(196.3 KiB, 2,237 DLs)

Unabsorbed depreciation of AYs 1997-98 to 2001-02 not eligible for relief granted by amended s. 32(2) in AY 2002-03

Till AY 1996-97 unabsorbed depreciation could be set off against income under any head. From AY 1997-98 to 2001-2002 unabsorbed depreciation could be set off only against business income. From AY 2002-2003 onwards unabsorbed depreciation could again be set off against income under any head of income. The question before the Special Bench was whether in AY 2003-04, the unabsorbed depreciation relating to AY 1997-1998 to 1999-2000 could be set off against non-business income. The assessee claimed that law prevailing in the year of set-off should apply and as in AY 2002-03 unabsorbed depreciation is permitted to be set-off against non-business income, that should apply to the earlier years’ brought forward depreciation as well. HELD rejecting the claim:

(i) The amendment made to s. 32(2) w.e.f AY 2002-03 is substantive. A substantive amendment is normally prospective in operation. S. 32(2) is a deeming provision which by legal fiction provides that the unabsorbed depreciation allowance u/s 32(1) is deemed to be depreciation allowance for the succeeding year(s). A deeming provision has to be strictly interpreted and cannot extend beyond the purpose for which it is intended. S. 32(1) deals with depreciation allowance for the current year and s. 32(2) uses the present tense to refer to allowance to which effect `cannot be’ and `has not been’ given. This indicates that s. 32(2) speaks of depreciation allowance u/s 32(1) for the current year starting from AY 2002-03. Brought forward unabsorbed depreciation of earlier years cannot be included within the scope of s. 32(2). If the intention of the legislature had been to allow such b/fd unabsorbed depreciation of earlier years at par with current depreciation for the year u/s 32(1), s. 32(2) would have used past or past prefect tense and not the present tense. Further, the unabsorbed depreciation for the period from AY 1997-1998 to 1999-2000 has been referred to as “unabsorbed depreciation allowance” and given a special name and cannot fall within s. 32(1) in AY 2002-03.

(ii) The substitution of s. 32(2) w.e.f AY 2002-03 is a limited repeal of the old s. 32(2) and its effect is that unabsorbed depreciation of the earlier period is allowable under the new provision but has to be dealt with in accordance with the old provision and is subject to the limitation of being eligible for set-off only against business income and for 8 years.

(iii) The argument that the department having taken a stand in Jai Ushin cannot argue to the contrary is not acceptable. Such limitation if placed on the revenue will also have to apply to assessees. Further, as a Special Bench is constituted to resolve conflict of opinion amongst different Benches it will be too harsh to stop the assessees or the Revenue from arguing the case in the way they like.

(iv) The principle that if two interpretations are possible then the view in favour of the assessee should be adopted cannot be applied in a loose manner so as to debar a superior authority from examining the legal validity of conflicting views expressed by lower authorities. This rule is applicable where the provision in question is such which is capable of two equally convincing interpretations and not otherwise.

(104.0 KiB, 2,054 DLs)

ITAT subject to RTI though case details cannot be disclosed without applicant showing public interest

The Applicant sought from the CPIO, ITAT, inspection of records relating to appeals of Escorts Limited & another and information on how third parties can become interveners and inspection of records relating to s. 4 RTI compliance. Information on the procedure to make vigilance complaints was also sought. The application was rejected by the CPIO on the ground that ‘larger public interest’ had not been established. The appeal was rejected by the appellate authority on the ground that the Applicant was “misusing the provisions of the RTI Act to create unnecessary proceedings before the authorities who are expected to do the important government work”. It was held that the Applicant was “harassing the authorities under the said Act in the name of doing certain public good work, which is known only to his imaginations”. It was also alleged that the Applicant was not a ‘whistle-blower’ but a ‘nuisance maker’ and that he may be using the RTI Act as a ‘black-mailing or arms twisting tactics’. It was also held that judicial records were not liable for disclosure. On second appeal, HELD by the CIC:

(i) The argument that because the information held by ITAT is in the form of only judicial record, such record is outside the purview of the RTI Act is not acceptable. Even the Supreme Court and High Courts have rules for disclosure of judicial information. The only requirement is that applicant must adhere to the particular rules in making an application under the RTI Act.

(ii) On the question whether the information sought by the Applicant can be regarded as “information, the disclosure of which would amount to invasion of privacy” and exempt from disclosure u/s 8(1) (j), in Rakesh Kumar Gupta vs. PIO it was held that s. 8(1)(j) would not apply. However, as that order has been stated by the Delhi High Court, the earlier order of the CIC in Raj Kumari vs. CCIT would apply where it was held that personal information given to a public authority was not liable for disclosure. Disclosure of personal information will amount to invasion of privacy unless public interest is disclosed. Accordingly, inspection of the case files of third parties cannot be granted. However, the ITAT is liable to disclose the other information sought.

(iii) The decision of the Appellate Authority seems moved more by animosity than in reliance upon the law. The Applicant represents a class of persons created by the ITAT itself to generate information regarding delinquent activities of tax payers. In doing this, it cannot treat such a resource as a mere pest but must accept responsibility for this requirement. It may be kept in mind that this resource is sustained only by financial returns promised by disclosure about delinquent tax payers to the Department. While encouraging such an activity, the Income Tax Department cannot then seek to keep itself aloof from the consequences.

(114.5 KiB, 2,075 DLs)

Even s. 143(1)(a) cannot be reopened u/s 147 without proper “reasons to believe”

The assessee, a charitable trust claimed exemption u/s 10(23C)(vi). The return was processed u/s 143(1)(a). No assessment order u/s 143(3) was passed. Subsequently, the AO issued a notice u/s 147 on the ground that as the assessee had not invested a sum of Rs. 1.02 crores in investments u/s 11(5), the said sum of Rs. 1.02 crores was chargeable to tax. The reopening was upheld by the CIT(A). On appeal by the assessee, HELD allowing the appeal:

(i) The recorded reason that the violation of s. 11(5) r.w.s. 13(1)(d) by the assessee led the amount of Rs. 1.02 crores to be included in the assessee’s total income is clearly contrary to the legal position that while the assessee may lose exemption u/s 10(23C) for not adhering to the conditions of s. 11(5), this does not result in the said amount being chargeable to tax in the hands of the assessee. The fact that the amount was not invested in the prescribed manner does not mean that it can be assessed as income;

(ii) The reasons are required to be self explanatory and read as recorded by the AO. No substitution, addition or deletion is permissible. No inference can be allowed to be drawn on the basis of reasons not recorded. It is for the AO to disclose and open his mind through the recorded reasons. The reasons must have a live link with formation of belief. (Hindustan Lever 268 ITR 332 (Bom) & Kelvinator 320 ITR 561 (SC) followed);

(iii) The fact that only an Intimation was passed u/s 143(1)(a) is irrelevant because what is material is whether the AO had proper “reasons to believe” that income had escaped assessment. In the absence of proper “reasons”, the reopening is invalid (Prashant S. Joshi vs. ITO (Bom) followed; Rajesh Jhaveri 291 ITR 500 (SC) referred).

(75.8 KiB, 1,286 DLs)

PE Profits not taxable as FTS u/s 9(1)(vii)

The assessee, an Australian company, set up a permanent establishment (PE) in India to render technical services for evaluation of coal deposits and conducting feasibility studies for transportation of iron ore. The AO accepted that the income was business profits under Article 7 of the DTAA but held that as no rate of tax was prescribed in the DTAA and the nature of the income was “fees for technical services”, the income was assessable u/ss 115A & 44D. This was upheld by the CIT (A). On appeal by the assessee, HELD allowing the appeal:

(i) The assessee was not rendering simple technical or consultancy services but was rendering specific activities through the PE. Accordingly, Article 12 of the DTAA was not applicable. Income attributable to a PE is assessable under Article 7 of the DTAA. Under Article 7(2), the PE is deemed to be a wholly independent enterprise and under Article 7(3) deduction in accordance with the subject to the law relating to the tax in India is allowable. Since Article 7 of the DTAA comes into play, s. 9(1)(vii) is not applicable. Since Article 7 (2) of the DTAA specifies that the PE in India is to be treated as a wholly independent enterprise in India, ss. 44D and 115A will not apply in so far as they relate to foreign companies.

(64.1 KiB, 1,212 DLs)

Retrospective amendment after passing order does not lead to “apparent mistake”

Following HCL Comnet 305 ITR 409 (SC), the Tribunal took the view vide order dated 17.3.2009 that provision for bad debts debited to the P&L A/c could not be added to the “book profits” u/s 115JA. To supercede HCL Comnet, clause (g) was inserted in the Explanation to s. 115JA by the F. A. 2009 w.r.e.f 1.4.1998. The amendment received the assent of the President on 19.8.2009, after the order of the Tribunal was passed. The department filed a MA contending that in view of the said retrospective amendment, there was a “mistake apparent from the record”. HELD dismissing the application:

As per the law laid down in Sudhir Mehta 265 ITR 548 (Bom), where an order is passed as per the prevailing law, a retrospective amendment which comes into force after the date of the passing of the order does not show any mistake in the order.

(238.3 KiB, 1,144 DLs)

Despite cessation of PE, gains on transfer of PE asset taxable under Act and DTAA

The assessee, a Mauritian tax resident, owned a jack-up rig used for drilling of mineral oil. The rig was given on charter basis to an Indian company which in turn leased it to ONGC for operations in Indian territorial waters. On 24.4.1997, the assessee entered into an agreement with Foramer SA, France, to sell the jack-up rig. On 15.9.1997, the surveyors boarded the rig and coordinated its move from Bombay High to the hand-over location outside India. On 19.9.1997, the assessee issued a bill of sale in favour of the purchaser. On 30.9.1997, the assessee obtained a port-clearance certificate and started moving the rig. The rig was handed over outside India to the buyer on 6.10.1997. The charter agreement was terminated on 3.10.1997. The assessee informed the AO of the termination of the charter and that it had discontinued business operations in India and moved the rig outside territorial waters though it did not mention the fact of sale of the rig. The AO reopened the assessment u/s 147 and took the view that as depreciation had been allowed on the rig, the difference between the sale consideration and WDV (Rs. 102 crores) was a short-term capital gain. This was confirmed by the CIT(A). In appeal to the Tribunal, the assessee argued that since sale of the rig had taken place on 6.10.1997 outside India, it had no tax implications in India and that the reopening was invalid. HELD dismissing the appeal:

(i) The argument that as the sale of the rig took place outside India and was not taxable in India, the assessee was under no obligation to disclose the fact of sale is not acceptable. The law requires even details of exempt income to be disclosed in the return. As the assessee was taxable in India in respect of its PE, it was under an obligation to share all the facts relevant to the PE – whether in respect of business profits or other head of income. The question whether the gains were taxable or not could be determined only after examination of relevant facts which the assessee was duty bound to share. As there was a failure to disclose material facts, the reopening was valid;

(ii) On merits, under the Act, when a non-resident has operations in India through a presence in India, such presence is to be treated as a “permanent establishment” (“PE”) in India. The PE is to be treated as hypothetically independent of the non-resident . The assets of the PE are also to be recognized as such and the profit or gains on sale of assets of the PE have to be treated as profits of the PE. The gains or losses on sale of PE assets have to be treated as “accruing or arising in India” irrespective of whether the assets were sold in India or outside India. The income can also be deemed to have accrued or arisen in India u/s 9(1)(i) as the rig was part of a “business connection” and “an asset or source of income” in India (principles laid down in Hyundai Heavy Industries 291 ITR 482 followed);

(iii) Under Article 13(2) of the DTAA, gains on alienation of moveable assets of the PE (or the PE itself) are taxable in the country in which such PE is located;

(iv) The argument that the gains on transfer of PE/PE assets are taxable only if the PE exists is not acceptable because then the provision for taxability of gains on PE/ PE assets in the source country will be rendered redundant. The provisions can also then be avoided by simply deferring the transfer till the closure of the PE. This will lead to absurdity (Van Oord Dredging 105 ITD 97 referred to – PE’s business profits can be taxed even if received after closure of the PE);

(v) On facts, the argument that the sale of the rig took place on 6.10.1997 outside India and after termination of the charter is not correct because the record shows that the rig was first sold and as a consequence the charter was terminated and the rig was moved to international waters for delivery to the buyer. It was not a case where the business came to an end, the rig was moved to international waters and then, by an unconnected event, the rig was sold.

Obiter: It is ironical that while the Supreme Court has been proactive in recognizing the cross-border concept of PE even in the context of domestic tax legislation, the legislature is yet to lay down profit allocation rules for such PEs in the domestic legislation.

(143.1 KiB, 868 DLs)

S. 10(23C)(vi): Surplus does not mean trust ceases to be “solely for educational purposes and not for profit”

The assessee-trust was a public charitable trust engaged in education of women. In the earlier years, the assessee was granted exemption u/ss 11, 10(22) & 10(23C)(vi). The assessee’s application for renewal of exemption u/s 10(23C)(vi) was rejected on the ground that (i) the objects permitted the non-educational object of constructing an ashram and (ii) the assessee had earned a surplus of over 12% from its activities and so was not existing “solely for educational purposes and not for profit”. On a Writ Petition filed by the assessee, HELD allowing the Petition:

(i) The fact that the assessee has varied objects does not mean that it ceases to be solely engaged in educational purposes when the facts show that the assessee has not carried out any other object;

(ii) The fact that a surplus incidentally arises from the activities of the assessee does not disentitle an assessee of the benefit of s. 10(23C). The third proviso to s. 10(23C) which permits accumulation of surplus up to limits shows that the generation of surplus is per se not a disabling factor. The effect of Aditanar Educational Institution 224 ITR 310 (SC) is that the decisive or acid test is whether the object is to make a profit. In evaluating or appraising the issue, one should bear in mind the distinction between the corpus, the objects and the powers of the concerned entity;

(iii) The judgement in Queens’ Educational Society 319 ITR 160 (Utt) that “the law is well settled that if the profit is proved by an educational society then that will be the income to the Society as the surplus amount remains in the account books of the society” is distinguishable on facts. The Court is not correct in holding as a principle of law that the benefit of the exemption can be denied on the ground that the assessee has only pursued its main object of providing education and not pursued the other objects for which the Trust was constituted because were the assessee to pursue other objects, it would clearly run afoul of s. 10(23C)(vi) and cease to exist solely for educational purposes. Pinegrove International Charitable Trust followed.

(110.3 KiB, 1,423 DLs)

Assessee’s TP study cannot be rejected lightly, “comparables” have to be comparable on all parameters, no incentive to shift profits offshore if tax rates there are higher

The assessee, engaged in the business of manufacture and export of plain and studded jewellery of gold, platinum etc, entered into international transactions with four AEs. The assessee adopted the Transactional Net Margin Method (“TNNM”) and argued that the transactions were at arms’ length on the basis that its operating profit margin was 3.56% on sales and 3.70% on cost whereas that of the comparables was 3.27% of sales and at 3.82% on cost. The TPO rejected the method on the basis that the allocation of expenses on the basis of turnover was not correct and it ought to have done on other parameters. The TPO held that as the average operating profit margin on cost of comparable companies engaged in the business of manufacturing jewellery came to 7.25%, that had to be adopted as the arms length operating margin. The CIT (A) deleted the addition. On appeal by the department, HELD dismissing the appeal:

(i) The external comparables selected by the assessee were from a public data base and the assessee has followed a detailed search process and made an analysis considering the various factors of selecting the external comparables as required under Transfer Pricing Regulations and Guidelines. Therefore, the transfer pricing study of the assessee and ALP determined on the basis of such study simply cannot be rejected without any cogent reasons. Unless proper method is followed, comparables are chosen and selected after doing a proper FAR study as well as adjustments are made to the extent possible it is unfair to summarily reject the transfer pricing analysis made by the assessee;

(ii) The comparables selected by the TPO were not comparable with the assessee because they were either (a) situated in Seepz and got various benefits not available to others and could earn higher profit margins, (b) the turnover was predominantly domestic, (c) the total turnover was either much higher or lower than that of the assessee;

(iii) The fact that the AEs earned meager profit or incurred losses as compared to the profit of the assessee showed that there was no transfer of profit by the assessee out side India;

(iv) Since the tax rates were higher in USA compared with those of India, therefore, there would be no incentive to transfer profits to higher tax chargeable regions especially when the assessee enjoyed deduction u/s. 80HHC.

(114.7 KiB, 1,272 DLs)

Despite TDS u/s 195, payer is liable as “agent” u/s 163. However, if payee is assessed, payer cannot be assessed as “representative assessee”

The assessee purchased shares of an Indian company from Alcan Inc, Canada. Alcan filed an application u/s 197(1) for issue of a TDS certificate on the basis that the capital gains was Rs. 317.71 crores and tax at 10% was chargeable. The AO issued a certificate directing the assessee to withhold Rs. 40 crores on a provisional basis subject to regular assessment. The assessee complied with the same. During the pendency of the assessment proceedings against Alcan, the AO issued an order u/s 163 treating the assessee as Agent of Alcan in respect of the capital gains. Thereafter, on 15.3.2004, the AO passed an order assessing the capital gains in the hands of the assessee as agent of Alcan in which the rate of tax was taken at 20%. On 16.3.2004, an assessment order was passed in the case of Alcan itself assessing the capital gains in its hands at the rate of 20%. Alcan’s appeal was allowed by the Tribunal (Alcan Inc vs. DDIT 110 ITD 15 (Mum)) and the rate of tax was held to be 10%. The assessee filed an appeal on the point that (a) as it had deducted tax u/s 195, it could not be treated as an “agent” u/s 163; (b) As more than 2 years had passed after the remittance, the assessee could not be treated as an “agent” as it was not in the position to exercise its rights u/s 162(1) and retain funds and (c) as the department had assessed Alcan, the assessee could not be assessed as representative assessee. HELD:

(a) The contention that the assessee having duly deducted tax u/s 195 cannot be treated as an Agent of Alcan u/s 163 is not acceptable because s. 163 is merely intended to ensure that a person can be regarded as a representative assessee if certain conditions are fulfilled. The s. 163 order does not fasten liability on the representative assessee. Therefore, the fact that the Agent has deducted tax u/s 195 is not a bar to treat him as an Agent u/s 163;

(b) The contention that there has been a delay in initiating proceedings u/s 163 which has resulted in prejudice to the Agent is also not acceptable as the law does not contemplate any time limit for initiating proceedings u/s 163. The proceedings for assessing income of the principal were also not barred by time;

(c) However, while the department has the option u/s 166 to assess either the non-resident principal or the representative assessee, once the choice is made and the income is brought to tax in the hands of the principal, the same income cannot be again assessed in the hands of a representative assessee (Saipem UK 298 ITR (AT) 113 (Mum) followed). Consequently, the assessment order on the assessee had to be annulled.

(147.5 KiB, 2,092 DLs)

S. 153A order void if s. 132 search warrant in improper status. Assessee can retract admission of undisclosed income

A survey u/s 133A was conducted on 28.10.04 at the premises of a charitable trust of which the assessee was the managing trustee. The assessee admitted unaccounted income of Rs. 1.93 crores. Search u/s 132 was conducted on 29.10.2004 and cash of Rs. 1.93 crores was found and seized. The search warrant was in the names of “K. M. Shah Charitable Trust, Mansukhbhai K. Shah” (the trust and the assessee). The assessee retracted the admission on 24.12.2004. An assessment order u/s 153A was passed in which the said sum was assessed in the hands of the assessee. The assessee challenged the s. 153A order on the ground that the warrant was not in his name and there was no search u/s 132, he could not be assessed u/s 153A. The CIT (A) upheld the assessment with the finding that as a search u/s 132 had been conducted in the name of the assessee, the s. 153A proceedings were valid. On appeal by the assessee, HELD allowing the appeal:

(i) In order for the AO to assume jurisdiction u/s 153A, it is essential that (a) The warrant of authorization must be issued in the name of the assessee, (b) It must be served on the assessee and (b) a search has to be conducted on the assessee;

(ii) The warrant of authorization u/s 132 was issued in the name of “K. M. Shah Charitable Trust, Mansukhbhai K. Shah“. This cannot be regarded as a warrant of authorization issued in the name of assessee in his individual capacity. The search cannot be regarded as conducted against the assessee in his individual capacity. The assessee’s name appears in the warrant and panchnama as the Managing Trustee of the Trust and not in his individual capacity. When a warrant is issued in joint names, an assessment in individual capacity/status is invalid (Vandana Verma (All) followed). Consequently, the s. 153A proceedings were invalid;

(iii) Also, though the assessee admitted on oath that the amount deposited in the accounts of the Trust was his unexplained personal money, this was not conclusive as it had been retracted. An assessee is entitled to show that the admission was not correct or true. (Pullangode Rubber 91 ITR 18 (SC) & Kishanlal Shivchand 88 ITR 293 (P&H) followed). No independent or corroborative evidence was found to show that money deposited in the bank account of the Trust belonged to the assessee in his individual capacity (the Trust enjoyed exemption u/s 11).