduction over and above the standard deduction provided under Section 16 is permissible under the Act. Accordingly, the claim of expenditure or net income theory put forward by the Development Officers was rejected by the High Court of Karnataka. Similar is the view taken by the High Court of Andhra Pradesh in K. A. Choudary vs. Commissioner of Income-Tax and Others, the Madras High Court in Commissioner of Income-Tax vs. E. A. Rajendran and in Commissioner of Income-Tax vs. P. Arangasamy and Others, the Orissa High Court in the decision in Commissioner of Income-Tax vs. Sri Anil Singh, the High Court of Bombay in Commissioner of Income-Tax vs. Gopal Krishna Suri and the Calcutta High Court in Commissioner of Income-Tax vs. Ramlal Agarwala, all in favour of the Revenue. However, the High Court of Gujarat in Commissioner of Income-Tax vs. Kiranbhai H. Shelat and Another has taken a contrary view placing heavy reliance on Section 10(14) of the Act as it stood prior to 01.04.1989;
++ "Perquisite" is excluded from the purview of Section 10(14). 'Perquisite' is defined under Section 17(2) of the Act. That apart, what is excluded under Section 10(14) as it stood prior to 01.04.1989 is the expenses incurred in the performance of the duty. It is for the employer to certify the actual expenses incurred in the performance of duty and in which case, as clarified by the CBDT, to that extent, the same shall not be shown as part of salary. On facts, as clearly noted in the Judgment of the High Court of Kerala, there is no claim by the employee either for reimbursement or exclusion of the actual expenditure incurred in performance of the duty. These two distinctions unfortunately missed the notice of the High Court of Gujarat. The Court in fact was swayed by the letter written by the LIC of India to the CBDT for clarification that, to the extent of 40% of the incentive bonus could be exempted as expenditure incurred for the development of business which made them eligible for the incentive bonus. The High Court of Gujarat failed to take note of the reply by the CBDT that it was for the LIC of India to reimburse the actual expenditure involved in the performance of the duty by the Development Officers and to that extent the same was not to be shown as salary;
++ compartmentalization of income under various heads and computation of the taxable portion strictly in accordance with the formula of deductions, rebates and allowances are to be done only as per the scheme provided under the Act. As held by this Court in Karamchari Union, Agra vs. Union of India and Others, the Income-Tax Act, 1961 is a self contained code and taxability of the receipt of any amount or allowance has to be determined on the basis of the meaning given to the words or phrases given in the Act. Thus, we do not agree with the view taken by the High Court of Gujarat in Kiranbhai's case. The same does not lay down the correct principle of law;
++ though the counsel for the appellant made a persuasive attempt to place reliance on the decision of this Court in State of West Bengal and Others vs. Texmaco Limited, we are afraid the same is of no assistance to the assessee. The incentive bonus referred to in the said decision is the special scheme of the company. The question considered in the said decision was as to whether the said bonus would form part of salary as defined under the West Bengal State Tax on Professions, Trades, Callings and Employments Act, 1979. This Court held, placing reliance on the definition of 'salary' in the said Act that only in case there was remuneration on a regular basis, the same was exigible to tax under the said Act. On facts, it was found that there was no regular payment of incentive bonus. That is not the factual or legal position in the case of the appellant under the Act and, therefore, the said decision is not relevant at all for the purpose of this case;
++ the assessee being a salaried person, the incentive bonus received by him prior to 01.04.1989 has to be treated as salary and he is entitled only for the permissible deductions under Section 16 of the Act. The expenses incurred in the performance of duty as Development Officer for generating the business so as to make him eligible for the incentive bonus is not a permissible deduction and, hence, the same is exigible to tax. There is no merit in the appeal.
(See 2013-TIOL-37-SC-IT)
Regards,
Pawan Singla
BA (Hon's), LLB
Audit Officer
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