The FAR analysis gives the basis of broad characterization for e.g. Manufacturer, Service Provider, Distributor, etc with a further sub-characterization including low-risk service provider, high risk service provider; Full-Fledged manufacturer, contract manufacturer, etc. These characterizations are vitally important to determine the arm’s length price of international transactions

Rule 8D(2)(ii) allocates “expenditure by way of interest ……….. which is not directly attributable to any particular income or receipt”. This refers to interest relatable to tax-free income as well as taxable income. However, the definition of variable ‘A’ embedded in the formula under Rule 8D(2)(ii) refers only to interest expenditure directly related to tax exempt income but not to interest expenditure directly related to taxable income. The result is that while Rule 8D(2)(ii) seeks to allocate all interest expenditure, it ends up allocating only interest expenditure relatable to tax-free income. This is clearly incongruous. In Godrej & Boyce Mfg Co Ltd 328 ITR 81 (Bom), the department took the stand, to defend the constitutional validity of Rule 8 D, that both, interest directly attributable to tax exempt income as well as interest directly relatable to taxable income would be excluded from the definition of variable ‘A’ in the Rule 8D(ii) formula. Once the Revenue has taken a particular stand about the applicability of the formula in Rule 8 D(2)(ii) based on which the constitutional validity of Rule 8D is upheld, it is not open to the Revenue to take any other stand on the issue with regard to the actual implementation of the formula in the case of any assessee. Accordingly, the correct application of the formula set out in Rule 8D(2)(ii) is, as noted in Godrej and Boyce, that interest expenses directly attributable to tax exempt income as also directly attributable to taxable income have to be excluded from the computation of common interest expenses to be allocated under Rule 8D(2)(ii)

Though the assessee’s project, when it was commenced in the year 2003, was in compliance with s. 80-IB(10) as it then stood, the law prevailing in the year of completion of the project has to be seen. As the Project breached the ceiling of maximum commercial area imposed by s. 80-IB(10)(d) inserted w.e.f. 1.4.2005 (lesser of 2000 sq. ft or 5% of aggregate BU area), the assessee is not eligible for s. 80-IB(10) relief (Saroj Sales Corp vs. ITO 115 TTJ Mum 485 not followed; Brahma Associates 333 ITR 289 (Bom) & Reliance Jute 120 ITR 921 (SC) referred)

Merely because a notice u/s 143(2) had already been issued and the assessee filed revised return thereafter, disclosing additional income towards capital gains, which was not correctly shown in the original return, does not tantamount to detection of concealment of income u/s. 271(1)(c) of the Act (Suresh Chandra Mittal 251 ITR 9 (SC) followed) {see also Radheshyam Sarda (ITAT Indore)}

It is the settled law that if a revised return offering additional income is filed after investigation has started but before the issue of the s. 148 notice, s. 271(1)(c) penalty is not leviable. In Sureshchand Mittal 251 ITR 9, the Supreme Court held that even where the assessee surrendered additional income by way of a revised return after persistent queries by the AO, once the revised ROI has been regularized by the revenue, the assessee’s explanation that he had declared the additional income to buy peace had to be treated as bona fide and s. 271(1)(c) penalty could not be levied. On facts, as the assessee filed a revised ROI after survey but before the issue of the s. 148 notice, penalty was not leviable

It is a settled proposition of law that the Tribunal u/s 254(1) has no power to take back the benefit conferred by the AO or enhance the assessment. Once the matter has been restored by the Tribunal, the income cannot be enhanced from what was determined at the time of original assessment proceedings, which was the subject matter of dispute before the Tribunal. This proposition of law has been upheld by the Supreme Court in Hukumchand Mills Ltd 62 ITR 232 (SC) and reiterated in Mcorp Global 309 ITR 434 (SC). Therefore, the enhancement of assessment by making 100% disallowance in respect of free food allowance cannot be sustained and the same is restricted to 50%, as was made by the AO in the original round of proceedings

S. 143(1) assessment cannot be reopened u/s 147 in absence of “new material” The assessee filed a ROI in which it claimed deduction for non-compete fees and depreciation on leased premises which was accepted by the AO vide Intimation u/s …

Telco Dadajee Dhackjee Ltd vs. DCIT (ITAT Mumbai Third Member) Read More »

When s. 10A(9) was omitted in AY 2004-05, the Finance Minister said in the budget speech that the provision was “illogical” and had to be removed. Given the object & purpose of the omission, it can be held that the omission has retrospective effect and applies to change in the ownership in AY 2003–04. Further, sub–section (9) was omitted without any saving clause and it is not a case of repeal. If a provision in a statute is unconditionally omitted without any saving clause in favour of the pending proceedings, all actions must stop where such an omission is found. As s. 10A(9) has been omitted, it is as if the sub-section never existed in the statute (G.E. Thermo Matrix (ITAT B’lore followed)

S. 74(1), as substituted w.e.f. 01.04.2003, uses the present tense and refers to the long-term capital loss of the current year. It applies to the long-term capital loss of AY 2003-04 onwards and not to the long-term capital loss relating to the period prior to AY 2003-04. The set-off of long-term capital loss relating to a period prior to AY 2003-04 is governed by s. 74(1) as it stood in that AY

S. 14A talks of making disallowance of expenses incurred in relation to an income not chargeable to tax. No exception, such as the dividend being main or incidental income, has been carved out in the provision. The relation of expenses for disallowance is with the exempt income irrespective of the source or nature of the exempt income. When the legislature in its wisdom has not spelt out any exception coming in the way of applicability of s. 14A, it is wholly impermissible to artificially find any such exception contrary to the language of the provision and the intention of the legislature. Accordingly. s. 14A applies even if the securities are held as stock-in-trade (Leena Ramachandran 339 ITR 296 (Ker) distinguished)