ESOP to expatriate employee of foreign company not chargeable for period he was outside India even if ESOP was vested and exercised in India

If a part of the activity done by the assessee-employee has no relation to any India specific job or activity it is not chargeable to tax in India. On facts, the assessee was in India only for a short period i.e. 1.4.2006 onwards. Prior to that, he has not done any service connected with any activity in India. Accordingly, as the assessee has not rendered service in India for the whole grant period, only such proportion of the ESOP perquisite as is relatable to the service rendered by the assessee in India is taxable in India (Sumit Bhattacharya 112 ITD 1 (SB) referred)

S. 195 TDS: Application for refund of TDS due to cancellation of contract with non-resident can be made vide s. 154 application

Before the CIT(A) the assessee filed copies of various invoices raised on it in pursuance to the contract by the Taiwanese company and also filed copy of credit note issued pursuant to the cancellation of the contract and documents showing inward remittance of the amount earlier paid. The CIT(A) held that the case of the assessee is covered by sub-clause (b) of clause 2 of Circular No. 7 dated 23.10.2007 and clause 2(b) of Circular No. 790 dated 20.04.2000. In para 2.1 of Circular 7 dated 23.10.2007, it is clearly provided that once the amount already remitted in pursuance of a contract has been refund back to the remitted after cancellation of the contract, no income accrues to the non-resident. It is also provided in the circular that the amount of tax paid u/s195 can be refunded to the deductor with prior approval of the CCIT. The detailed procedure is provided in the said circular and certain pre-conditions are to be satisfied, suitable undertaking from the deductor has to be obtained before the refund can be issued. It is also specified that refund can be given only if the non-resident has not filed any return and the time limit for filing of return has already expired. It was held that as the contract has been cancelled and the money has been received back, no tax is payable by the non-resident assessee. The CIT (A) directed the AO to verify that the conditions laid down in Circular No.7 of 2007 have been satisfied. There is no infirmity in the order of the CIT(A) and it cannot be said that AO was not allowed any opportunity as he has to verify the details before granting any refund of tax if any

S. 195(2) TDS: AO has no power to issue Nil TDS certificate

S. 195(2) presupposes that the person responsible for making the payment to a non-resident is in no doubt that tax is payable in respect of the some part of the amount to be remitted to a non-resident, but is not sure as to what should be portion so taxable or is not sure as to the amount of tax to be deducted. Consequently, in an application made u/s 195(2), the AO cannot assume jurisdiction to hold that the entire payment is not chargeable to tax and the payer need not deduct tax at source. As the AO had no power u/s 195(2) to hold that no tax is deductible at source, the order passed by him holding that no tax is deductible at source on the technology transfers is non est in law. As there is no estoppel against the law, the assessee cannot take advantage of such an order (GE India Technology Centre 327 ITR 456 (SC) referred)

S. 14A/ Rule 8D: Interest on loans for specific taxable purposes to be excluded

Rule 8D(2)(ii) refers to expenditure by way of interest which is not directly attributable to any particular income or receipt. If loans have been sanctioned for specific projects/expansion and have been utilized towards the same, then obviously they could not have been utilized for making any investments having tax-free incomes and have to be excluded from the calculation to determine the disallowance under Rule 8D(2)(ii) (Champion Commercial Co. Ltd (ITAT Kol) followed)

S. 14A/ Rule 8D does not apply to short-term investments gains from which is taxable

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 AO is directed to recompute disallowance u/s 14A read with Rule 8D after excluding short term investments

The assessee’s contention is that the assessee voluntarily surrendered and consented to pay tax to avoid further litigation and to buy peace of mind though the department’s contention is that the surrender was only because the assessee failed to establish the genuineness of the claim. If the assessee gives an explanation which is unproved but not disproved i.e. it is not accepted but circumstances do not lead to the reasonable and positive inference that the assessee’s case is false, then the penalty is not imposable. In the present case, the assessee’s explanation remained unproved but it cannot be said as disproved. Further, s. 68 is an enabling provision for making an addition where the assessee fails to give an explanation regarding the cash credit but such addition does not automatically justify imposition of penalty u/s 271(1)(c) r/w Explanation 1 thereto. In order to justify levy of penalty, there must be some material or circumstances leading to a reasonable conclusion that the amount does represent the assessee’s income and the circumstances must show that there was a conscious concealment or act of furnishing of inaccurate particulars. From a bare reading of s. 271, it is clear that the provisions of Explanation 1 to s. 271 do not make the assessment order conclusive evidence that the amount assessed was, in fact, the income of the assessee and that the assessee did not satisfactorily explain the cash credits by producing evidence and documents. Accordingly, penalty u/s 271(1)(c) is not leviable (Upendra V. Mithani (Bom) (included in file) and National Textile 249 ITR 125 (Guj) followed)

A study of the partnership deed shows that Deloitte Haskins & Sells, Mumbai, which is the participating firm, is not a stranger to the assessee. The assessee can take policy decisions, which have a policy bearing on such firm, once there is an approval of the majority of the members of the “National Firm”. Mukund Dharmadhikari was representing Deloitte Haskins & Sells, Mumbai, and the endeavour of the assessee was to bring on board the participating firm, on which it had powers to make policy decision, so that they became entitled for a share of profit. In other words, the effort of the assessee was to bring indirectly into the partnership M/s Deloitte Haskins & Sells, Mumbai, which was already a participating firm. The assessee was a renowned partnership firm and was well aware that number of partners cannot exceed 20. It is a well settled principle of law that what is permissible is tax planning, but not evasion. When an attempt is made by a concern to evade tax using subtle camouflages, bounden duty of the authorities is to find out the real intention. It is the duty of the Court in every case, where ingenuity is expended to avoid taxing and welfare legislations, to get behind the smoke screen and discover the true state of affairs. The Court has to go into substance and not to be satisfied with the form. Though in Rashik Lal 229 ITR 458 (SC) & Bagyalakshmi 55 ITR 660 (SC) it was held that a partner may be a trustee or may enter into a sub-partnership with others, or can be a representative of a group of persons and that qua the partnership, he functions in his personal capacity, these decisions will not apply since the assessee was indirectly trying to bring in M/s Deloitte Haskins & Sells, Mumbai, another firm, which was already a participating firm, as its partner, circumventing the limit of maximum 20 members. The AO did not apply his mind and go into these aspects and so the CIT was justified in directing him to look into the issue.

Rule 8D(2)(ii) is a computation provided 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)

The facts do not suggest that the assessee has acted in a malafide manner or that the reasons explained are only a device to cover an ulterior purpose. It is a settled proposition of law that Courts should take a lenient view on the matter of condonation of delay provided the explanation and the reason for delay is bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way. The Court should be liberal in construing sufficient cause and should lean in favour of such party. Whenever substantial Justice and technical considerations are opposed to each other, cause of substantial Justice has to be preferred. On facts, the reasons explained by the assessee show that due to bonafide mistake and inadvertence, the appeal could not be filed within the period of limitation. Accordingly, the delay of 496 days has to be condoned (Mst. Katiji 167 ITR 471(SC) referred)

A combined reading of s. 201(1A) and s. 40(a)(ia) shows that while a case of short-deduction of TDS is covered by s. 201(1A), it is not covered by s. 40(a)(ia). There is an obvious omission to include short deduction / lesser deduction in s. 40(a)(ia). Therefore, in case of short /lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the assessing officer, cannot be disallowed (S.K. Tekriwal (Cal HC) & Chandabhoy and Jassobhoy 49 SOT 448 (Mum) followed)