The word “tax”in Articles 14(2) and 2(1)(b) of the India-USA DTAA includes “surcharge” and for purposes of Article 14(2) which provides that the rate of tax payable by a USA company shall not exceed 15% of the rate payable by domestic companies, the surcharge payable by domestic companies has to be included.

Note: The decision of the ITAT Bombay in Bank of America Vs. DCIT 73 TTJ 51 was disapproved.

Where the assessee entered into “international transactions” with “associated enterprises” and the AO made adjustments to the arms length price, held, deleting the adjustments that:

(i) In order to determine the most appropriate method for determining the arm’s length price, it is first necessary to select the ‘tested party’ and the tested party will be the least complex of the controlled taxpayer and will not own valuable intangible property or unique assets that distinguish it from potential uncontrolled comparables.

(ii) the gross margins of the tested party need to be compared with gross margins of comparable uncontrolled transactions or unrelated enterprises entering into suchtransactions.

(iii) On facts, where the results of the analysis done from the Indian side by the assessee showed that the international transactions entered by the assessee with the associated enterprises were at arm’s length, no adjustments were permissible.

The AO has no jurisdiction u/s 115J of the Act to go behind the Profit & loss account of the assessee and to make adjustments therein beyond what is expressly provided in s. 115J. An assessee is entitled to provide for depreciation in its books at rates which are higher than the rates specified in Schedule XIV to the Companies Act.

Note: The judgement of the Kerala High Court in 253 ITR 378 was reversed.

(i) Before dubbing the accounts to be complex or difficult to understand, there has to be a genuine and honest attempt on the part of the AO to understand accounts maintained by the assessee; appreciate the entries made therein and in the event of any doubt, seek explanation from the assessee. The opinion must be based on objective criteria and not on the basis of subjective satisfaction. Recourse to s. 142 (2A) cannot be had by the AO merely to shift his responsibility of scrutinizing the accounts of an assessee and pass on the buck to the special auditor.

(ii) The CIT has a very heavy duty to see that the requirement of the previous approval is not an empty ritual. Before granting approval, the CIT must have the material on the basis whereof an opinion has been formed by the AO. The approval must reflect application of mind.

(iii) While there is no general rule of universal application as to the applicability of the principle of natural justice the requirement of giving reasonable opportunity of being heard before an order is made, is generally read into the provisions of a statute, particularly when the order has adverse civil consequences for the party affected unless a statutory provision either specifically or by necessary implication excludes the application of principles of natural justice. This principle holds good irrespective of whether the power conferred on a statutory body or tribunal is administrative or quasi-judicial.

(iv) The exercise of power under S.142 (2A) leads to serious civil consequences and, therefore, even in the absence of express provision for affording an opportunity of pre-decisional hearing to an assessee the requirement of observance of principles of natural justice is to be read into the said provision.

Note: Rajesh Kumar 287 ITR 91 (SC) was affirmed.

(i) U/s 6 (6), a person will become an ordinarily resident only if (a) he has been residing in nine out of ten preceding years; and (b) he has been in India for at least 730 days in the previous seven years;

(ii) Though judgments given by a High Court are not binding on the other High Court(s), judicial decorum, propriety and discipline requires that the High Court should, especially in the event of its contra view or dissent, discuss the aforesaid judgments of the different High Courts and record its own reasons for its contra view;

(iii) It is well settled that when two interpretations are possible, then invariably the Court would adopt the interpretation which is in favour of the tax payer and against the Revenue;

(iv) Circulars issued by the Department are binding on the Department.

The Tribunal deleted penalty on the finding that the assessee had been induced to offer undisclosed income on the assurance that penalty would not be levied. The frame of the question raised by the department in its appeal to the High Court did not challenge the perversity of the finding. However, the High Court still held that the finding was perverse. Held:

the Tribunal is the final fact- finding authority and its decision on the facts can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal on facts is perverse, in the sense that it is such as could not reasonably have been arrived at on the material placed before the Tribunal. In the absence of such a question having been claimed, the High Court was obliged to accept the findings of fact arrived at by the Tribunal and then proceed to decide the question of law referred to it.

(i) In McDowell 154 ITR 148, the Court nowhere said that every action or inaction on the part of the tax payer which results in reduction of tax liability to which he may be subjected to in the future, is to be viewed with suspicion and be treated as a device for avoidance of tax irrespective of legitimacy or genuineness of the act.

(ii) The effect of Azadi Bachao Andolan 263 ITR 706 is that an act which is otherwise valid in law cannot be treated as non est merely on the basis of some underlying motive supposedly resulting in some economic detriment or prejudice to the national interests, as perceived by the AO.

The issue of notice under s. 16 (2) W. T. Act {s. 143 (2) I. T. Act} is mandatory for reassessment proceedings. If notice u/s 16 (2) {143 (2)} is not issued, the assessment order passed u/s 17 {s. 147} is not valid.

Note: Bandana Gagoi 289 ITR 28 (Gau) was followed.

See also: ACIT vs. Aurangabad Holiday Resorts (ITAT Pune), Atul Glass Industries vs. DCIT (ITAT Delhi), Vin Vish Corporation vs. ACIT (ITAT Mumbai) & Tulika Mishra vs. JCIT (ITAT Delhi).

The consequences arising out of invoking Chapter XIV-B of the Act are drastic and draconian. The accounts of the assessee may be re-opened for ten years and not only a legal presumption is raised against the assessee but the burden shifts on the assessee to show that it did not have any undisclosed income. Under these circumstances the Revenue should not exercise its powers in a mechanical power but should be circumspect while taking action under the provisions of Chapter XIV-B of the Act.Where the ‘satisfaction’ recorded by the AO u/s 158 BD was vague and lacking material particulars, held the proceedings were bad-in-law.

See Also: DCIT vs. NITS Softech (ITAT Delhi)

Where a notice issued u/s 158BD was vague, showed non-application of mind on the part of the issuing authority and had been issued in a casual manner, held it did not meet the requirements of law and the resultant assessment order was liable to be quashed.

See Also: New Delhi Auto vs. JCIT (Delhi High Court)