(149.1 KiB, 1,308 DLs)

Assessment records of third parties can be demanded under RTI

The Applicant, an informer of the department, filed a RTI application seeking inspection & copies of all records available with the income tax department including assessment orders of Escorts Ltd, Dr. Naresh Trehan and connected parties. The application was rejected by the PIO on the ground that there was no overriding public interest in disclosing the information relating to third parties and the disclosure would lead to an invasion of privacy of the assessees. On appeal by the applicant, HELD allowing the appeal:

(i) U/s 3 of the RTI Act information as defined u/s 2(f) which is not exempt from disclosure u/s 8(1) or 9 and is held by a public authority has to be disclosed. As the information sought is information as defined u/s 2(f) and is held by the Income Tax department which is a Public authority, the limited issue is whether the exemption clauses applies:

(ii) S. 8(1) (b) which exempts the disclosure of information which has been expressly forbidden by any court of law or tribunal does not apply as there is no such order.

(iii) S 8(1) (d) which exempts the disclosure of information which would harm the competitive position of a third party does not apply because the information sought is not of commercial confidence and its disclosure does not harm competitive interest.

(iv) S. 8(1) (e) which exempts disclosure of information held in fiduciary relationship does not apply because the returns are filed by the assessees under a statutory requirement and not pursuant to a fiduciary relationship with the income-tax department.

(v) S. 8(1) (h) which exempts disclosure of information which would impede the process of investigation does not apply because the mere fact that an investigation is underway and assessments are not finalized is not a sufficient ground in the absence of anything to show that the investigation would be impeded.

(vi) S. 8(1) (j) which exempts disclosure information which relates to personal information the disclosure of which has no relationship to any public activity or interest, or which would cause unwarranted invasion of the privacy of the individual does not apply to corporate entities and can only be claimed by natural persons and not by corporate entities. There is a difference between having a legal personality and owning ‘personal information’. Personal information is information relating to a natural person, not a legal person.

(vii) As regards the individual about whom information is sought (Dr. Naresh Trehan), though the information is “personal”, it does not satisfy the condition of “not having been disclosed to the public authority as part of a public activity” because information given in discharge of a statutory obligation, is a public activity and therefore, information provided by an assessee to the Department for purposes of income tax assessment is information disclosed in relation to a public activity and not eligible for exemption.

(viii) The argument that the disclosure of the information would lead to unwarranted invasion of the privacy of the individual also does not apply for two reasons. Firstly, the information has been provided by the assessee to meet his legal obligations and the disclosure of the same to another person cannot be construed as being an unwarranted invasion of the privacy of the individual. The Citizen’s right to Information should be given greater primacy than privacy. Information provided by individuals in fulfillment of statutory requirements is not covered by the exemption u/s 8 (1) (j). Secondly, as there has been large evasion of taxes by the group, if citizens monitor assessments through RTI, it could be a major gain for public revenue and perhaps a good check on corrupt officials.

(ix) The Appellant, as informer, is assisting the Department by bringing instances of tax evasion to its notice, and if he is using information that he has received through RTI Applications for this purpose, it cannot be considered to be misuse of information in any way, nor can it be considered to be an unwarranted invasion of privacy of the assessee. And even if the exemption clauses of s. 8 (1) is applicable it certainly serves a larger public interest, if tax evasion is curbed.

(x) The contention that the Appellant is likely to misuse the information and could endanger the life and property of the assessee is a mere apprehension and cannot be accepted as it would defeat the objective of the RTI Act.

(xi) Accordingly, the PIO was directed to provide inspection of the records and the other information sought by the appellant.

(12.9 KiB, 1,446 DLs)

Ad-interim stay of recovery granted by Supreme Court

In a SLP filed against the judgement of the Karnataka High Court in CIT vs. Samsung Electronics, the Supreme Court, by an ad-interim order dated 18.12.2009 directed issue of notice to the Respondents and also directed “Stay of recovery till further orders”.

(140.3 KiB, 1,161 DLs)

Consideration for permission to use TDR / FSI not chargeable to tax

The assessee co-op housing society gave permission to a developer to construct 2 floors and 8 flats on the building belonging to the society by using the TDR / FSI available to the developer. In consideration, the developer paid Rs. 26 lakhs to the assessee and Rs. 66 lakhs to its members aggregating Rs. 92 lakhs. The AO took the view that the assessee had relinquished its right “to load TDR and construct additional floors” and as there was no cost of acquisition, the entire consideration of Rs. 26 L was assessable as long-term capital gains. On appeal, the CIT (A) took the view that even the amounts received by the Members were assessable in the assessee’s hands. He accordingly enhanced the assessment and directed that the consideration be taken at Rs. 92 L. On appeal by the assessee, HELD reversing the CIT (A):

The assessee – society and its members had no right to construct additional floors on the existing building as they had exhausted the right available while constructing the flats in the building. The TDR was not obtained by the assessee and sold to the developer. Accordingly, the assessee had not transferred any existing right to the developer nor any cost was incurred / suffered prior to permitting the developer to construct the additional floors. In the absence of a cost of acquisition, the judgement in B. C. Srinivasa Setty 128 ITR 294 (SC) applied and the consideration was not assessable as capital gains.

(245.0 KiB, 823 DLs)

Foreign Law Firms are not eligible to open liaison offices or to practice law in India. Even giving an opinion on a legal matter amounts to “practise of law”. Non-Advocates cannot practise law

White & Case, a foreign law firm, was granted permission by the RBI u/s 29 of FERA to open a liaison office in India. A PIL was filed contending that such permission was in contravention of s. 29 of FERA as well as s. 29 of the Advocates Act. HELD upholding the challenge:

(i) The liaison offices opened by the foreign law firms to act as a coordination and communications channel between the head office / branch offices and its clients in and outside India related to providing legal services to the clients. Similarly, the liaison activity of providing “office support services for lawyers of those offices working in India on India related matters” and drafting documents, reviewing and providing comments on documents, conducting negotiations and advising clients on international standards and customary practice relating to the client’s transaction etc. was nothing but practising the profession of law in non litigious matters;

(ii) U/s 29 of FERA, RBI has power to grant permission for carrying on “activities of a trading, commercial or industrial nature”. There is a fundamental distinction between professional activity and the activity of a commercial character. As the liaison activities of the foreign law firms related to the profession of law, no permission could be granted to the foreign law firms under section 29 of FERA;

(iii) S. 29 of the Advocates Act which provides that there shall “be only one class of persons entitled to practise the profession of law, namely, advocates” applies not only to persons practising as advocates before any Court / authority in litigious matters but also to persons practising in non litigious matters as well. Practising the profession of law involves a larger concept while practising before the Courts is only a part of that concept.

(iv) The argument of the UOI that if it is held the Advocates Act applies to persons practising in non-litigious matters, then no bureaucrat would be able to draft or give any opinion in non-litigious matters without being enrolled as an advocate is without merit because there is a distinction between a bureaucrat drafting or giving opinion during the course of his employment and a law firm or an advocate drafting or giving opinion to the clients on professional basis. Further, while the bureaucrat is answerable to his superiors, a law firm or an individual engaged in non litigious matters is answerable to none. To avoid such anomaly the Advocates Act has been enacted so as to cover all persons practising the profession of law be it in litigious matters or in non-litigious matters.

(v) Consequently, the RBI was not justified in granting permission to the foreign law firms to open liaison offices in India u/s 29 of FERA. Further, the foreign law firms were not entitled to practise in non litigious matters in India without following the provisions of the Advocates Act.

(71.4 KiB, 1,570 DLs)

Under “block of assets”, user of individual assets is not required

The assessee purchased machinery which was not put to use during the year though it formed a part of the “block of assets”. On the question whether depreciation on the said machinery was allowable, the Tribunal held that once a particular asset falls within the block, it is added to the WDV and depreciation is to be allowed on the block. The individual asset loses its identity and the question whether an individual asset is put to use in a particular year or not is irrelevant inasmuch as the requirement of law is to establish the use of the block of assets and not the use of particular equipment. On appeal by the Revenue, HELD affirming the Tribunal’s order:

(i) The rationale and purpose for which the concept of block asset was introduced, as reflected in the CBDT’s Circular dated 23.09.1988 is that once the various assets are clubbed together and become ‘block asset’ within the meaning of s. 2(11), it becomes one asset. Every time, a new asset is acquired, it is to be thrown into the common hotchpotch, i.e., block asset on meeting the requirement of depreciation being allowable at the same rate. Individual assets lose their identity and become an inseparable part of block asset insofar as calculation of depreciation is concerned;

(ii) The fusion of various assets into the block asset gets disturbed only when the eventuality contained in clause (iii) of s. 32 takes place, viz., when a particular asset is sold, discarded or destroyed in the previous year (other than the previous year in which first brought in use). Even in that event, the amount by which the moneys payable in respect of that particular building, machinery, etc. together with the amount of scrap value is to be deducted from total written down value of the ‘block asset’;

(iii) Though as per s. 32(1) the asset is to be owned and “used” for the purpose of business or profession, the expression “used for the purpose of business” when applied to block asset would mean use of block asset and not any specific items in the said block as individual assets have lost their identity after becoming inseparable part of the block asset;

(iv) The fact that under the second proviso to s. 32 assets acquired after 30th Sept shall be entitled to 50% depreciation of amount admissible does not mean requirement of user of individual asset remains intact. In the first year when the particular asset is acquired, user of the asset is required. In subsequent years, the user of individual assets is not required.

(1.3 MiB, 895 DLs)

Even exempt capital gains are includible in “book profits”

The assessee earned long-term capital gains of Rs. 40.57 L which was not chargeable to tax u/s 54EC. As the said gains were credited to the P&L A/c, the assessee excluded the gains whilst computing “book profits” u/s 115JB in view of the Special Bench judgement in Sutlej Cotton Mills 45 ITD 22 (Cal) (SB) where it had been held that non-taxable capital receipts had to be excluded from book profits. The AO and the CIT (A) rejected the claim. On appeal by the assessee HELD dismissing the appeal:

(i) The effect of the judgements of the Supreme Court in Apollo Tyres and HCL Comnet is that if the accounts are prepared as per Schedule VI to the Companies Act, the AO has no jurisdiction to make adjustments to the “book profits” other than what was provided in the Explanation to s. 115JB. There is no scope for excluding non-taxable profits from the “book profits” as s. 54EC is not specified in the Explanation;

(ii) The assessee had itself included the capital gains in its P&L A/c and it was not the assessee’s case that its’ accounts were not as per Schedule VI;

(iii) It is true that the profits shown in the P&L A/c can be adjusted in respect of matters which are separately disclosed in the accounts or in the notes to accounts. E.g. prior period / extraordinary items shown separately (Khaitan Chemicals 307 ITR 150 (Del)) and current year’s depreciation shown separately in the notes (Sain Processing 17 DTR 215 (Del)). However, as it is not the assessee’s case that the capital gains was not otherwise includible in the net profit, this principle does not apply;

(iv) Though sub-section (5) of s. 115JB provides that “save as otherwise provided in this section, all other provisions of this Act shall apply”, the normal provisions of the Act are not relevant for the purpose of computing “book profits”.

(184.5 KiB, 2,163 DLs)

Even capital profits have to be added to “book profits” for s. 115JB

The assessee earned a capital profit of Rs. 10.38 crores on sale of rights to immovable property. The said profit was directly credited to the capital reserves in the balance sheet instead of being routed through the Profit & loss account. The accounts of the assessee company were duly certified by the auditors and were also adopted in the AGM. The audited accounts were filed with ROC. In the computation of “book profits” for s. 115JB, the said capital profits were not included. The AO took the view that by not crediting the capital profit to the P&L A/c, the assessee had contravened sub-clause (xi)(a) of clause (3) of Part II of the Schedule VI to the Companies Act and that he was, therefore, entitled to add the capital profit to the “book profit”. On appeal, the CIT (A) reversed the AO on the ground that the AO had no jurisdiction to go beyond the net profit shown in the P&L A/c except to the extent provided in the Explanation to s. 115JB. On appeal by the Revenue, HELD reversing the CIT (A):

(i) Part II of Schedule VI to the Companies Act requires that the P&L A/c of a company shall disclose every material feature including credits or receipts and debits or expenses in respect of non-recurring transactions or transactions of exceptional nature also. The company is also required to set out the various items relating to the income and expenditure of the company arranged under most convenient heads and disclosing profit or loss in respect of transactions of a kind not usually undertaken by the company or undertaken in circumstances of exceptional or non-recurring nature if material in amount.

(ii) As the assessee had not routed the capital profits through the Profit and Loss A/c. and directly credited it to the Balance Sheet, its accounts were not prepared in the manner provided in Part II and Part III of Schedule VI to the Companies Act. The fact that the auditors had certified the accounts is not relevant.

(iii) In Apollo Tyres Ltd 265 ITR 273 and Kinetic Motor Co. Ltd 262 ITR 340 it was held that if the accounts were prepared in accordance with Schedule VI, the AO had no jurisdiction to make adjustments beyond what was provided in s. 115JB. However, as the assessee had bypassed the provisions of Schedule VI and directly credited the capital profit to the reserve account, these judgements did not apply and the AO had the power to rework the book profit.

(175.7 KiB, 929 DLs)

Tribunal has inherent power to dismiss an appeal for non-appearance of appellant

The Tribunal dismissed the excise appeal of the assessee for non-appearance. The application filed by the assessee for restoration of the appeal was also dismissed. The dismissal was challenged before the High Court on the ground that under s. 35C of the Excise Act (corresponding to s. 254 of the Income-tax Act) the Tribunal had no power to dismiss an appeal for non-appearance of the Appellant. It had to decide on merits. HELD:

(i) In Chenniappa Mudaliar 74 ITR 41 the Supreme Court struck down R. 34 of the Tribunal Rules, 1946 (now Rule 24) and held that the Tribunal had no power to dismiss an appeal for non-appearance of the Appellant. This view has been followed in the context of the Excise Act in Viral Laminates 100 E.L.T. 335 (Guj.) and Prakash Fabricators & Galvanizers 130 E.L.T 433 (Del.).

(ii) While not inclined to depart from the view taken by the two High Courts, reference must be made to Sunderlal Vs. Nandramdas AIR 1958 MP 260 where it was observed that though the Act does not give any power of dismissal, it is axiomatic that no court or tribunal is supposed to continue a proceeding before it when the party who has moved it has not appeared nor cared to remain present. The dismissal, therefore, is an inherent power which every tribunal possesses. This was approved in Dr. P. Nalla Thampy Vs. Shankar 1984 (Supp) SCC 631. In New India Assurance vs. Srinivasan (2000) 3 SCC 242, it was held that every court or judicial body or authority, which has a duty to decide a lis between two parties, inherently possesses the power to dismiss a case in default. Where a case is called up for hearing and the party is not present, the court or the judicial or quasi judicial body is under no obligation to keep the matter pending before it or to pursue the matter on behalf of the complainant who had instituted the proceedings. That is not the function of the court or, for that matter of a judicial or quasi judicial body. In the absence of the complainant, therefore, the court will be will within its jurisdiction to dismiss the complaint for non prosecution.

(iii) Accordingly, though the Rule conferring power on the Tribunal has been struck down, one cannot altogether lose sight of the rule that every court or tribunal has an inherent power to dismiss a proceeding for non prosecution when the petitioner/appellant before it does not wish to prosecute the proceeding. In such a situation, unless the statute clearly requires the court or tribunal to hear the appeal / proceeding and decide it on merits it can dismiss the appeal / proceeding for non-prosecution. The power must be exercised judiciously and taking into consideration all the facts and circumstances of the case.

(70.8 KiB, 1,102 DLs)

Cutting & polishing marble blocks is “production” for s. 80-IA

The assessee was engaged in conversion of marble blocks into slabs and tiles by sawing and polishing. The question was whether this amounts to “manufacture or production of article or thing” for purposes of deduction u/s 80IA. HELD, deciding in favour of the assessee:

(i) The word “production” is wider in its scope than the word “manufacture”. It means manufacture plus something in addition thereto. This ground reality is now noted in s. 2(29BA) inserted by Finance Act, 2009 w.e.f 1.4.2009. In Lucky Minmat 245 ITR 830 (SC), it was held that mere mining of limestone and marble and cutting the same before it was sold will not constitute “manufacture” or “production” but conversion into lime and lime dust could constitute the activity of manufacturing or production. In Aman Marble Industries 157 ELT 393 (SC) it was held that cutting of marble blocks into marble slabs was not “manufacture” but the Court was not concerned whether there was “production”.

(ii) While mere extraction of stones and its cutting into slabs may not constitute manufacture the activity of polishing and conversion of blocks into polished slabs and tiles amounts to “manufacture” or “production” because the conversion of blocks into polished slabs and tiles results in emergence of a new and distinct commodity. There is accordingly “manufacture or production” for s. 80-IA

(iii) If the contention of the Department that the activity undertaken by the assessee is not manufacture is to be accepted there would be serious and disastrous revenue consequences because the assessees would plead that they were not liable to pay excise duty, sales tax etc. because the activity did not constitute manufacture.

(96.6 KiB, 1,640 DLs)

Fees for services coming within S. 44BB are not taxable u/s 9 (1) (vii) r.w.s. 44DA

The Applicant, a Polish company, was engaged in conducting seismic surveys and providing seismic data to oil companies in connection with their oil exploration and drilling activities. The AAR had to consider whether the income derived by the Applicant was assessable u/s 44BB or u/s 9 (1) (vii) r.w.s. 44DA. HELD, deciding in favour of the Applicant:

(i) S. 44BB applies to an assessee engaged in the business of providing services or facilities in connection with ….. the prospecting … of mineral oils. On the other hand, Explanation 2 to s. 9 (1) (vii) defines “fees for technical services” to mean consideration for the rendering of technical services but not including consideration for mining or like project undertaken by the recipient.

(ii) The Applicant’s case falls within s. 44BB because the words in connection with therein have an expansive meaning. The services provided by the Applicant have a real, intimate and proximate nexus with the prospecting for or extraction of mineral oils. The seismic survey and data acquisition is a prelude and critical component of the oil and gas exploration activity. Without seismic data acquisition and interpretation, it is impracticable to carry out the activity of prospecting which is a step in aid to exploration.

(iii) The argument of the Revenue that that the term ‘services’ in s. 44BB are other than the services covered by Expl. 2 to s. 9(1)(vii) is not acceptable. There is no compelling reason to assign a narrow and restricted meaning to the expression ‘services’ and confine it to services other than technical, consultancy or managerial services.

(iv) The argument of the Revenue that that the exclusion with regard to mining projects in Expl. 2 to s. 9 (1)(vii) is applicable only to those who have taken up main project but not to those who rendered services to the enterprise promoting the main project is also not acceptable in view of binding Instruction No. 1862 issued by the CBDT on 22.10.1990 wherein it was held that the term ‘mining project’ in Expl 2 to s. 9(1)(vii) covers the rendering of services.

(v) Even on first principles, s. 44BB is a special provision dealing with the computation of profits of non-residents engaged in providing services in prospecting for etc of mineral oils and will prevail over s. 9 (1) (vii) which is a general provision for charging fees for technical services to tax.