(36.1 KiB, 581 DLs)

Concern expressed at “mutual acrimony” between Members of Chandigarh Bench

The Applicant, an Accountant Member of the Tribunal, was transferred from Chandigarh to Rajkot. He challenged the transfer on the ground that it was punitive and had arisen because of a complaint against him by a Judicial Member. It was alleged that the Sr. VP, who decided the complaint, had indicted him without a hearing and that the said VP was part of the Collegium which had recommended the transfer. In turn, the Judicial Member alleged that she had been subjected to harassment by the Applicant and other Members of the Chandigarh Bench. She claimed that she had heard a bunch of appeals with the Applicant and that though she had drafted the judgement, the Applicant did not sign it till he sat on another Bench and decided another bunch of appeals by taking a contrary view to the view taken by her. She claimed that the Applicant had “purposely” kept the draft judgement in abeyance in order to be able to take a different view in another Bench while the Applicant alleged that there was something “extra judicial in her mind“. HELD by the CAT, dismissing the application:

(i) The documentation indicates an unsavoury and uneasy situation prevalent at the Chandigarh Bench of the ITAT and the litigating parties are found to be engaged in an unenviable endeavour to wash the proverbial dirty linen in public. The prevalence of the factual scenario, indicating almost complete want of trust and faith inter-se, ought to be foreign to each segment of dispensation of justice which (system), for optimum and unbiased delivery requires an ambience based upon balanced and conscientious approach. For reasons of propriety, we are not noticing any part of the mutual acrimony as between the personnel who are a part of the dispensation at the local Bench of ITAT. We express our deep sense of exasperation at the prevalent scenario and hope and trust that the sentiments expressed by the President of the ITAT in the course of his letter dated 4.1.2012 for ensuring bonhomie at the local Bench of the ITAT, would be pursued to its logical conclusion;

(ii) Transfer is an incident of public service. It is well settled that Courts/ Tribunals ought to refrain from interfering in transfer matters unless there is an element of perversity or extreme arbitrariness/ bias in the grant of the relevant order. The transfer order was passed on the recommendation of the collegium and though the Applicant found fault with the association of the VP who dealt with the complaint, no bias on part of the President or the other VP was alleged. Further, the claim that as the transfer was pursuant to a complaint, the competent authority ought to have granted a hearing is not acceptable. An employer is free to effect transfer on the basis of a complaint or adverse report without hearing the employee. The giving of a hearing may actually be counter-productive in such matters. Also, the Applicant was not free from blame because, having heard the bunch of appeals with the JM and having allotted the matters to her for dictation, it was not appropriate for him to retain the draft judgement till he sat on another Bench and took a view contrary to the one taken by the JM. If he was not agreeable with the view of the JM, he ought to have written an order of dissent. (Desire expressed that the competent authority may consider the feasibility of doing something to establish appropriate ambience at the Chandigarh Bench of the ITAT).

(235.9 KiB, 641 DLs)

S. 143(2): “Issue” of notice is equivalent to its “service”

In respect of AY 2009-10, the assessee filed a ROI on 29.09.2009. The last date for service of the s. 143(2) notice was 30.09.2010. A notice u/s 143 (2) was served by affixation at 11.20 pm on 30.09.2010. The assessee filed a Writ Petition claiming that u/s 282 (1), a notice or requisition had to be served either by post or as if it was a summons issued by a Court under the CPC and that service by affixture was invalid. The assessee relied on CIT vs. AVI-OIL India 323 ITR 242 (P&H) where it was held that a notice u/s 143(2) had not only to be issued, but had to be served before the expiry of 12 months (now 6M) from the end of the month in which the return was furnished. Hotel Blue Moon 321 ITR 362 (SC) was relied upon to contend that in the absence of a s. 143(2) notice, the assessment was invalid. HELD dismissing the Petition:

S. 143(2) (ii) provides that no notice shall be “served” on the assessee after the expiry of six months. The question is that what is the meaning of expression ‘served’? Is it used literally, so as to mean actual physical receipt of notice by the addressee or the expression ‘served’ is inter changeable with the word issue. We are of the opinion that the expressions ‘serve’ and ‘issue’ are interchangeable. In view of the law laid down in several judgments, the date of receipt of notice by the addressee is not relevant to determine, as to whether the notice has been issued within the prescribed period of limitation. The expression “serve” means the date of issue of notice. The date of receipt of notice cannot be left to be undetermined dependent upon the will of the addressee. Therefore, to bring certainly and to avoid attempts of the addressee to evade the process of receipt of notice, the purpose of the statute will be better served, if the date of issue of notice is considered as compliance of the requirement of proviso to s. 143(2) of the Act. In fact that is the only conclusion that can be arrived at to the expression ‘serve” in s. 143(2). In AVI-OIL India 323 ITR 242 (P&H), a literal meaning of the term “service” was taken in ignorance of the binding precedents. It does not lay down any binding principle and is per incuriam.

(449.9 KiB, 742 DLs)

Undesirable haste in passing assessment order results in miscarriage of justice

The AO issued a reopening notice u/s 148 and furnished the recorded reasons pursuant to which the assessee submitted its objections as required by GKN Driveshafts (India) Ltd. vs. ITO 259 ITR 19 (SC). The objections were filed on 26.10.2010 and were disposed of vide order dated 2.11.2010 by a non-speaking and cryptic order. Thereafter, without issuing any further notice or hearing the assessee, the AO passed an assessment order dated 19.11.2010 even though the limitation period for passing the order was to expire on 31.12.2010. The assessee filed a Writ Petition to challenge the reopening. HELD by the High Court quashing the reassessment order and passing strictures:

Though, pursuant to GKN Driveshaft, the AO was under an obligation to dispose of the objections to the reopening by passing a speaking order, he passed a non-speaking and cryptic order. Further, though the AO had sufficient time to complete the assessment, he had proceeded with the reassessment proceedings with undesirable haste and hurry, in violation of principles of natural justice and contrary to the procedure mandated and this had resulted in a miscarriage of justice. The fact that the assessee had an alternative remedy of filing an appeal (which it had exercised) was no bar to the exercise of writ jurisdiction. The concerned CIT should examine the reassessment file in the present case and take appropriate action if warranted. The department to pay cost of Rs.10,000 to the assessee.

(941.9 KiB, 564 DLs)

Only way to prevent Dept from filing frivolous appeals is by imposing heavy costs

The assessee set up a 100% EOU unit in AY 1993-94 and claimed 5 year deduction till AY 1997-98 as was then allowable u/s 10B. By the IT (SA) Act, 1998, s. 10B was amended w.e.f. 1.4.1999 to allow deduction for 10 years from the date the eligible unit started software development. Accordingly, the assessee claimed s. 10B deduction for AY 1999-2000 to 2001-02. The AO held that as the deduction under the amended provision was allowable only for the “unexpired period”, it was necessary that as on the date of the amendment, there was “unexpired period” and as the assessee’s entitlement had ended in AY 1997-98, it was not eligible for further relief. The CIT (A) & Tribunal allowed the claim on the ground that there was nothing in the Act to provide that the units which have fully availed the exemption u/s l0-B will not get the benefit of the amended provision. On appeal by the department, HELD dismissing the appeal while passing strictures and imposing heavy costs:

(i) It is clear from the amended s. 10B that the benefit of tax holiday is extended for a period of ten consecutive assessment years beginning with the assessment year in which the undertaking begins to manufacture or produce articles. The object behind the amendment is to give added thrust to exports. lf the assessee has already availed the benefit under the unamended provision and 10 years have expired as of 01.04.1999, the assessee would not be entitled to the said benefit. If 10 years from the date of production has not expired prior to 01.04.1999, he would be entitled for the remaining unexpired period. The department’s stand that if the 5 year period had expired as of the date of the amendment, the benefit is not available runs counter to the intention with which the amended provision was enacted and negates it.

(ii) This case shows how the department is filing appeals without proper application of mind and wasting the precious time of the Court and the tax payer’s money. Even if the AO was overzealous in passing the assessment order, there was no need to file an appeal to the High Court. This is not an isolated case. The department is filing appeals mechanically either for the purpose of statistics or to save their skins without application of mind. In the process, a person eligible to tax holiday has been denied the benefit and made to contest the proceedings. If the object of extending the benefits was to give added thrust to exports, the assessee is made to unnecessarily waste his time in fighting the dispute in different forums. The only way to bring reason to the department is by imposing costs so that appropriate action may be taken against the person who has taken a decision to file the appeal and recover the same after enquiry. The department is directed to pay costs of Rs. 1 lakh for wasting the tax payer’s money. lt is open to the authorities to recover the money from the person who has taken a decision to file the frivolous appeal.

(150.3 KiB, 364 DLs)

Foreign Lawyers cannot practice law in India but are entitled to visit India for short periods to advice on foreign law & conduct international commercial arbitration

A Writ Petition was filed claiming that Foreign Law Firms and foreign lawyers were practising the profession of law in India in contravention of the Advocates Act and that they should be restricted from having any legal practice either on the litigation side or in the field of non-litigation and commercial transactions within the territory of India. HELD by the High Court:

(i) Foreign law firms or foreign lawyers cannot practice the profession of law in India either on the litigation or non-litigation side, unless they fulfil the requirement of the Advocates Act, 1961 and the Bar Council of India Rules. As rightly held in Lawyers Collective vs. Bar Council 112 BLR 32 establishing liaison office in India by the foreign law firm and rendering liaisoning activities is not permissible. However, given that the foreign law firms have to give legal advise to their clients in India regarding foreign law or their own system of law and on diverse international legal issues, there can be no bar in their visiting India for a temporary period on a “fly in and fly out” basis, for such purpose. Also, having regard to the aim and object of the International Commercial Arbitration introduced in the Arbitration and Conciliation Act, 1996, foreign lawyers cannot be debarred to come to India and conduct arbitration proceedings in respect of disputes arising out of a contract relating to international commercial arbitration (Vodafone International Holdings B.V referred).

(i) The BPO Companies providing a wide range of customised and integrated services and functions to its customers like word-processing, secretarial support, transcription services, proof-reading services, travel desk support services, etc. do not come within the purview of the Advocates Act, 1961 or the Bar Council of India Rules. However, in the event of any complaint made against these B.P.O. Companies violating the provisions of the Act, the Bar Council of India may take appropriate action against such erring companies.

(205.1 KiB, 900 DLs)

36(1)(vii)/36(1)(viia) Bad Debts: Banks are entitled to both deductions

The Supreme Court had to consider whether a bank was eligible to claim a deduction for bad debts u/s 36(1)(vii) in respect of its (rural & urban) advances and also claim a provision for bad and doubtful debts u/s 36(1)(viia) in respect of its rural advances in view of the Proviso to s. 36(1)(vii) which provides that only the excess over the credit balance in the provision for bad and doubtful debts account made u/s 36(1)(viia) can be claimed. The Special Bench of the Tribunal in DCIT vs. Catholic Syrian Bank 88 ITD 185 held that as s. 36(1)(viia) was confined to rural advances, a claim for bad debts of urban advances was not subject to the limitation of the Proviso to s. 36(1)(vii). However, the Full Bench of the Kerala High Court took a contrary view in CIT vs. South Indian Bank 233 CTR 214 (Ker) (FB) and held that a bank was entitled to claim deduction of bad debts u/s 36(1)(vii) only to extent it exceeded the provision allowed as deduction under s. 36(1) (viia). On appeal to the Supreme Court, HELD reversing the Full Bench of the High Court:

Per Court:

(i) The clear legislative intent of s. 36(1)(vii) & 36(1)(viia) together with the circulars issued by the CBDT demonstrate that the deduction on account of provision for bad and doubtful debts u/s 36(1)(viia) is distinct and independent of s. 36(1)(vii) relating to allowance of bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. The functioning of such banks is such that the rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the head office. An interpretation which serves the legislative object and intent is to be preferred rather than one which subverts the same. The deduction u/s 36(1)(vii) cannot be negated by reading into it the limitations of s. 36(1)(viia) as it would frustrate the object of granting such deductions. The Revenue’s argument that this would lead to double deduction is not correct in view of the Proviso to s. 36(1)(vii) which provides that in respect of rural advances, the deduction on account of the actual write off of bad debts would be limited to excess of the amount written off over the amount of the provision which had already been allowed u/s 36(1) (viia) (Southern Technologies 320 ITR 577 (SC) & Vijaya Bank 323 ITR 166 (SC) referred)

(ii) U/s 119, the CBDT is entitled to issue Circulars to explain or tone down the rigours of law and to ensure fair enforcement of its provisions. These circulars have the force of law and are binding on the income tax authorities, though they cannot be enforced adversely against the assessee. Normally, these circulars cannot be ignored. A circular may not override or detract from the provisions of the Act but it can seek to mitigate the rigour of a particular provision for the benefit of the assessee in certain specified circumstances. So long as the circular is in force, it aids the uniform and proper administration and application of the provisions of the Act (UCO Bank vs. CIT 237 ITR 889 (SC) followed)

Per S. H. KAPADIA, CJI (concurring)

(iii) S. 36(1)(vii) & 36(1)(viia) are distinct and independent items of deduction and operate in their respective fields. S. 36(1)(vii) allows a deduction for bad debts in respect of urban and rural debts. However, by virtue of the Proviso to s. 36(1)(vii), the deduction in respect of rural debts is limited to the extent of difference between the debt or part thereof written off in the previous year and the credit balance in the provision for bad and doubtful debts account made under s. 36(1) (viia). The proviso prevents benefit of double deduction with reference to rural loans. This is in consonance with the CBDT’s interpretation in the Circulars.

(622.9 KiB, 548 DLs)

Immunity from s.271AAA penalty available even if tax on undisclosed income unpaid till passing assmt order

Pursuant to a search u/s 132 the assessee disclosed additional income u/s 132(4) and offered the same to tax. However, the taxes due on the same were paid only after the passing of the assessment order. The AO held that as the taxes were not paid at the time of filing the ROI, the immunity from penalty u/s 271AAA was not available. This was reversed by the CIT (A) on the ground that u/s 271AAA (2), there was no precondition that the tax & interest had to be paid before filing of return or any other specified date. On appeal by the department, HELD dismissing the appeal:

S. 271 AAA makes a paradigm shift on the imposition of penalty in respect of unaccounted income unearthed as a result of search operation. Unlike s. 271(1)(c), s. 271 AAA penalty is imposable on undisclosed income without “concealment” or “furnishing inaccurate particulars” having to be shown. S. 271AAA(2) grants immunity from penalty if (i) in the s. 132(4) statement, the undisclosed income is admitted and the manner of deriving it is specified; (ii) the manner in which the undisclosed income was derived is substantiated; and (iii) the tax & interest on the undisclosed income is paid. While payment of taxes & interest is a condition precedent for availing immunity u/s 271AAA(2), there is no time limit for such payment. In the absence of a time limit for payment of tax & interest in the statute, the AO’s stand that it ought to have been paid at the time of filing the ROI is not acceptable. Further, though in the context of Explanation 5 to s. 271(1)(c) it has been held in Mahendra Shah 299 ITR 305 (Guj) that the conclusion of the assessment proceedings is the outer limit for making payment of tax & interest, that was in the context of s. 271(1)(c) which required the AO to record his satisfaction in the course of the assessment proceedings itself. As there is no such requirement in s. 271 AAA, there is no outer limit for payment of the due tax & interest. On facts, as the assessee had paid the due tax & interest within the time specified in the s. 156 notice of demand, s. 271AAA penalty was not imposable.

(273.2 KiB, 764 DLs)

In case of transfer by gift, will, trust, etc indexed cost to be determined with reference to holding by previous owner

The settlor acquired property before 1.4.1981 and he settled in on trust on 5.1.1996. The assessee-trust sold the property and computed the indexed cost of acquisition on the basis that it “held” the property from the time the settlor had held it. The AO accepted that the settlor’s cost of acquisition had to be treated as the assessee’s cost of acquisition but held that the settlor’s period of holding could not be treated as the assessee’s period of holding. This was upheld by the Tribunal. On appeal by the assessee to the High Court, HELD reversing the Tribunal:

The department’s contention that in a case where s. 49 applies the holding of the predecessor has to be accounted for the purpose of computing the cost of acquisition, cost of improvement and indexed cost of improvement but not for the indexed cost of acquisition will result in absurdities. It leads to a disconnect and contradiction between “indexed cost of acquisition” and “indexed cost of improvement”. This cannot be the intention behind the enactment of s. 49 and the Explanation to s. 48. There is no reason why the legislature would want to deny or deprive an assessee the benefit of the previous holding for computing “indexed cost of acquisition” while allowing the said benefit for computing “indexed cost of improvement”. The benefit of indexed cost of inflation is given to ensure that the taxpayer pays capital gain tax on the “real” or actual “gain” and not on the increase in the capital value of the property due to inflation. The expression “held by the assessee” used in Explanation (iii) to s. 48 has to be understood in the context and harmoniously with other Sections and as the cost of acquisition stipulated in s. 49 means the cost for which the previous owner had acquired the property, the term “held by the assessee” should be interpreted to include the period during which the property was held by the previous owner (CIT v. Manjula J. Shah 16 Taxman 42 (Bom) followed).

(210.8 KiB, 748 DLs)

Law on taxing non-compete fee u/s 28(va) & 55(2)(a) explained

In AY 2000-01, the assessee received Rs. 11 crores pursuant to a non-compete agreement which was for 5 years. The AO held that there was a “transfer” by way of relinquishment of the assessee’s “right to manufacture” and that the same was chargeable to capital gains by taking Nil cost u/s 55(2)(a). This was reversed by the CIT (A) on the ground that the personal skills of the assessee were placed under restraint and as the said personal skills were not a “capital asset”, capital gains was not chargeable. On appeal to the Tribunal, the matter was referred to the Special bench. HELD by the Special Bench:

(i) The taxability of a non-compete fee depends on the purpose for which it is paid. A non-compete fee can be divided into two categories: (a) consideration received by the transferor of a business for agreeing not to carry on the same business; (b) consideration received by other persons associated with the transferor to ensure that they do not indulge in competing business. For AY 2003-04 & onwards, non-compete fee received by the transferor of a business is taxable as a capital gains in view of s. 55(2)(a) which provides that the cost of a “right to carry on business” shall be Nil. Though s. 55(2)(a) as amended by the FA 1997 w.e.f. 1.4.1998 referred to a “right to manufacture, produce or process any article or thing“, that would not cover a non-compete covenant. For AY 2003-04 & onwards, a non-compete fee received by a person associated with the transferor is taxable as “business profits” u/s 28(va)(a) as being a payment for “not carrying out any activity in relation to any business“. A non-compete fee received in an earlier year is not chargeable to tax in view of Guffic Chem vs. CIT 320 ITR 602 (SC);

(ii) On facts, the consideration of Rs. 11 crores received by the assessee was not for sale of any business nor was it for not carrying on any business which he was carrying on, which he had transferred. It was also not a payment for a “right to manufacture, produce or process any article or thing“. The sum was not paid for transfer of any intangible right in respect of manufacture, production or process of cement. Accordingly, the capital gains provisions were not attracted. The amount was paid for “not carrying out any activity in relation to any business” and would fall within the ambit of s. 28(va)(a). However, as s. 28(va) came into effect in AY 2003-04, the receipts was not chargeable to tax in AY 2000-01.

(147.2 KiB, 716 DLs)

Software Royalty: View in favour of assessee should be followed

The assessee sold “shrink-wrap application software” called “Solidworks 2003″ to customers in India and claimed that the same was “business profits” and not assessable to tax as it did not a PE in India. The AO held that the income was assessable to tax as “royalty” u/s 9(1)(vi)/ Article 12(3) though the Tribunal (for an earlier year) reversed it on the ground that the product was a “copyrighted article” and not “copyright“. Before the Tribunal, the department claimed that the earlier view should not be followed in view of Samsung Electronics 203 Taxman 477(Kar) while the assessee relied on Ericsson AB 204 Taxman 192 (Del). HELD by the Tribunal:

The department’s argument that Ericsson AB 204 TM 192 was confined to a case where the software was embedded to the equipment is not correct. The Court did hold that consideration paid merely for right to use cannot be held to be royalty and the ratio would also apply when “shrink wrap” software is sold. Where two views are possible, the view in favour of the assessee has to be preferred. This principle is applicable to non-resident assessees as well in view of Article 24(1) of the DTAA (non-discrimination) which provides that nationals of a Contracting State shall not be treated less favourably than the nationals of the other Contracting State.