The question whether a particular activity of the assessee such as the interest generating activity should be taken into consideration in the determination of the ALP is a question which needs to be decided considering the nature of the business of the assessee and its’ “business model”. The Tribunal rightly held that as the earning of interest income was only the result of investment of surplus funds and was not a primary income-generating activity, the interest income had to be excluded from the “operating profit” for purposes of determination of ALP

The assessee exported tea to Iraq under the ‘Oil for Food Program’, as sanctioned by the United Nations. It paid commission of Rs 1.28 crores to one Alia Transportation, a Jordanian company. The Volcker Committee, which was set up to expose the ‘Oil for Food scam’ found that this company was a front company for the Iraqi regime, meant to receive illegal kickbacks, and did not render any services. The AO, acting on the report, held that the commission paid by the assessee was “illegal” and not allowable under the Explanation to s. 37(1). This was reversed by the CIT (A). On appeal by the department, the Tribunal (72 DTR 425) upheld the stand of the assessee on the ground that even if the amounts paid to Alia were actually kickbacks to Iraqi regime, that fact per se would not attract Explanation to s. 37(1). It was pointed out that while the transactions between Alia and the Iraqi regime may be contrary to the UN sanctions, the transactions between the assessee and Alia were not hit by the UN sanctions and that there was no specific violation of law by the assessee. It was emphasized that what the recipient of the payment does is not important because the assessee has no control over the matter. The onus of demonstrating that the assessee was aware that the payments were intended for kickbacks is on the AO which has not been discharged. It was held that the “purpose” of the expenditure has to be seen and if the payment is for bonafide business purposes, the fact that they end up being used as illegal kickbacks, will not attract Explanation to s. 37(1). On appeal by the department to the High Court, HELD dismissing the appeal

S. 149 (1) (b) provides that no notice u/s 148 shall be issued after the expiry of 4 years from the end of the relevant AY unless the income chargeable to tax which has escaped assessment amounts to Rs. 1 lakh or more. Under the proviso to s. 151 (1), no notice u/s 148 can be issued after the expiry of four years from the end of the relevant AY unless the CCIT/ CIT is satisfied on the reasons recorded by the AO that it is a fit case for issue of such notice. Accordingly, it is imperative that the AO should state in the recorded reasons that the escaped income is likely to be Rs.1 Lakh or more so that the sanctioning authority is aware that it has exercised power of extended period of limitation u/s 149 (1) (b) and applies its mind accordingly. A sanction given without being aware of this fact is not valid. On facts, as there is nothing in the recorded reasons to suggest that the income chargeable to tax which has escaped the assessment is Rs. one lakh or more, the reopening is not valid

The Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, is lower than the profit level indicator of the taxpayer, then the transaction reported by the taxpayer is at an arm’s length price and there is no need to take the arithmetical mean. The proviso to s. 92C(2) is explicit that where more than one price is determined by most appropriate method, the arm’s length price shall be taken to be the arithmetical mean of such prices. The Tribunal was also wrong in the finding that unless and until the comparables drawn by the taxpayer were rejected, a fresh search by the TPO could not be conducted because s. 92C (3) which stipulates four situations where under the AO/ TPO may proceed to determine the ALP in relation to an international transaction. If any one of those four conditions is satisfied, it would be open to the AO/ TPO to proceed to determine the ALP price. Also, the question of applying OECD guidelines does not arise at all because there are specific provisions of Rule 10B (2) & (3) and the first proviso to s. 92C(2) which apply. The Tribunal was also not right in reducing the list of comparables to merely four. Having held that the comparables given by the assessee were to be accepted and those searched by the TPO were to be rejected, the only option then left to the Tribunal was to derive the arithmetical mean of the profit level indicators of the comparables which were accepted by it. It erred in selecting only one profit level indicator out of a set of profit level indicators. However, on facts this make no difference because even if the arithmetical mean of the comparables as accepted by the Tribunal are taken into account, the profit level indicator would be less than 6.99 % which is the profit level indicator of the assessee

It is but evident that the department has failed to discharge its legal obligation in not refunding the seized amount. The argument of the department that unless a direction is issued, a speaking order shall not be passed on the application for refund of the amount due to him is not appreciated. It shows that the officers of the Income-tax Department are shirking their responsibilities. Speedy and affordable justice is the requirement of the day. But it cannot be achieved until the executive including tax-man discharge their duties faithfully honestly within the four corners of law. The revenue official failed to take any decision right or wrong on the refund application filed by the assessee and passed on the buck on the Court. Time has come for the heads of the departments to keep a strict vigil on such shirkers and to fix their responsibility. While it is no doubt true that collection of revenue is a serious matter for the State -and the bounden duty of the authorities functioning under the Act is to implement the provisions of the Act, there should be safety and assurance to an honest tax-payer. An honest tax-payer should not be subjected to unnecessary harassment and an action not warranted in law, which can be of very serious consequence to the tax-payer if is allowed to remain without correction, such harassment and browbeating of an honest tax-payer will otherwise drive even such honest tax-payers to become cynical and lead to a situation where taxpayers will get a feeling that paying taxes honestly is not a worthwhile exercise; that the tax authorities are a menace to the society rather than simply being representatives of the State for enforcing the tax provisions. The department shall pay costs of Rs. 15,000 to the assessee (Sandik Asia 280 ITR 643 (SC), Gujrat Flouro Chemicals 348 ITR 319 & Raghavendra Sherrigar (2005) 1425 STC 153) followed)

If the audit party brings certain aspects to the notice of the AO, he is entitled to reopen the assessment after forming his own belief. However, if the AO acts under compulsion of the audit party and not independently, the action of re-opening would be vitiated. On facts, it is clearly established that the AO was under compulsion from the audit party to issue notice for reopening because after the audit party brought the controversial issue to the notice of the AO, he did not agreed to the proposal for re-examination of the issue and wrote a letter and gave elaborate reasons why the assessment order was correct. The s. 148 notice was issued only after the Revenue Audit wrote to the CIT reiterating its stand that income had escaped assessment. Consequently, the s. 148 notice had to be quashed (Cadila Healthcare 65 DTR (Guj) 385 followed; P.V.S Beedies 237 ITR 13 (SC) referred)

The manner in which and the ground on which an adjustment of the refund was made is arbitrary and contrary to law. The stay order states that the assessee would not be treated as an assessee in default in respect of covered issues. Yet the department has proceeded to adjust the refund due and payable to the assessee merely on the ground that the department’s appeal is pending. The adjustment of a refund is a mode of effecting recovery. Once an issue has been covered in favour of the assessee in respect of another assessment year on the same point, it was wholly arbitrary on the part of the department to proceed to make an adjustment of the refund. If the adjustment was not made, there can be no manner of doubt that the assessee would have been entitled to a stay on the recovery of the demand. The demand cannot be adjusted by the department in this manner merely because it is in possession of the funds belonging to the assessee to which the assessee is legitimately entitled to and has been granted a refund. The making of an adjustment in these facts is totally arbitrary and contrary to law. As regards the other issues, the assessee has made out a strong prima facie case for a stay of the recovery of the demand. As the action of the department in adjusting the refunds due to the assessee was contrary to law, the interests of justice would be served if the department is permitted to make an adjustment to an extent of Rs.60 crores and refund the balance with interest.

We already have delivered a judgment on 3rd April, 2013 in ITAT No. 20 of 2013, G.A. No. 190 of 2013 (CIT, Kolkata-XI Vs. Crescent Export Syndicates) holding that the views expressed in the case of Merilyn Shipping & Transports (ITA.477/Viz./2008 dated 20.3.2012) were not acceptable. That is one reason why the matter should be remanded to the Tribunal. Another reason for remanding the matter to the Tribunal is that the finding of facts recorded by the CIT (Appeal) was not tested by the Tribunal. For the aforesaid reasons, the order under challenge is set aside and the matter is remanded to the Tribunal for a decision de novo

The grievance of the Revenue is that the Tribunal ought to have entertained the appeal by following the decision of the Apex Court in the matter of Surya Herbal Ltd. However, the revenue has not been able to point out before us any of circumstance as laid down by the Supreme Court in the matter of Surya Herbal Ltd being applicable to this case which would lead to non application of CBDT instructions No.3/2011. In the above circumstances, we see no reason to entertain the proposed question of law (it was also held following Chem Amit 272 ITR 397 that an appeal u/s 260A cannot be filed to challenge an order dismissing a MA)

Though s. 54F(4) provides that the amount not appropriated towards purchase of the new asset has to be deposited in the capital gains account scheme before the due date for filing the return u/s 139(1), sub-section (4) of s. 139 is in the nature of a proviso to s. 139(1). S. 139(4) provides that a person who has not furnished a return within the time allowed to him under s. 139(1) may furnish the return at any time before the expiry of one year from the end of the relevant assessment year or before the completion of the assessment whichever is earlier. For AY 2007-08, the last date for filing the return u/s 139(4) is 31.3.2009. This extended time limit is available for making deposit in the capital gains account scheme. As the assessee had invested the consideration in purchase of a new house before that date, the exemption has to be allowed (Jagriti Aggarwal 339 ITR 610 (P&H), Rajesh Kumar Jalan 286 ITR 274 & Fathima Bai (Kar)