In Virgin Creations the Calcutta High Court has passed a reasoned order and held that the amendment to s. 40(a)(ia) is retrospective in nature. The binding nature of the decision of the Special Bench when a lone decision of non-jurisdictional High Court is available on the very same issue was examined in the Third Member decision in Kanel Oil & Export Ltd 121 ITD 596 where it was held that where there is only a judgement of the non-jurisdictional High Court prevails over an order of the Special Bench even though it is from the jurisdictional Bench (of the Tribunal). As the Calcutta High Court’s decision is the lone one on the issue whether s. 40(a)(ia) is retrospective, it has to be followed in preference to the decision of the Special Bench of the Tribunal in Bharti Shipyard Ltd. Consequently, amounts in respect of which TDS is paid on or before the due date of filing the ROI is eligible for deduction

In AY 1999-2000, before expiry of the original time limit of five consecutive assessment years for which deduction was available as per then applicable law, the amended law became applicable and the assessee was accordingly eligible for deduction for the extended period of 10 years, as against 5 years allowed under the preamended law (DSL Software Ltd followed)

S. 153C authorises the AO to exercise jurisdiction over any person in whose case incriminating material has been found during the course of search conducted on another person. S. 153D provides that no order of assessment shall be passed by an AO below the rank of Joint Commissioner except with the prior approval of the Joint Commissioner. The fact that the heading to s. 153D refers to a “prior approval” and that it uses negative wording and the word “shall” makes the intention of the Legislature clear that compliance of s. 153D is mandatory. As the provision is mandatory, an act done in breach thereof will be invalid. Also, as the condition has been imposed in public interest, it cannot be waived by the assessee. Clause 9 of the Manual of Office Procedure also makes it clear that an assessment order under Chapter XIV-B can be passed only with the previous approval of the JCIT and that the approval must be in writing and stated to have been obtained in the body of the assessment order. Accordingly, in the absence of the JCIT’s approval, the AO had no jurisdiction to pass the s. 153C order and it was null and void (Ratnabai Dubhash 230 ITR 495 (Bom) & SPL’s Siddharth followed)

For applicability of s. 50C, it is essential that an asset should be a “capital asset”. The question whether an asset is a “capital asset” or “stock-in-trade” is one of fact and has to be determined as per the guidelines laid down. On facts, the assessee was a builder and the investment in purchase and sale of plots was ancillary and incidental to the business activity. The assessee had treated the land as stock in trade in the balance sheet. Consequently, s. 50C had no application

When s. 40(a)(ia) was proposed to be inserted by the Finance Bill 2004, it applied to any “amount credited or paid”. However, when enacted by the Finance Act 2004, it applied only to “amount payable”. The words “credited/ paid” and “payable” have different connotations and the latter refers to an amount which is unpaid. The change in language between the Bill and the Act is conscious and with a purpose. The legislative intent is clear that only the outstanding amount or the provision for expense (and not the amount already paid) is liable for disallowance if TDS is not deducted. Also, s. 40(a)(ia) creates a legal fiction by virtue of which even genuine and admissible expenses can be disallowed for want of TDS. A legal fiction has to be limited to the area for which it is created. Consequently, s. 40(a)(ia) can apply only to expenditure which is “payable” as of 31st March and does not apply to expenditure which has been already paid during the year.

The Proviso to s. 54EC provides that the investment made in a long term specified asset by an assessee “during any financial year” should not exceed Rs. 50 lakhs. It is clear that if the assessee transfers his capital asset after 30th September of the financial year he gets an opportunity to make an investment of Rs.50 lakhs each in two different financial years and is able to claim exemption upto Rs.1 crore u/s 54EC. The language of the proviso is clear and unambiguous and so the assessee is entitled to get exemption upto Rs.1 crore in this case

On the question whether the interest paid by the PE to the H.O. is deductible, while such interest is not deductible under the Act because the payer & payee are the same person, Article 7(2) and 7(3) of the DTAA & its Protocol makes it clear that for the purpose of computing the profits attributable to the PE in India, the PE is to be treated as a distinct and separate entity which is dealing wholly independently with the general enterprise of which it is a part and deduction has to be allowed for, inter alia, interest on moneys lent by the PE of a bank to its H.O.

U/s 14A read with Rule 8D, disallowance can be made for the expenditure incurred for earning of exempt income. From the assessee’s P&L A/c, it is evident that the total expenditure incurred was Rs. 49 lakhs only which was claimed as a deduction. The disallowance u/s 14A & Rule 8D cannot exceed the expenditure actually claimed by the assessee. Accordingly, the action of the AO & CIT (A) in making disallowance in excess of total expenditure debited to P&L A/c is unjustified

Under the normal provisions of the Act, Rule 8D cannot apply till AY 2008-09 though the AO is at liberty to identify actual expenditure incurred to earn tax-free income & make disallowance. However, while computing book profit u/s 115JB, no actual expenditure was debited in the profit & loss account relating to the earning of exempt income. S. 14A cannot be imported into while computing the book profit u/s 115JB because clause (f) of Explanation to s. 115JB refers to the amount debited to the profit & loss account which can be added back to the book profit while computing book profit u/s 115JB of the Act. In Goetze (India) Ltd. vs. CIT 32 SOT 101 (Del) it was held that sub-sec. (2) & (3) of s. 14A cannot be imported into clause (f) of the Explanation to s. 115JA. Accordingly, it is held that no addition to book profit can be made on account of alleged expenditure incurred to earn exempt income while computing income u/s 115JB