(169.9 KiB, 1,112 DLs)

S. 391-394 scheme of arrangement is not a “tax avoidance scheme”

Vodafone Essar Gujarat Ltd (“transferor”) filed a Petition u/s 391 to 394 of the Companies Act, 1956 to transfer its ‘Passive Infrastructure Assets’ to Vodafone Essar Infrastructure Ltd (“transferee”) free of liabilities and encumbrances. The corresponding liabilities were not to be transferred. No consideration was payable by the transferee nor were any shares to be allotted to the members of the transferor. Post de-merger, the transferee was to be made a substantially owned company of a new company to be formed by all or some of the shareholders of the transferee. Thereafter, the transferee was to be amalgamated/ merged into Indus Towers Ltd. The application was opposed by the income-tax department on the ground that since no consideration was involved, the transaction was ultra vires. It was also claimed that the transaction did not fall within the anbit of ss. 391 to 394 but was a simple transfer between two separate entities to evade legitimate taxes which would be payable if the transaction was effected as a simplicitor transfer. It was also claimed that the Scheme was solely for purposes of avoiding tax. The Company Judge came to the conclusion that the transferee was a paper company and that the sole object of the Scheme was to avoid tax on income in excess of Rs. 3,500 crore and also stamp duty and VAT to the tune to Rs.600 crores. He accordingly refused to sanction the arrangement. On appeal by the Company, HELD reversing the Company Judge:

(i) The Scheme cannot be said to have no purpose or object and that it is a mere device/subterfuge with the sole intention to evade taxes. While it is true that the Scheme may result into tax avoidance, it cannot be said that the only object of the Scheme is tax avoidance. In Vodafone International Holdings B.V 341 ITR 1 (SC) it was held that the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/saving device but that it should apply the “look at” test to ascertain its true legal nature. The corporate business purpose of a transaction is evidence of the fact that the impugned transaction is not undertaken as a colourable or artificial device. The stronger the evidence of a device, the stronger the corporate business purpose must exist to overcome the evidence of a device. Tax planning may be legitimate provided it is within the framework of law though a “colourable device” cannot be a part of tax planning. It cannot be said that all tax planning is illegal/illegitimate/impermissible. A similar scheme of arrangement involving demerger of passive infrastructure assets of the Company has been sanctioned by the Delhi High Court;

(ii) The Revenue’s argument that the transfer is void for want of consideration is not acceptable because it is not a party to the transaction. Even a consideration of one rupee can be said to be a valid consideration and it is not necessary that consideration is always a monetary consideration. In a reconstruction there is a give and take and mutual/reciprocal promises and obligations, which can be said to be consideration for each other. Even the most trifle benefit can be consideration so as to avoid the impact of section 25 of the Contract Act.

(29.3 KiB, 754 DLs)

Low Tax Effect Circular has retrospective effect & applies to pending appeals

The department filed an appeal in the High Court where the tax effect was less than Rs. 10 lakhs. The assessee argued that in view of Instruction No. 3 of 2011 dated 9.2.2011, the appeal was not maintainable. The department argued that the said Instruction made it clear that it applied only to appeals filed the date of its issue and had no retrospective effect. HELD by the High Court dismissing the appeal:

The question about applicability of Instruction No.3 of 2011 has been considered in several judgements including Smt. Vijaya V. Kavekar (Bom) and Ranka & Ranka (Kar) and the view is that Instruction No.3 of 2011 dated 9.2.2011 would also apply to pending appeals. We are in agreement with this view and so tax appeals filed by the department which are below the tax effect of Rs.10 lakhs are not maintainable.

(181.6 KiB, 602 DLs)

TDR Premium received by Co-op Hsg Society from its members is exempt on ground of “mutuality”

The assessee, a Co-operative Housing Society formed of plot owners, passed a resolution to the effect that if any member desired to avail of the benefit of Transferable Development Rights (TDR) for carrying out construction or additional construction on his plot, he should apply for a No Objection Certificate which would be granted on payment of a premium calculated at the rate of Rs.250 per sq.ft. The Society received a premium of Rs.18.75 lakhs from its members for this purpose and claimed that the receipt was not chargeable to tax on the grounds of mutuality. The AO rejected this plea on the ground that the TDR premium was in reality a “profit sharing arrangement of commercial nature” and was chargeable to tax. The CIT (A) & Tribunal upheld the assessee’s plea. On appeal by the department to the High Court, HELD dismissing the appeal:

In Mittal Court Premises Co-op Society 320 ITR 414 (Bom) it was held in the context of non-occupancy charges that the principle of mutuality would apply to a co-op society. The same principle applies to the TDR premium paid by a member to the Society of which he is a member as consideration for being permitted to make an additional utilization of FSI on the plot allotted by the Society. There is a complete mutuality between the Society and its members and the TDR premium is not chargeable to tax.

(23.6 KiB, 1,407 DLs)

Sandik Asia 280 ITR 643 (SC) is not correct and should be reconsidered

The Supreme Court had to consider whether interest is payable by the Revenue to the assessee if the aggregate of instalments of Advance Tax/TDS paid exceeds the assessed tax? The assessee relied upon Sandvik Asia Limited vs. CIT 280 ITR 643 where it was held that the assessee was entitled to be compensated by the Revenue for delay in paying to it the amounts admittedly due. HELD by the Supreme Court:

We have serious doubts about the correctness of the judgement in Sandvik Asia. In our view, the judgement in Modi Industries Ltd correctly holds that advance Tax or TDS loses its identity as soon as it is adjusted against the liability created by the assessment order and becomes tax paid pursuant to the assessment order. If Advance Tax or TDS loses its identity and becomes tax paid on the passing of the Assessment Order, then, is the assessee not entitled to interest under the relevant provisions of the Act? We say no more. With respect, we are of the view that Sandvik Asia has not been correctly decided. In the circumstances, we direct the Registry to place this matter before Hon’ble the Chief Justice on the administrative side for appropriate orders.

(29.0 KiB, 1,334 DLs)

S. 147 Reopening on “change of opinion” is not permissible

For AY 1999-2000, the assessee claimed a deduction for Rs. 19.86 crores which was allowed by the AO in s. 143(3) assessment. Subsequently, after the expiry of 4 years, the AO reopened the assessment u/s 147 on the ground that the said loss was a “speculative loss” and could not be allowed as a deduction. The assessee filed a Writ Petition to challenge the reopening which was allowed by the High Court (file included) on the ground that though the AO was justified in his analysis that there was escapement of income, there was “nothing new” which had come to the notice of the revenue and that reopening was based on a “mere relook” which was not permissible. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

The assessee had disclosed full details in the Return of Income in the matter of its dealing in stocks and shares. According to the assessee, the loss incurred was a business loss, whereas, according to the Revenue, the loss incurred was a speculative loss. Rejection of the objections of the assessee to the re-opening of the assessment by the Assessing Officer vide his Order dated 23rd June, 2006, is clearly a change of opinion. In the circumstances, we are of the view that the order re-opening the assessment was not maintainable

(65.6 KiB, 1,906 DLs)

Unabsorbed depreciation of AYs 1997-98 to 2001-02 is eligible for relief granted by amended s. 32(2) in AY 2002-03

In AY 2006-07, the assessee claimed a set-off of the unabsorbed depreciation brought forward from AY 1997-98, 1999-2000, 2000-01 & 2001-02. The AO allowed the claim u/s 143(3). Subsequently, within four years from the end of the AY he reopened the assessment on the ground that pursuant to the amendment to s. 32(2) by the Finance Act No.2 of 1996 w.e.f. AY 1997-98, the unabsorbed depreciation for AY 1997-98 could be carried forward up to a maximum period of 8 years from the year in which it was first computed and this period expired in AY 2005-06 and could not be allowed in AY 2006-07. The assessee filed a Writ Petition to challenge the reopening in which it claimed (a) that the reopening was based on a “change of opinion” and (b) that as s. 32(2) was amended in AY 2002-03 to remove the time period of 8 years, the claim for unabsorbed depreciation of AY 1997-98 was allowable without any time limit. HELD by the High Court upholding the assessee’s plea:

(i) There must be “tangible material” to reopen the assessment and it cannot be done because he has drawn another inference from the documents already considered by him because it would amount to a change of opinion. The assessee had disclosed the facts and if the AO drew a wrong legal inference, he cannot take benefit of his own wrong & reopen u/s 147.

(ii) Prior to the Finance Act No.2 of 1996 unabsorbed depreciation could be carry forward indefinitely. The Finance Act No.2 of 1996 restricted the period of carry forward & set-off of unabsorbed depreciation to 8 years from AY1997-98. Circular No.762 dated 18.2.1998 clarified that the brought forward depreciation for the earlier years would be added to the depreciation for AY 1997-98 and the period of 8 years would begin from AY 1997-98 onwards. S. 32 (2) was amended by Finance Act, 2001 w.e.f. AY 2002-03 to restore the position as it was prevailing prior to the Finance Act No. 2 of 1996 and the period of 8 years was done away with. In Circular No.14 of 2001, the CBDT clarified that the removal of the 8 year time period was “with a view to enable the industry to conserve sufficient funds to replace plant and machinery“. The effect of the amendment is that the unabsorbed depreciation available to an assessee on 1.4.2002 (AY 2002-03) has to be dealt with in accordance with the s. 32(2) as amended by the Finance Act, 2001 and not by s. 32(2) as it stood before the said amendment. Had the intention of the Legislature been to allow unabsorbed depreciation allowance worked out in AY 1997-98 only for eight subsequent assessment years even after the amendment of s. 32(2) by Finance Act, 2001 it would have incorporated a provision to that effect. However, it does not contain any such provision and so a purposive and harmonious interpretation has to be taken. Therefore, the unabsorbed depreciation pertaining to AY 1997-98 can be carried forward for set-off indefinitely.

(18.4 KiB, 3,196 DLs)

“Goodwill” is an intangible asset eligible for depreciation u/s 32

Pursuant to an amalgamation of another company with the assessee, the difference between the consideration paid by the assessee and the net value of assets of the amalgamating company was treated by the assessee as “goodwill” and depreciation of Rs. 54 lakhs was claimed thereon u/s 32(1)(ii). The AO rejected the claim on the ground that (i) “goodwill” was not an “intangible asset” as defined in Explanation 3 to s. 32(1) and (ii) the assessee had not paid anything for the same. The Tribunal and High Court upheld the assessee’s claim. On appeal by the department to the Supreme Court, HELD dismissing the appeal:

Explanation 3 to s. 32 states that the expression “asset” shall mean an intangible asset, being know-how, patents, copyrights, trademarks, licences, franchises or any other business or commercial rights of similar nature. The words “any other business or commercial rights of similar nature” in clause (b) of Explanation 3 indicates that goodwill would fall under the expression “any other business or commercial right of a similar nature“. The principle of ejusdem generis would strictly apply while interpreting the said expression which finds place in Explanation 3(b). Consequently, “Goodwill” is an asset under Explanation 3(b) to s. 32(1) & eligible for depreciation. Though the AO held that the assessee had not “paid” anything for the goodwill, this cannot be accepted because (a) the CIT (A) & Tribunal (correctly) held that that the difference between the cost of an asset and the amount paid in the process of amalgamation constituted “goodwill” and (b) this aspect was not challenged by the department before the High Court.

(115.6 KiB, 1,016 DLs)

S. 147: If claim not considered by AO, there is no “change of opinion”

For AY 2002-03, the AO issued a notice u/s 148 to reopen the assessment (within 4 years) on the ground that the assessee had been wrongly allowed exemption u/s 10(23G) on certain bonds that had been acquired out of surplus funds and not by way of loans & advances. The assessee filed a Writ Petition to challenge the reopening on the ground that the issue had been considered at the stage of the original assessment and that the reopening was based on a “change of opinion”. HELD by the High Court after a comprehensive review of the law on the subject:

(i) An assessment can be reopened within a period of four years if the AO has some tangible material at his command on which he has reason to believe that income has escaped assessment. Reopening on a “change of opinion” is not possible. The term “opinion” means a “view, judgment or appraisal” formed in the mind about a particular matter. Consequently, if in the original assessment, the AO did not examine the claim of the assessee, did not raise queries or elicit answers, it cannot be stated that merely because the AO did not reject such a claim in the final order of assessment, he should be deemed to have expressed an opinion with respect to such a claim. As long as there is some tangible material to support the belief that income chargeable to tax has escaped assessment, reopening is permissible. Such tangible material need not be “new” or be alien to the record;

(ii) The assessee’s argument that as the Full Bench judgement in Kelivinator 256 ITR 1 (Del) (FB) was approved by the Supreme Court 320 ITR 561, the observations made by the Full Bench must be regarded as the ratio of the Supreme Court is not correct because the question before the Supreme Court was whether the concept of “change of opinion” stands obliterated with effect from 1.4.1989 or not. The Supreme Court did not hold that the tangible material must be that which did not form part of the original record of the assessment proceedings. The ratio of the decision of the Supreme Court is what the judgement lays down and not what the decisions of the High Court under challenge held. Further, it is doubtful whether even the Full Bench in Kelvinator meant to convey that a certain claim which has not been examined by the AO in the original assessment, cannot be a subject matter of reopening on the basis of material already on record. Now, the Delhi High Court has itself referred the matter for reconsideration to another Full Bench in Usha International;

(iii) If the AO notices the claim, raises queries and extracts a response from the assessee, the fact that he is silent in the assessment order does not mean that he has not applied his mind to the issue. The assessee has no control over the manner in which the assessment order is to be written. A reopening in this situation would be based on a “change of opinion” and not be permissible. The wide observations in Praful Chunilal Patel 236 ITR 832 cannot be understood to mean that even where a particular claim had been examined by the AO in the original assessment, reopening is permissible because this would be counter to Kelvinator 320 ITR 561;

(34.6 KiB, 1,194 DLs)

S. 143(1) intimation cannot be reopened u/s 147 in absence of “tangible material”

For AY 2002-03, the AO issued an Intimation u/s 143(1) accepting the return. Subsequently, based on objections raised by the audit, he issued a s. 148 notice to reopen the assessment. The AO set out four issues in the recorded reasons and for two he stated that the reopening was to “verify” the expenditure. The assessee filed a Writ Petition to challenge the reopening inter alia on the ground that there was no reason to believe that income had escaped assessment. HELD by the High Court:

Even in a case where only a s. 143(1) Intimation is passed, the power to reopen can be exercised only where there is “reason to believe that income has escaped assessment” and not merely to “scrutinize” the return or “verify” the expenditure. Further, even in case of reopening of an assessment which was previously accepted u/s 143(1) without scrutiny, the AO would have power to reopen the assessment, provided he had some tangible material on the basis of which he could form a reason to believe that income chargeable to tax had escaped assessment. Such reason to believe need not necessarily be a firm final decision of the AO. This safeguard is necessary to prevent arbitrary exercise of powers u/s 147 to circumvent the scrutiny proceedings which could not be framed in view of notice u/s 143(2) having become time barred. On facts, in respect of two issues, the AO reopened the assessment to verify the claims. For mere verification of the claim, power of reopening of assessment cannot be exercised. The AO in the guise of power to reopen an assessment cannot seek to undertake a fishing or roving inquiry and seek to verify the claims as if it were a scrutiny assessment.

Note: The Petition was ultimately dismissed because for the other two issues, there was material to justify the reopening.

(156.0 KiB, 719 DLs)

Article 9: Income from “slot charter” is exempt as income from “operation of ships”

The assessee, a UK company, engaged in the international transportation of goods by sea, entered into Slot Hire Agreements with Orient Express Lines Mauritius (“OEL”), under which OEL provided container slot spaces to the assessee on its ships. Availing the slot hire facility, the assessee arranged for the transportation of the goods from ports in India to their international destinations. The assessee claimed that the income from the “slot hire charges” was exempt under Article 9 of the India-UK DTAA. The AO rejected the claim on the ground that Article 9 dealt with “income from the operation of ships” and that slot hire charges were not covered. However, the CIT(A) and the Tribunal allowed the claim. On appeal by the department to the High Court, HELD dismissing the appeal:

There is no distinction in principle between a slot charter and a voyage charter of a part of a ship. They are both in a sense charterers of a space in a ship. The phrase “operation of ships” in Article 9 must be understood in the context of the phrase “the business of operation of ships” in s. 44B. As income from slot hire agreements falls within s. 44B it must be held to be within the ambit of Article 9(1). Article 9 does not require the ship to be owned by an the assessee. It merely requires the income to be “from the operation of ships in international traffic”. A charter is certainly contemplated by Article 9 and an enterprise that controls the management/operation of the ship would be included in Article 9 even if it does not own the ship (KLM Royal Dutch Airlines 178 Taxman 291 (Del) followed)