(Majority view) Special Bench has no jurisdiction to consider whether an ex-Member of the ITAT can practice before it. (Dissenting view) Special Bench is duty bound to answer the question. On merits, Ex-Member cannot be disbarred from practice before it

Per Mukul Shrawat, JM (for himself & G. C. Gupta, VP): There is a cardinal Rule that nemo debet esse judex in propria causa (no one should be a judge in his own cause). Though in Concept Creations 120 ITD 19 (SB) (Del) it was held that the Special Bench was competent to go into the said question, the position has now been altered in view of the (interim) order of the Allahabad High Court in Dinesh Chandra Agarwal vs. UOI where it was held that the judgment rendered in the case of Concept Creations “was beyond its pale of tax appeals as contained in the Income Tax Act, vide sections 253 and 254 thereof”. Hence the view taken by the Special Bench in Concept Creations about the competence of the Tribunal to hear service related issues now stands reversed. Once an authority higher than the Tribunal has expressed an opinion on some issue, then the Tribunal is no longer at liberty to rely upon its earlier decision, may be a decision of the Special Bench. The Tribunal being a subordinate Court, is expected to follow in letter and spirit an order of the High Court unless reversed by the Apex Court or by an order of the Jurisdictional High Court taking a contradictory view. Hence, the decision of the Special Bench in Concept Creation is no more good law and the present legal position is that the Tribunal has no inherent jurisdiction to decide the question as to whether an ex-Member of the Tribunal can appear and practice before the Income Tax Tribunal Benches. The question referred to us is alieni juris hence forbidden to adjudicate.

Law laid down on when an isolated transaction can be regarded as an “adventure in the nature of trade” and the taxability of agricultural land situate beyond municipal limits

(ii) As regards Q. 2 (which would apply even if the transaction was an adventure in the nature of trade), the land cannot be treated as capital asset since it is situated beyond eight kilometers from the municipal limits and it was purchased as agricultural land and sold accordingly without making any changes such as conversion in the land records, plotting of land, etc. The assessee earned agricultural income in the immediately preceding year on sale of standing crop and the same was offered as agricultural income and accepted by the AO for rate purposes. It is thus clear that it is a case of sale of agricultural land and the land being situated beyond eight kilometres from the municipal limit, it cannot be subjected to tax under the Income Tax Act either as business income or capital gains. Though the Kerala High Court in T.K. Sarala Devi 167 ITR 136 and the of P&H High Court in Tula Ram 199 ITR 450 dissented from the decision of the Bombay High Court in Manubhai A. Sheth 128 ITR 87, in the light of the latest decision of the Apex Court in Singhai Rakesh Kumar vs. Union of India 247 ITR 150, the only interpretation permissible is that the land situated outside the municipal limits stands excluded from the expression ‘capital asset’ from the inception and the sale proceeds have to be treated as revenue received from agricultural land. At any rate, the view taken by the Bombay High Court can be said to be an appropriate view, on an analysis of provisions of s. 2(1A)/2(14)(iii) (a) &(b)/10(1). When two views are possible a view which is in favour of the assessee has to be taken in the light of the decision of the Apex Court in Vegetable Products Ltd. 88 ITR 192. Consequently, the surplus arising on sale of the impugned agricultural land gives rise to agricultural income and not assessable to tax.

S. 32: Assessee (Bank) is entitled to depreciation on assets given on lease

In so far as the issue relating to the claim of depreciation on leased transactions is concerned, the Supreme Court in ICDS vs. CIT 350 ITR 527 had the occasion to consider the question “whether the Assessee is entitled to depreciation on vehicles financed by it which is neither owned by the Assessee nor used by the Assessee?” The Supreme Court after perusing the lease agreement and other related factors held that the lessor is the owner of the vehicles. As an owner, it used the assets in the course of its business satisfying both the requirements of S. 32 of the Act and hence is entitled to claim depreciation. A similar view was taken by the Delhi High Court in Cosmos Films 338 ITR 266 wherein the Delhi High Court considered the implications of S. 19 of Sale of Goods Act, 1930. The Tribunal, Mumbai Bench in the case of Development Credit Bank Ltd has followed the decision of the Supreme Court in the case of ICDS and the decision of Delhi High Court in the case of Cosmos Films and allowed the claim of depreciation. The Tribunal, Mumbai bench, in the case of L&T has considered a similar issue and followed the findings of the Supreme Court in the case of ICDS and also of the co-ordinate bench in the case of Development Credit Bank Ltd and allowed the claim of depreciation on sale of lease back assets. Considering all these judicial decisions in the light of the facts, we direct the AO to allow depreciation

No s. 14A/ Rule 8D disallowance for investment in shares of subsidiaries & Joint Ventures

In AY 2009-10, the assessee has specifically raised a point before the AO that 97.82% of the investment is in subsidiary companies and joint venture companies and, therefore, no expenditure was incurred for maintaining the portfolio on these investments or for holding the same. The assessee has also pointed out that these investments are long term investment and no decision is required in making the investment or disinvestment on regular basis because these investments are strategic in nature in the subsidiary companies on long term basis and, therefore, no direct or indirect expenditure is incurred. The department has not disputed this fact that out of the total investment about 98% of the investments are in subsidiary companies of the assessee and, therefore, the purpose of investment is not for earning the dividend income but having control and business purpose and consideration. Therefore, prima facie the assessee has made out a case to show that no expenditure has been incurred for maintaining these long term investment in subsidiary companies. The AO has not brought out any contrary fact or material to show that the assessee has incurred any expenditure for maintaining these investments or portfolio of these investments. In Godrej & Boyce Mfg. Co it was held that s. 14A(2) does not ifso facto empower the AO to apply the method prescribed by Rule 8D straightaway without considering whether the claim made by the assessee is correct. Also, in Garware Wall Ropes it was held that a disallowance u/s 14A cannot be made if the primary object of investment is holding controlling stake in the group concern and not earning any income out of investment. Similarly, in Oriental Structural Engineers (approved by the Delhi High Court) it has been held that s. 14A disallowance cannot be made for investment in subsidiaries and SPVs out of commercial expediency

The term “month” in s. 54E, 54EA, 54EB & 54EC does not mean “30 days” but the “calendar month”. So, the expression “within a month” means “before the end of the calendar month”

Sections 54E, 54EA & 54EB require the investment to be made “within a period of six months after the date of such transfer”. The subtle question is that whether the word “month” refers in this section a period of 30 days or it refers to the month only. The term ‘month’ is not defined in the Income-tax Act. Therefore, its meaning has to be understood as per the General Clauses Act, 1897 which defines the word “month” to mean a month reckoned according to the British calendar. In Munnalal Shri Kishan Mainpuri 167 ITR 415 (All) it was held in the context of limitation u/s 256(2) that the word ‘month’ refers to a period of 30 days and, therefore, the reference to “six months” in s. 256(2) is to “six calendar months” and not “180 days”. On some occasions, the Legislature had not used the term “Month” but has used the number of days to prescribe a specific period. For example, the First Proviso to s. 254(2A) provides that the Tribunal may pass an order granting stay but for a period not exceeding 180 days. This is an important distinction made in the statute while subscribing the limitation/ period. This distinction thus resolves the present controversy by itself

Transfer Pricing: A transaction (such as a corporate guarantee) which has no bearing on profits, incomes, losses or assets of the enterprise is not an ‘international transaction’ u/s 92B(1) and not subject to transfer pricing

(iii) When an assessee extends assistance to the AE, which does not cost anything to the assessee and particularly for which the assessee could not have realized money by giving it to someone else during the course of its normal business, such an assistance or accommodation does not have any bearing on its profits, income, losses or assets, and, therefore, it is outside the ambit of international transaction u/s 92B (1)

Transfer Pricing: After TPO determines the AMP expenditure incurred for benefit of AE, balance is deemed to be incurred for assessee’s business & is automatically allowable u/s 37(1)

The avowed object of the TP adjustment on account of AMP expenses is to first find out and attribute the amount spent by the assessee towards promotion of its foreign AE’s brand/logo etc and then make addition for such amount with appropriate mark-up. By this exercise, the total AMP expenses get segregated into two classes, viz., one benefiting the assessee’s business and two, benefiting the foreign AE by way of promotion of the brand. Whereas the first amount is deductible in full subject to the regular provisions, the second amount is added to the total income with suitable mark-up by way of the TP adjustment. Once the total amount of AMP expenses is processed through the provisions of Chapter X of the Act with the aim of making TP adjustment towards AMP expenses incurred for the foreign AE, or in other words such expenses as are not incurred for the assessee’s business, there can be no scope for again reverting to s. 37(1) qua such amount to make addition by considering the same expenditure as having not been incurred `wholly and exclusively’ for the purposes of assessee’s business. If the amount of AMP expenses is disallowed by processing under both the sections, that is 37 and 92, it will result in double addition to the extent of the original amount incurred for the promotion of the brand of the foreign AE de hors the mark-up

S. 56(2)(vii) does not apply to bonus & rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares

S. 56(2)(vii)(c) (ii) provides that where an individual or a HUF receives any property for a consideration which is less than the FMV of the property, the difference shall be assessed as income of the recipient. S. 56(2)(vii) does not apply to the issue of bonus shares because there is a mere capitalization of profit by the issuing-company and there is neither any increase nor decrease in the wealth of the shareholder as his percentage holding remains constant. The same argument applies pari material to the issue of additional shares to the extent it is proportional to the existing share-holding because to the extent the value of the property in the additional shares is derived from that of the existing shareholding, on the basis of which the same are allotted, no additional property can be said to have been received by the shareholder. The fall in the value of the existing holding has to be taken into account. As long as there is no disproportionate allotment, i.e., shares are allotted pro-rata to the shareholders, based on their existing holdings, there is no scope for any property being received by them on the said allotment of shares; there being only an apportionment of the value of their existing holding over a larger number of shares. There is, accordingly, no question of s. 56(2)(vii)(c) getting attracted in such a case. A higher than proportionate or a non-uniform allotment though would attract the rigor of the provision to the extent of the disproportionate allotment and by suitably factoring in the decline in the value of the existing holding

Transfer Pricing: Companies in ITES cannot be classified into low-end BPO services and high-end KPO services for comparability analysis but have to be classified based on the functions performed. Comparables with abnormal profit margins cannot be discarded per se but must be examined to determine whether the high margins are due to normal business conditions or not

(iv) As suggested in the OECD Guidelines on Transfer Pricing, determining a reliable estimate of arm’s length outcome requires flexibility and the exercise of good judgment. It is to be kept in mind that the TNMM may afford a practical solution to otherwise insoluble transfer pricing problems if it is used sensibly and with appropriate adjustments to account for differences. When the comparable uncontrolled transactions being used are those of an independent enterprise, a high degree of similarity is required in a number of aspects of the AE and the independent enterprise involved in the transactions in order for the controlled transactions to be comparable. Given that often the only data available for the third parties are company-wide data, the functions performed by the third party in its total operations must be closely aligned to those functions performed by the tested party with respect to its controlled transactions in order to allow the former to be used to determine an arm’s length outcome for the latter. The overall objective should be to determine a level of segmentation that provides reliable comparables for the controlled transaction, based on the facts and circumstances of the particular case. The process followed to identify potential comparables is one of the most critical aspects of the comparability analysis and it should be transparent, systematic and verifiable. In particular, the choice of selection criteria has a significant influence on the outcome of the analysis and should reflect the most meaningful economic characteristics of the transactions compared. Complete elimination of subjective judgments from the selection of comparables would not be feasible but much can be done to increase objectivity and ensure transparency in the application of subjective judgments