(99.5 KiB, 439 DLs)

A composite contract for installation & commissioning cannot be split so as to exempt the profits from offshore supply of goods

The Applicant entered into a contract with ONGC for “services for supply, installation and commissioning of 36 manometer gauges”. The applicant claimed that the contract, though composite, had to be split into various components in line with Ishikawajima-Harima Heavy Industries 288 ITR 408 (SC), Hyundai Heavy Industries 291 ITR 482 (SC) & Hyosung Corporation 314 ITR 343 (AAR), and that the income attributable to the supply of manometer gauges was not taxable in India because the title to the goods had passed outside India & the payment was received outside India. HELD by the AAR rejecting the plea:

Though in Ishikawajima-Harima, a two judge bench of the Supreme Court had adopted a dissecting approach by dissecting a composite contract into two parts and holding one of the parts not amenable to taxation in India, this cannot be followed in view of the 3 Judge verdict in Vodafone International Holdings vs. UOI 345 ITR 1 (SC) where it was held that a transaction had to be “looked at and not looked through” and seen as a whole and not by adopting a “dissecting approach”. A contract for sale of goods differs from a contract for installation and commissioning of a project. The tests relevant for considering where the title to the equipment, passed would not be relevant while construing the terms of a supply and erection contract. On facts, the contract is for erection and commissioning of 36 manometer gauges and not one for sale of equipment or erection of the equipment. It is a composite & indivisible contract for supply and erection at sites within the territory of India and cannot be split. The income accrued in India and was assessable u/s 44BB.

(302.7 KiB, 345 DLs)

Tribunal has to deal with factual findings of AO & give reasons for its conclusion

Pursuant to a search u/s 132, the AO passed a block assessment order u/s 158BC. The Tribunal allowed the assessee’s appeal on the ground that (i) the search warrant did not mention the assessee’s name and (ii) the assessment was not based on material found during the search. The department filed an appeal claiming that (a) the search warrant & panchnama did refer to the assessee’s name and (b) the detailed assessment order exposing the assessee’s modus operandi had not been dealt by the Tribunal. HELD by the High Court allowing the appeal:

The Tribunal recorded a wrong factual finding that the search warrant did not include the assessee’s name. The Tribunal has not specifically referred to and dealt with the findings of the AO. which are detailed, specific & with reference to several factual aspects, documents, etc. The Tribunal is required to deal with the factual findings recorded by the AO and give its factual conclusions. The factual conclusion should be based upon reasons and should be outcome of analysis and discussion. The Tribunal being the final fact finding authority cannot merely record its conclusions without discussing the factual matrix, evidence and material. Merely stating that the papers etc. do not pertain to the assessee and the contents of the document cannot be utilized, is the conclusion or the final inference which is not sufficient in the light of what has been held by the AO in the block assessment order. The fact that the assessee filed a detailed written synopsis does not mean that the order of the Tribunal meets the legal requirement. The law mandates that the Tribunal should give reasons which are discernible and apparent from the order. What weighed with the Tribunal cannot be assumed in the absence of discussion.

(76.9 KiB, 755 DLs)

No S. 14A/ Rule 8D disallowance without showing how assessee’s method is wrong

In AY 2008-09, the assessee claimed that it had not incurred any expenditure in earning dividend income and no disallowance u/s 14A could be made. However, the AO computed disallowance u/s14A & Rule 8D of Rs.12.81 lakhs. This was upheld by the CIT (A). On appeal to the Tribunal, HELD:

S. 14A(2) empowers the AO to determine the amount of expenditure incurred in relation to tax-free income if, “having regard to the accounts of the assessee, he is not satisfied with the correctness of the claim of the assessee“. The satisfaction of the AO as to the incorrect claim made by the assessee is sine qua non for invoking the applicability of Rule 8D. The satisfaction can be reached only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO is satisfied, then there is no requirement to proceed with the computation under Rule 8D. The AO wrongly proceeded on the premise that Rule 8D is automatic irrespective of the genuineness of the assessee’s claim in respect of expenses incurred in relation to exempt income. The correct sequence for making any disallowance u/s14A is to, firstly, examine the assessee’s claim of having incurred some expenditure or no expenditure in relation to exempt income. If the AO is satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate.

(20.1 KiB, 1,074 DLs)

S. 36(1)(iii): S. A. Builders 288 ITR 1 (SC) to be reconsidered

The assessee borrowed funds and used it to subscribe to the equity capital of its subsidiary company. The subsidiary company used the said funds for the purpose of acquiring the Centaur Hotel, Juhu Beach, Mumbai. The assessee paid interest on the borrowed money and claimed that a deduction u/s 36(1)(iii). The AO rejected the claim though the CIT (A), Tribunal & High Court (338 ITR 482) allowed it by relying on S. A. Builders Ltd vs. CIT 288 ITR 1 (SC). It was held that as the assessee, being a holding company had a deep interest in its subsidiary, and hence if the holding company advanced borrowed money to a subsidiary and the same is used by the subsidiary for some business purposes, the assessee would be entitled to deduction of interest on its borrowed loans. On appeal by the department, HELD by the Supreme Court:

Issue notice on the applications for condonation of delay as also on the special leave petitions. In our view, S.A. Builders Ltd. vs. Commissioner of Income-Tax (Appeals) and Another, reported in 288 ITR 1, needs reconsideration.

(284.4 KiB, 785 DLs)

Tests to determine where shares gain is capital gains or business profits

The assessee offered LTCG of Rs. 2.59 crores and STCG of Rs. 5.53 crores on sale of shares. The AO held that the LTCG & STCG were assessable as business profits on the ground that (a) the dividend was meager, (b) the assessee had undertaken risk by dealing in shares, (c) the holding period of most of the securities was very short, (d) the ratio of sales to purchases is was 1.77, (d) the sale and purchase transactions were frequent and (e) the scale of the activity of sale and purchase of securities was substantial. The CIT (A) upheld the taxability of STCG as business profits though the Tribunal deleted that as well. On appeal by the department, HELD dismissing the appeal:

To determine whether an assessee is an investor in shares or a dealer in shares, a pragmatic and common sense approach has to be adopted always keeping in mind commercial considerations. The tests have been laid down in Instruction No.4/2007 dated 15.6.2007 & CIT vs. Rewashanker A. Kothari 283 ITR 338 (Guj). On facts, the Tribunal was right that the STCG was not assessable as business profits because (a) the assessee was a salaried employee, (b) He maintained two separate portfolios for investment and trading, (c) the shares were held for periods ranging from 2.4 months to 11 months, (d) though the quantum or total number shares was substantial, the transactions in question were only seven in number and the period of holding was not insignificant and small. While the quantum or total number may not be determinative but in a given case keeping in view period of holding may indicate intention to make investment, (e) substantial dividend income had been received, (f) the element of uncertainty and risk is always there in securities and this factor cannot be a determinative factor to decide whether the assessee is trading in shares or is an investor. Some investors do take risk, (g) The ratio of sales and purchase will always be in favour of sales when the sales are sold and (h) in the earlier assessment years, transactions in the investment portfolio were accepted by the AO.

(98.8 KiB, 496 DLs)

Despite borrowing, gains on shares assessable as STCG & not business profits

The assessee earned gains from shares of which Rs. 7.61 crores was out of delivery-based transactions and offered as STCG while Rs. 4.26 crores was out of futures & options and offered as business profits. The AO & CIT (A) assessed the STCG as business profits on the ground that (a) there was no LTCG, (b) there was no dividends, (c) there were hundreds of transactions during the year, (d) the assesee had borrowed interest-bearing funds for purchase of shares & (e) the average holding period was 41 days. On appeal by the assessee, HELD allowing the appeal:

In the books, the delivery based transactions were accounted as investment and a distinction from the non-delivery transactions is maintained. The transactions were with a limited number of companies (8) and the average number of transactions in one month were 8. The CBDT Circular permits the assessee to deal in the shares of one scrip and treat some as trading and some as a capital investment. The fact that the assessee borrowed funds for investing in shares cannot constitute a factor as in none of the case laws or CBDT circular it has been held that borrowings will not be allowed in investment transactions. Investment in capital assets can also be carried out by use of borrowed funds. There is no bar notified by the law, judicial pronouncement or CBDT Circular.

(97.8 KiB, 565 DLs)

S. 40(b)(v): Partnership deed need not quantify partner’s remuneration

The assessee’s partnership deed provided that the partners would be paid remuneration / salary “according to the standards and norms fixed by the relevant provisions of the Income Tax Act, 1961”. The AO disallowed the claim for deduction of the salary paid to the partners u/s 40(b)(v) on the ground that as the deed did not quantify the amount of remuneration. This was reversed by the CIT (A) and Tribunal. On appeal by the department, HELD dismissing the appeal:

The Tribunal finding that “The quantification of the remuneration was apparent from clause 8 of the partnership deed which provided that the remuneration would be payable as per norms fixed by the Income-tax Act. The requirement in law is that remuneration should have been authorized and the amount of remuneration shall not exceed the amount specified in s. 40(b)(v) which uses the word ‘authorised‘ and not the word ‘quantify‘” is a finding of fact which cannot be interfered with by this Court.

(67.4 KiB, 303 DLs)

Dept’s appeal dismissed owing to ‘apathy’ in serving notice of hearing

Notice of hearing of the department’s appeal could not be served on the assessee through post at the address given in Form 36. The DR was accordingly directed to directly effect service of the notice of hearing on the assessee. On the date of hearing, the DR was unable to say whether service was effected or not. HELD by the Tribunal dismissing the appeal:

The department has shown total apathy in the matter of service of notices of hearing. The opportunity of hearing to the other side is essential before adjudicating appeal for which service of notice is condition precedent. It is the established practice and procedure that in case notices of hearing cannot be served on the assessee in revenue’s appeals, such notices are got served through Income-tax authorities. This practice is based on considerations of expediency and equity and is fully in conformity with the judicial powers and jurisdiction of the Tribunal and does not run contrary to any provisions of the Statute. It is within the incidental or implied powers of the Tribunal as enunciated in M.K. Mohammed Kunhi 71 ITR 815 (SC) & Paras Laminates 186 ITR 722 (SC). Accordingly, the Tribunal was within its powers to direct, and it was obligatory on the part of the I.T. authority, to effect service of notice of hearing on the assessee since the service could not be effected by post at the address given by the revenue in the memorandum of appeal since the department, as an executive organization, is well equipped with the requisite staff strength of Notice Server, Income-tax Inspector etc. for serving various statutory notices on the tax payer. Since the revenue has shown apathy with regard for serving the notices of hearing on the assessee and has also not made any request to get the notice served by alternate way i.e., by way of publication etc as laid down in rule 20 of CPC, there is no alternative but to dismiss the appeal (Aditya Organisers 91 ITD 342 (Ahd) followed)

(326.9 KiB, 481 DLs)

S. 147 reopening reasons need not be supplied within limitation period

For AY 2004-05, the AO issued a notice u/s 148 on 15.3.2011. The recorded reasons were supplied to the assessee on 30.8.2011 (after the expiry of the limitation period of 6 years). The assessee, relying on Haryana Acrylic vs. CIT 308 ITR 38 (Del), challenged the reopening inter alia on the ground that as the recorded reasons were supplied after the expiry of the limitation period, the reassessment proceedings were invalid. HELD dismissing the petition:

There is no requirement in s. 147, 148 or 149 that the reasons recorded should also accompany the notice issued u/s 148. The requirement in s. 149(1) is only that the notice u/s 148 shall be issued. There is no requirement that it should also be served on the assessee before the period of limitation. There is also no requirement in s. 148(2) that the reasons recorded shall be served along with the notice of reopening the assessment. The only mandatory requirement is that before issuing the notice to reopen the assessment the AO shall record his reasons for doing so. After GKN Driveshafts 259 ITR 19 (SC) the AO is duty bound to supply the recorded reasons to the assessee after the assessee files the return in response to the s. 148 notice. Haryana Acrylic turned on the peculiar facts of that case, where two sets of reasons had been recorded by the AO. As the second set of reasons alleging non-disclosure of material facts surfaced for the first time in the affidavit filed by the Revenue before the High Court after the expiry of 6 years, it was held that the reassessment proceedings were invalid. As this is not the fact situation here, the assessee’s plea cannot be accepted.

(53.8 KiB, 412 DLs)

Unaccounted expenditure to be set-off against unaccounted income despite Expl. to s. 37(1) & proviso to s. 69C. Govt. criticized for apathy towards black money

Pursuant to a search u/s 132, an assessments u/s 158BC was made and various additions were made. One of the issues was whether if the AO makes an addition of unaccounted income on the basis of seized records, he is required to give a deduction for the unexplained expenditure shown in the same records. HELD by the Court:

(i) The assessee was engaged in unaccounted business and the seized accounts showed unaccounted receipts and unaccounted expenditure. There is no justification for doubting the entries found in the seized records pertaining to expenditure while accepting the income found recorded therein. When the Department relies on the seized records for estimating undisclosed income, there is no reason why the expenditure stated therein should be disbelieved merely because there is no written agreement and that payments were not made through cheques or demand drafts. This would be unrealistic and not justified. The statute authorizes assessment of “undisclosed income” which has to be arrived at after allowing expenditure incurred by the assessee whether it be accounted in the regular books or not. The Explanation to s. 37(1) does not apply because the unaccounted business is not an “illegal business” and the proviso inserted to s. 69C by the Finance (No.2) Act, 1998 w.e.f. 1.04.1999 does not cover excess expenditure over accounted expenditure in business is covered by s. 69C itself.

(ii) We are constrained to observe about the effort made by us to persuade the Central Government to take steps to prevent generation and circulation of black money. Through a detailed interim order we appraised the Government that unless prohibition is introduced against cash dealings particularly in property sales in film industry and the like against at least for payments over a certain limit in cash, black money generation and circulation cannot be controlled because the disincentives on cash dealings contained under the various provisions of the Income Tax Act have failed to achieve the objective. Further, by prohibiting use of cash in major transactions terror and mafia funding and corruption could be arrested to a large extent. Above all, the worst enemy of our economy that is, circulation of high denomination counterfeit currencies (presently estimated at 7000 crores) could be prevented to a large extent. Unfortunately, the response of the Central Finance Ministry is not at all encouraging in as much as Government wants status quo to continue to the detriment of the economic interest of the country and the people as a whole. Our limitations while exercising appellate jurisdiction u/s 260A inhibit us from initiating any proceedings or issuing direction against the Central Government. However, we express our anguish on the attitude of the Central Government to have created this vicious situation and allow the same to continue.