(197.3 KiB, 733 DLs)

S. 80HHC deduction is allowable for s. 115JB even if there are no normal profits despite Ajanta Pharma 223 CTR 441 (Bom)

The assessee’s income was computed u/s 115JB as it had no income under the normal provisions of the Act. The assessee claimed that despite the absence of normal profits, it was eligible for deduction u/s 80HHC in computing the book profits under Expl. (iv) of s. 115JB in accordance with the judgement of the Special Bench in Syncome Formulations 106 ITD 193 (Mum) (SB) and that the judgement of the Bombay High Court in Ajanta Pharma 223 CTR 441 (Bom) (which held that Syncome Formulations was overruled) was not applicable. HELD upholding the assessee’s plea:

In Syncome Formulations, the Special Bench had to consider two questions i.e. (a) method of computation of deduction u/s 80HHC and (b) percentage of deduction allowable in each year. As regards the percentage of deduction, the Special Bench held that the assessee would be entitled to 100% deduction. This view was overruled by the High Court in Ajanta Pharma where it was held that in view of s. 80HHC (1B), deduction was only allowable as per the limits set out therein. However, the first issue as to the method of deduction u/s 80HHC was not before the High Court. As per Sun Engineering 198 ITR 297, the observations of a Court have to be read in context. Consequently, the judgement of the Special Bench on this aspect still held good and the assessee was entitled to deduction u/s 80HHC even though there were no normal profits.

(3.7 MiB, 3,010 DLs)

S. 195 / 201 liability cannot be avoided on ground of non-taxability of recipient

The assessee made payments to a foreign company for purchase of ‘shrink-wrapped’/ready-made software without deduction of tax at source u/s 195 (1). The AO held that the payments were chargeable to tax in the hands of the foreign company as “royalty” u/s 9 (1) (vi) and that the assessee was liable u/s 201 for non-deduction of tax and interest thereon. On appeal, this view was confirmed by the CIT (A) though the Tribunal (94 ITD 91) held that the payments for software, being a purchase of a ‘copyrighted article’ and ‘goods’ as held by in Tata Consultancy Services 271 ITR 401 (SC), was not liable to tax in India and consequently there was no obligation on the assessee to deduct tax at source u/s 195 (1). On appeal by the Revenue, HELD reversing the Tribunal:

(i) The effect of the judgement of the Supreme Court in Transmission Corporation of India 239 ITR 587 is that the moment there is a payment to a non-resident, there is an obligation on the payer to deduct tax at source u/s 195 (1). The only way to escape the liability is for the payer to make an application to the AO u/s 195 (2) for non-deduction or for deduction at a lower rate. If the payer does not make an application and obtain an order u/s 195 (2), it is not open to him to argue that the payment has not resulted in taxable income in the hands of the non-resident recipient and that, therefore, there is no failure on the part of the payer to deduct tax u/s 195 (1);

(ii) In an appeal by the payer against an order u/s 201 imposing liability on the payer for failure to deduct tax u/s 195 (1), there is absolutely no scope for the appellate authority to adjudicate whether the non-resident recipient was chargeable to tax or not and the rate at which it was so chargeable. If the appellate authority in the payer’s case determines the tax liability of the recipient, there may arise conflicts if in the assessment of the recipient a different view is taken as to its taxable status;

(iii) The Tribunal committed an error in determining in the appeals filed by the payer that the payment to the non-resident was not liable to tax and thereby holding the payer was not liable u/s 201 for non-deduction u/s 195 (1).

(218.8 KiB, 537 DLs)

Limitation period u/s 154 (7) for rectification begins from date of appeal order

S. 154 (7) provides that a rectification order can be passed within four years “from the end of the financial year in which the order sought to be amended was passed”. The AO passed an assessment order u/s 143 (3) on 24.11.1998 in which he committed the mistake of reducing the depreciation instead of adding to the income resulting in double deduction. The assessee went up in appeal on other issues to the CIT (A) who decided the appeal on 28.6.2004. The AO gave effect to the CIT (A)’s order vide order dated 23.7.2004. The AO thereafter passed an order u/s 154 dated 26.4.2006 by which he rectified the mistake committed in the order dated 24.11.1998. On the question whether the said order was barred by limitation, the Tribunal decided the issue in favour of the assessee on the ground that the rectification order was passed beyond four years. On appeal by the department, HELD reversing the Tribunal:

(1) Under the Doctrine of Merger, once an appeal against the order passed by an authority is preferred and is decided by the appellate authority, the order of the said authority merges into the order of the appellate authority. With this merger, the order of the original authority ceases to exist and the order of the appellate authority prevails, in which the order of the original authority is merged. For all intent and purposes, it is the order of the appellate authority that has to be seen;

(2) The word “order” in s. 154 (7) has not been qualified in any way and it does not mean only the original order but includes the appeal – effect order.

(3) On facts, the assessment order dated 24.11.1998 merged in the CIT (A)’s order dated on 28.6.2004. This date had to be considered for computing the limitation period of four years. The fact that the error sought to be rectified occurred in the original assessment order and was not subject matter of appeal is irrelevant.

(239.6 KiB, 966 DLs)

If the search warrant is in joint names, an assessment in individual capacity is void

A search warrant u/s 132 (1) (c) was issued in the joint names of the assessee and her spouse. Subsequently, a block assessment of undisclosed income was made u/s 158BC in the individual name of the assessee. In appeal against such assessment, the assessee raised a preliminary objection that the search warrant having been issued in the joint names of the assessee and her spouse, the assessment on the assessee in the individual capacity was invalid. The objection was upheld by the Tribunal. The department appealed to the High Court. HELD, dismissing the appeal:

S. 132 (1) (c) empowers the officer to enter the premises etc and search it if he has “reason to believe” that “any person” is in possession of any money, bullion etc representing undisclosed income. As the search warrant was issued in the joint names of the assessee and her spouse, it means that the officer had reason to believe that the undisclosed assets and income were held jointly. If so, it is not open for the AO to assess the assessee individually on the basis of the assets and documents seized during the course of search in pursuance to the said warrant but the assessment ought to have been only in the capacity of AOP or BOI.

(42.6 KiB, 494 DLs)

Even block assessments can be reopened u/s 147/148

The AO passed a block assessment order u/s 158BC by which he assessed the undisclosed income of the assessee at Rs. 24.37 L. Subsequently, he passed an order by which he added a further sum of Rs. 13.66 L to the said undisclosed income without issuing a notice u/s 148. The Tribunal allowed the appeal on the ground that the AO could not have made the addition without reopening the block assessment u/s 147. On appeal by the Revenue, the High Court upheld the Tribunal’s order. However, on the question whether the AO had jurisdiction to issue notice u/s 148 in respect of a block assessment made under Chapter XIV-B in view of the judgement of the Gujarat High Court in Cargo Clearing Agency 307 ITR 1, HELD dissenting from the judgement:

The view of the Gujarat High Court that while s. 147 permits re-assessment of income that has escaped assessment for any assessment year, assessment under Chapter XIV-B is for a block period of 10/6 years without reference to any particular assessment year and that, therefore, s. 147 does not apply to a block assessment cannot be accepted in view of the judgement of the Supreme Court in Suresh N. Gupta 297 ITR 322 where it was held that the other provisions of the Act would be applicable to the scheme under Chapter XIV-B, if no conflict arises upon such application. The provisions of Chapter XIV prescribing the period of limitation for reopening of assessments apply to block assessments under Chapter XIV-B and there is no conflict between the two.

(93.2 KiB, 1,738 DLs)

Special Bench judgement may prevail over non-jurisdictional High Court judgement. Snowcem India 313 ITR 170 (Bom) may be per incuriam

The Tribunal had to consider whether an assessee liable to pay Minimum Alternate Tax u/s 115JA was also liable to pay interest u/ss 234B & 234C for short-fall in payment of advance tax. The Judicial Member followed the judgement of the Bombay High Court in Snowcem India Ltd 313 ITR 170 and held that interest u/ss 234B and 234C could not be levied when book profits was computed u/s 115JA. The Accountant Member dissented and followed the earlier judgement of the Special Bench in Ashima Syntex Ltd 117 ITD 1 where a contrary view was taken. The Third Member had to consider whether the judgment of a non-jurisdictional High Court would prevail over that of the Special Bench of the Tribunal. HELD by the Third Member:

(i) The view that the High Court is above the Tribunal in the judicial hierarchy and that the judgement of a non-jurisdictional High Court would prevail over that of the Special Bench is subject to two exceptions. The first exception is where there is only one judgment of a High Court on the issue and no contrary view has been expressed by any other High Court. But when there are several decisions of non-jurisdictional High Courts expressing contrary views, the Tribunal is free to choose that view which appeals to it and in certain circumstances the view which is favourable to the taxpayer may be adopted;

(ii) The second exception is where the judgment of the non-jurisdictional High Court, though the only judgment on the point, is ‘per incuriam’ i.e. is rendered without having been informed about certain statutory provisions or binding precedents that are directly relevant. A ‘per incuriam’ judgement need not be given effect to by a lower court;

(iii) In Snowcem India Ltd, the Bombay High Court decided in favour of the assessee following the precedents rendered in the context of s. 115J. However, its attention was not drawn to sub-sec (4) of 115 JA which, according to the department, makes all the difference between s. 115J and s. 115JA. Accordingly, the judgment cannot be relied upon by the assessee as being entirely in its favour on all the aspects of section 115JA and therefore it cannot be said that it should be followed in preference to the order of the Special Bench in Ashima Syntex;

(iv) Consequently, the judgement of the Special Bench had to be followed and it had to be held that the assessee was liable to pay interest u/ss 234B & 234C even when income was computed u/s 115JA.

(529.0 KiB, 769 DLs)

Share broker is eligible to claim “bad debts” u/s 36 (1) (vii) / 36 (2)

The assessee, a share broker, purchased shares on behalf of its client and paid for them. The brokerage on the said transaction was offered to tax. As the client did not pay for the shares, the assessee wrote off the amount due and claimed the same as a bad debt u/s 36 (1) (vii). The AO rejected the claim on the ground that as the said “debt” had not “been taken into account in computing the income”, the conditions of s. 36 (2) (i) were not satisfied. This was confirmed by the CIT (A). On appeal, the Tribunal upheld the claim on the ground that s. 36 (2) (i) required “such debt or part thereof” to be taken into account in computing the income and as the brokerage had been offered to tax, s. 36 (2) (i) was satisfied. On appeal by the Revenue, HELD dismissing the appeal:

(i) The assessee being a broker, the fact that it paid for the shares did not make it an “investment” for the assessee. The transaction was one of brokerage on purchase / sale on behalf of the client;

(ii) The money receivable from the client for the said shares was a “debt” and since it became bad, it was rightly treated as a “bad debt”;

(iii) Since the brokerage payable by the client was a part of the debt and that debt had been taken into account in computing the income, the conditions of s. 36 (2) (i) read with s. 36 (1) (viii) were satisfied and the entire bad debt was allowable as a deduction.

(92.7 KiB, 2,758 DLs)

Even under Rule 8D of S. 14A, disallowance can be made only if there is actual nexus between tax-free income and expenditure

The assessee earned dividend income on shares which was exempt from tax. The AO took the view that the investment in shares was made out of borrowed funds on which interest expenditure was incurred and consequently made a disallowance u/s 14A. This was partly upheld by the CIT (A). On further appeal by the assessee, the Tribunal deleted the disallowance by noting that the assessee had proved that the investment in shares was made out of non-interest bearing funds. It held that unless there was evidence to show that the interest – bearing funds had been invested in the tax – free investments and the nexus was established by the Revenue, s. 14A could not be applied on mere presumption. The Revenue appealed to the High Court and claimed that in view of s. 14A (2) and Rule 8D (1) (b), a disallowance could be made even if the assessee claimed that no expenditure had been incurred in respect of the tax – free income. HELD, dismissing the appeal:

(i) If the investment in the shares is out of the non-interest bearing funds, disallowance u/s 14A is not sustainable;

(ii) The contention of the revenue that directly or indirectly some expenditure is always incurred which must be disallowed u/s 14A cannot be accepted;

(iii) Disallowance u/s 14A requires a finding of incurring of expenditure. If it is found that for earning exempted income no expenditure has been incurred, disallowance u/s 14A cannot stand;

(iv) The contention of the revenue even if the assessee has made investments in shares out of its own funds, the said own funds are merged with the borrowed funds in a common kitty and, therefore, disallowance u/s 14A can be made is also not justified.

(571.9 KiB, 1,668 DLs)

Indexed cost of gifted assets has to be determined with reference to previous owner

The assessee transferred a capital asset which was received by her by way of gift on 1.2.2003. The previous owner had acquired the capital asset on 29.1.1993. In computing capital gains, the assessee claimed that the indexed cost of acquisition had to be worked out by taking the date of acquisition by the previous owner. The AO rejected the claim though the CIT (A) accepted it. On appeal by the Revenue, the issue was referred to the Special Bench. HELD by the Special Bench:

(i) Explanation (iii) to s. 48 defines the term “indexed cost of acquisition” to mean the amount which bears to the cost of acquisition the same proportion as the …. Cost Inflation Index for the first year in which the asset was held by the assessee …” A literal reading of the provision suggests that one has to go by the year in which the asset was held by the assessee. However, this would be inconsistent with the scheme of the Act as reflected in the definition of “short-term capital asset” in Expl. 1(b) to s. 2 (42A) which provides that the period for which the asset was held by the previous owner also has to be taken into account. It is not logical that the cost of acquisition and the period of holding is determined with reference to the previous owner and the indexation factor is determined with reference to the date of acquisition by the assessee. Such an interpretation will lead to absurdity and unjust results and defeat the purpose of the concept of ‘indexed cost of acquisition’. In accordance with the principles of purposive interpretation of statutes, Expl. (iii) to s. 48 has to be read to mean that the indexed cost of acquisition has to be computed by taking into account the period for which the asset was held by the previous owner.

(180.6 KiB, 1,808 DLs)

S. 80-IA (4) deduction is not available to contractors

The assessee, a civil contractor, claimed deduction u/s 80-IA (4) in respect of the profits from infrastructure projects executed by it. The lower authorities rejected the claim on the ground that the assessee was a mere contractor and not a developer. On appeal, the Judicial Member upheld the claim on the ground that the assessee was a developer. The Accountant Member dissented and after taking note of the Explanation to s. 80-IA then proposed to be inserted by the Finance Bill 2007 w.r.e.f 1.4.2000, rejected the claim. The President, acting as Third Member, noted that as the AM had decided on the basis of a point not raised by the parties during the hearing (i.e. the Explanation), a solitary TM decision on the issue may create complications and so the issue was referred to a Larger Bench. HELD by the Larger Bench:

(i) On the question whether the reference was under sub-sec (3) or (4) of s. 255, there is a material difference in the circumstances where a reference is made to a Special Bench u/s 255 (3) and a Third Member or Larger Bench u/s 255 (4). A Third Member / Larger Bench is constituted only when there are differing orders. The present case was one of differing orders and consequently the reference was u/s 255 (4);

(ii) As proceedings u/s 255(4) are confined to the points of difference and the Bench has to confine itself to the facts of the case, interveners are normally not allowed. The exceptions are where a pure question of law is involved. Interveners are allowed provided they confine themselves strictly to the point in difference;

(iii) A Bench constituted u/s 255 (4) has to apply the law as amended with retrospective effect even though such law was not available at the time of passing of the separate orders by the dissenting Members. The order of the TM/Bench is final and conclusive on the point in difference and the failure to apply the applicable law will render the order of the TM/Bench absurd and erroneous;

(iv) On merits, s. 80-IA (4) (even pre-amendment) applies to a “developer”. The difference between a “developer” and “contractor” is that the former designs and conceives new projects while the latter executes the same. As the assessee was merely executing the job of civil construction, it was not eligible u/s 80-IA (4). The assessee was also not the “owner” of the facility;

(v) The intention of the Legislature is to provide deduction u/s 80-IA (4) only to the person directly engaged in developing, maintaining and operating the facility. There should be a complete development of the facility and not just a part of it;

(vi) The Explanation below 80-IA (13) inserted by FA 2007 & 2009 w.r.e.f 1.4.2000 which provides that s. 80-IA(4) shall not apply to a person executing a works contract entered into with the enterprise is unambiguous and cannot be interpreted otherwise.