(146.4 KiB, 950 DLs)

S. 14A: ITAT cannot remand to apply Daga Capital if AO has not made disallowance

In assessment proceedings, the AO raised a query about disallowance of expenditure attributable to exempted dividend income u/s 14A. After considering the assessee’s reply, no disallowance was made u/s 14A, though interest expenditure was disallowed on the ground that it was not for business purposes. This was confirmed by the CIT (A). On appeal by the assessee, the Tribunal remanded the matter to the AO by observing that the AO should reconsider the matter in the light of Daga Capital Management 199 TTJ 289 (SB) (Mum). On appeal by the assessee, HELD:

As the AO had not made any disallowance u/s 14A, the Tribunal could not have not touched the question of s. 14A and made observations prejudicial to the assessee while remanding the matter. It had no jurisdiction to issue directions to the AO decide afresh on the touchstone of s. 14A and Daga Capital Management Pvt. Ltd. Accordingly, the order of the Tribunal to the extent it directed consideration of applicability of s. 14A was quashed & set aside.

(36.3 KiB, 2,368 DLs)

Ishikawajima-Harima is still good law despite retrospective amendment

The assessee entered into a contract with Raytheon – Ebasco, a foreign company, and two of its’ foreign subsidiaries, for commissioning of a power plant. The assessee made payments to Raytheon for rendering technical services, providing ‘start-up’ services and taking ‘overall responsibility’ for the Project. The two foreign subsidiaries of Raytheon carried on onshore services. The technical services were rendered by Raytheon wholly outside India and it supervised the carrying on of the ‘start up’ services by its subsidiaries. The assessee did not deduct tax at source on payments to Raytheon and the AO held it to be liable u/s 195 r.w.s 201.

The Court had to decide: (i) Whether the assessee as payer had locus standi to argue that the payments to the foreign company were not liable to tax and (ii) Whether Ishikawajima-Harima 288 ITR 408 (SC) was still good law in view of the retrospective amendment to s. 9 by the Finance Act 2007 w.r.e.f 1-6-1976. HELD:

(i) It cannot be said that the person obliged to effect TDS u/s 195 has no right to question the assessment of tax liability since in law, if TDS is not effected by the payer, the payer would be responsible to pay the tax liability of the payee. The payer has every right to question the tax liability of the payee to avoid vicarious consequences;

(ii) In Ishikawakima-Harima it was held that fees for technical services was not assessable to tax u/s 9(1)(vii) if the twin conditions of it being rendered in India and utilized in India were not satified. The amendment to s. 9 suggests that the criterion of residence, place of business or business connection of a non-resident in India have been done away with for fastening the tax liability. However, the criteria of rendering service in India and the utilization of the service in India as laid down in Ishikawajma-Harima to attract tax liability u/s 9(1)(vii) remains untouched and unaffected by the Explanation to s. 9 ;

(iii) As the purport of the Explanation to s. 9 is plain in its meaning, it is unnecessary and impermissible to refer to the Memorandum explaining the Finance Bill 2007. It is explicit from s. 9(1)(vii)(c) and the Explanation to s. 9 that the ratio of Ishikawajma – Harima still holds the field;

(iv) On facts, as the “technical services” were rendered outside India, the fees thereof were not chargeable to tax in India. As regards, the “start up services and over all responsibility”, the work was done partly in India by Raytheon’s two subsidiaries under its’ direct supervision. Though the subsidiaries held an independent contract with Jindal, they virtually constituted the agents of Raytheon and accordingly the fees for the said services were taxable in India.

(405.0 KiB, 1,606 DLs)

Futures & Options are speculative transactions u/s 43(5). S. 43 (5)(d) is not retrospective

In respect of AY 2004-2005, the assessee suffered a loss on account of trading in futures and options. S. 43 (5) defines a “speculative transaction” as one in which a contract for purchase and sale of any commodity, including stocks and shares, is settled otherwise than by actual delivery. Clause (d) was inserted in s. 43 (5) by the Finance Act, 2005 w.e.f 1.4.2006 to provide that “an eligible transaction of trading in derivatives” shall not be deemed to be a speculative transaction. The Special Bench had to consider (i) whether transactions in derivatives are a “speculative transaction” u/s 43 (5) and if so (ii) whether clause (d) of s. 43 (5) is clarificatory and retrospective in nature. HELD, deciding against the assessee:

(i) A ‘derivative’ is a security representing the value of the underlying stocks and shares and must be given the same treatment as that given to the stocks and shares. Also, s. 43 (5) uses the term “commodity” in a wide sense and covers ‘derivatives’. Further, the fact that s. 43(5)(d) exempts certain derivatives from the ambit of the definition of ‘speculative transaction’ shows that they would otherwise have come within that term as otherwise the amendment would be redundant.

(ii) Clause (d) of s. 43(5) cannot be held to be clarificatory because it does not exempt all transactions in derivatives but only the ‘eligible transactions’ on ‘recognized stock exchanges’. Rules 6DDA & 6DDB which deal with ‘recognized stock exchanges’ were inserted w.e.f. 1.7.2005. Consequently, it applies only to AY 2006-2007 & onwards.

(37.8 KiB, 614 DLs)

State Govt. Undertakings do not need COD clearance

Cross appeals filed by the assessee, a State Govt. undertaking, and the department were dismissed by the Tribunal on the ground that the parties had not obtained the approval of the Committee on Disputes (“COD”). The assessee as well as the department challenged the decision of the Tribunal. HELD, reversing the decision of the Tribunal:

(1) Four judgments of the Supreme Court (ONGC vs. CCE 1992 Supp (2) SCC 432, ONGC vs. CCE 1995 Supp (4) SCC 541, ONGC vs. CCE 2004 (6) SCC 437 and MTNL vs. CBDT 267 ITR 647) deal with disputes between public sector undertakings of the Central Government and a Department of the Central Government, while the fifth judgement (Chief Conservator of Forests vs. Collector (2003) 3 SCC 472) deals with a dispute was between two Departments of the State Government. The directions made by the Apex Court have to be read in context and in backdrop of the controversy before the Apex Court. There is not a single order made by the Apex Court which relates to a dispute between Union of India and a State, or a Department of Union of India and a State, or a Public Sector Undertaking of Union of India and a State. Hence, it is not possible to expand the scope of directions made by the Apex Court so as to include a dispute between a Department of the Central Government and a State Government Undertaking. Therefore, the impugned order of Tribunal suffers from an error apparent in law and cannot be sustained.

(2) Apart from the above, a more fundamental aspect of the matter is that the Tribunal is a creature of statute. Under sections 252 to 254 and connected provisions, the Tribunal does not have the power to determine whether an appeal should be admitted or not except on the ground of limitation. The Tribunal has no right of holding that an appeal cannot be admitted.

(202.3 KiB, 714 DLs)

Filing Fee for appeal to ITAT in ‘assessed loss’ cases is only Rs. 500

The assessee, having been assessed to a loss of Rs. 9 crores, filed an appeal before the Tribunal. S. 253 (6) provides that if the assessed ‘total income’ is “less” than Rs. 1 lakh, a fee of Rs. 500 for filing the appeal is payable while if the income is “more”, a higher fee is payable subject to a maximum of Rs. 10,000. The Tribunal took the view that if the loss was more than Rs.1 lakh, the total income would be more than Rs.1 lakh (although negative) and a higher fee was payable on the basis that the object behind s. 253(6) was that big cases involving income of more than a particular figure, positive or negative, required more time and effort of the Tribunal to deal with and as the nature of fees was compensatory, a higher fee for a bigger case would be in consonance with the object.

On a writ petition by the assessee, HELD, reversing the order of the Tribunal:

(i) The expression “more and less” in s. 253 (6) will have to be given its natural meaning. Though “income” includes a loss (“negative income”), negative income can never be more than positive income. It will always be less.

(ii) Where an assessee is assessed to a loss, it may be said either that he has been assessed to a nil income and is permitted to carry forward the loss or that he is assessed to the loss figure. Whichever way one looks at it the assessed income is “less” than Rs. I lakh and s. 253 (a) would apply. If, on the other hand, one takes the view that to an assessee assessed to a loss clauses (a) or (b) or (c) of s. 253 cannot apply as they postulate assessment out of a positive figure than, it is only clause (d) which applies and, even so, the fee payable would be Rs.500/.

(iii) The quantum of the item in dispute is irrelevant. Only the assessed total income has to be considered.

(982.7 KiB, 844 DLs)

Explanation to s. 37 (1) does not apply to “penalty” which is not of the nature of illegal / unlawful expenditure

The assessee became liable to pay “penalty” for overloading wagons under the rules of the Railways. The question arose whether the said “penalty” was disallowable under the Explanation to s. 37 (1) which provides that “expenditure incurred for any purpose which is an offence or which is prohibited by law” shall not be allowable. HELD, deciding in favour of the assessee:

The substance of the matter had to be looked into and given preference over the form. Though the amount was termed “penalty”, it was essentially of a commercial nature and incurred in the normal course of business and was consequently allowable.

Note: The judgement also holds that provision for estimated increases in wages made during ongoing negotiations with workers pending finalization of an agreement is deductible expenditure.

(2.3 MiB, 2,063 DLs)

For s. 80HHC r.w.s 28(iiid), only DEPB ‘profits’ to be reduced / added & not sale value

Expl. (baa) to S. 80HHC defines the term “profits of the business” to mean the profits under the head “profits and gains” as reduced by 90% of the sum referred to in s. 28 (iiid). The 2nd & 3rd Provisos to s. 80HHC (3) provide that the profits computed there under shall be increased by the said 90% amount computed in the proportion of export turnover to total turnover. S. 28 (iiid) refers to “any profit on the transfer of the Duty Entitlement Pass Book Scheme (‘DEPB’)”. The Special Bench had to consider whether the entire amount received on sale of DEPB entitlements represents ‘profits’ chargeable u/s 28 (iiid) or the profit referred to therein requires any artificial cost to be imputed. HELD deciding in favour of the assessee:

(i) The argument of the Revenue that DEPB is a post export event and has no relation with the purchase of goods cannot be accepted. There is a direct relation between DEPB and the customs duty paid on the purchases. For practical purposes, DEPB is a reimbursement of the cost of purchase to the extent of customs duty;

(ii) The DEPB benefit (face value) accrues and becomes assessable to tax when the application for DEPB is filed with the concerned authority. Subsequent events such as sale of DEPB or making imports for self consumption etc are irrelevant for determining the accrual of the income on account of DEPB;

(iii) Though s. 28 (iiib) refers to a “cash assistance against exports”, it is wide enough to cover the face value of the DEPB benefit;

(iv) S. 28 (iiid) which refers to the “profits on transfer of the DEPB” obviously refers only to the “profit” element and not the gross sale proceeds of the DEPB. If the Revenue’s argument that the sale proceeds should be considered is accepted there would be absurdity because the face value of the DEPB will then get assessed in the year of receipt of the DEPB and also in the year of its transfer;

(v) Consequently, only the “profit” (i.e. the sale value less the face value) is required to be considered for purposes of s. 80HHC.

(65.4 KiB, 4,598 DLs)

S. 14A disallowance has to be made even if assessee has no tax-free income

The assessee had borrowed funds for the purpose of investing in shares. The shares were held for capital purposes as well as for investment purposes. In AY 2004-2005, the assessee did not receive any dividend on the said shares and so there was no exempt income. The Special Bench had to consider whether the interest expenditure incurred by the assessee on the said borrowings used for purposes of investment in shares could be disallowed u/s 14A even though the assessee had not received any tax-free income in respect of the said shares. HELD, deciding against the assessee:

(i) In Rajendra Prasad Moody 115 ITR 522 the Supreme Court held that interest on monies borrowed for purchase of shares was allowable as a deduction u/s 57 (iii) irrespective of whether or not there is any yield of dividend to the assessee. It was held that the words “expenditure incurred for making or earning the income” in s. 57 (iii) did not mean that income actually had to be earned for the allowability of the expenditure. The converse of this principle is now applicable. i.e. s. 14A disallows expenditure “in relation to income which does not form part of total income” and in order for the expenditure to be disallowed, actual income need not be earned;

(ii) The fact that the expenditure is allowable u/ss 36 (1) (iii) / 57 is irrelevant because s. 14A has overriding effect and supercedes all other provisions;

(iii) The disallowance has to be of the entire amount of the expenditure so related and cannot be reduced by the receipt of interest which has no relation to such expenditure.

(147.1 KiB, 1,832 DLs)

Expenditure on convertible debentures is deductible

The assessee incurred expenditure on issue of convertible debentures. The department claimed that convertible debentures were akin to shares and that in line with the judgement of the Supreme Court in Brooke Bond 225 ITR 798 the expenditure was capital in nature. HELD rejecting the claim that:

A debenture, when issued, is a loan. The fact that it is convertible does not militate against it being a loan. In accordance with India Cement 60 ITR 52 (SC), expenditure on a loan is always revenue in nature even if the loan is taken for capital purposes. Consequently, the expenditure on convertible debentures is admissible as revenue expenditure.

(385.9 KiB, 947 DLs)

Settlement Applications not disposed of by 31.3.2008 for reasons not attributable to the applicant cannot be treated as having abated

S. 254 D (4A) was amended by the Finance Act 2007 to provide that if in respect of an application filed before 1.6.2007, the Settlement Commission did not pass a final order before 31.3.2008, the proceedings would abate. S. 245 HA (3) provided that the consequence of such abatement was that the income-tax authorities could, in making the assessment, use all the confidential material furnished by the assessee before the Settlement Commission. The said provisions were challenged as being ultra vires Article 14 of the Constitution. HELD, upholding the challenge:

(i) Though Article 14 does not prohibit classification, the same has to be reasonable and not arbitrary. The FA 2007 created two classes of applicants – those whose applications were pending as of 1.6.2007 and those who filed thereafter. While the classification was not unreasonable, the choice of 31.3.2008 as the cut-off date was arbitrary & irrational. The question whether an application could be disposed of by 31.3.2008 depended on the fortuitous circumstance of the Settlement Commission at its whims and fancies deciding to do so. The said date had no rational relation to the object of expeditious disposal of cases;

(ii) S. 245HA (3) which makes available to the AO the hitherto confidential information furnished by the applicant has the effect of severely prejudicing the assessee for no fault of his but solely for the inability of the Settlement Commission to dispose of the application by the specified date. This provision is also arbitrary, unreasonable and violative of Article 14;

(iii) S. 278 AB inserted by the FA 2008 to confer power in the Commissioner to grant immunity from penalty and prosecution in abated proceedings is no remedy to the unconstitutionality because it is inconceivable that the CIT who may have earlier objected to the maintainability of the application would now hold the applicant to be worthy of immunity;

(iv) The fixing of the cut-off date u/s 245 D (4A) (1), the abatement of proceedings u/s 245HA (1)(iv) & the making available of confidential information u/s 245HA (3) for no fault of the applicant are ultra vires the Constitution. In order to save these provisions from being struck down as being unconstitutional, they will have to be read down as applying only to cases where the Settlement Commission is unable to pass an order on or before 31.3.2008 for any reason attributable on the part of the applicant. The expression “reasons attributable” should be reasonably construed. If in the writ petition, the applicant has urged that it was not responsible for the non-disposal of the application and the same is not denied by the revenue, the circumstance should be considered in favour of the applicant;

(v) Accordingly, the Settlement Commission has to consider whether the proceedings have been delayed on account of any reasons attributable on the part of the applicant. If it comes to the conclusion it is not so, then it has to proceed with the application as if not abated;

(vi) The Government should consider appointment of more benches of the Settlement Commission if it desires early disposal of pending applications.