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DATE: May 15, 2014 (Date of publication)
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S. 50B applies only to a “sale” for a “monetary consideration” and not to a case of “exchange” of the undertaking for shares under a s. 391/394 scheme of arrangement

The definition of the term “slump sale” in s. 2(42C) means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sale. In Motors & General Stores (P) Ltd 66 ITR 692 (SC) it was held that a “sale” meant a transfer for a monetary consideration and that an “exchange” would not amount to a “sale”. On facts, scheme of arrangement shows that the transfer of the undertaking took place in exchange for issue of preference shares and bonds. Merely because there was quantification when bonds/preference shares were issued, does not mean that monetary consideration was determined and its discharge was only by way of issue of bonds/preference shares. In other words, this is not a case where the consideration was determined and decided by parties in terms of money but its disbursement was to be in terms of allotment or issue of bonds/preference shares. All the clauses read together and the entire Scheme of Arrangement envisages transfer of the Lift Division not for any monetary consideration. The Scheme does not refer to any monetary consideration for the transfer. The parties were agreed that the assessee was to transfer the undertaking and take bonds/preference shares as consideration. Thus, it was a case of exchange and not a sale. Therefore, s. 2(42C) of the Act was inapplicable. If that was not applicable and was not attracted, then, s. 50B was also inapplicable. The judgement of the Delhi High Court in SRIE Infrastructure Finance Ltd 207 Taxman 74 (Del) is distinguishable on facts. There is no necessity to analyze the circumstances in which s. 50B was inserted in the statute book.

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DATE: May 14, 2014 (Date of publication)
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Despite pronouncement of verdict in open court & signing of draft judgement, Judge entitled to alter verdict until judgement is signed & sealed

Up to the moment the judgment is delivered Judges have the right to change their mind. There is a sort of ‘locus paenitentiae’ and indeed last minute alterations often do occur. Therefore, however much a draft judgment may have been signed beforehand, it is nothing but a draft till formally delivered as the judgment of the Court. Only then does it crystallise into a full fledged judgment and become operative. It follows that the Judge who “delivers” the judgment, or causes it to be delivered by a brother Judge, must be in existence as a member of the Court at the moment of delivery so that he can, if necessary, stop delivery and say that he has changed his mind. There is no need for him to be physically present in court but he must be in existence as a member of the Court and be in a position to stop delivery and effect an alteration should there be any last minute change of mind on his part. If he hands in a draft and signs it and indicates that he intends that to be the final expository of his views it can be assumed that those are still his views at the moment of delivery if he is alive and in a position to change his mind but takes no steps to arrest delivery. But one cannot assume that he would not have changed his mind if he is no longer in a position to do so. A Judge’s responsibility is heavy and when a man’s life and liberty hang upon his decision nothing can be left to chance or doubt or conjecture; also, a question of public policy is involved. As we have indicated, it is frequently the practice to send a draft, sometimes a signed draft, to a brother Judge who also heard the case. This may be merely for his information, or for consideration and criticism. The mere signing of the draft does not necessarily indicate a closed mind. We feel it would be against public policy to leave the door open for an investigation whether a draft sent by a Judge was intended to embody his final and unalterable opinion or was only intended to be a tentative draft sent with an unwritten understanding that he is free to change his mind should fresh light drawn upon him before the delivery of judgment.

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DATE: May 14, 2014 (Date of publication)
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Important principles on distinction between “contract for sale of goods” and “works contract” explained

(ii) Four concepts have clearly emerged from the numerous judgements of the Supreme Court on the point. They are (a) the works contract is an indivisible contract but, by legal fiction, is divided into two parts, one for sale of goods, and the other for supply of labour and services; (b) the concept of “dominant nature test” or, for that matter, the “degree of intention test” or “overwhelming component test” for treating a contract as a works contract is not applicable; (c) the term “works contract” as used in Clause (29A) of Article 366 of the Constitution takes in its sweep all genre of works contract and is not to be narrowly construed to cover one species of contract to provide for labour and service alone; and (d) once the characteristics of works contract are met with in a contract entered into between the parties, any additional obligation incorporated in the contract would not change the nature of the contract;

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DATE: May 10, 2014 (Date of publication)
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Meaning of the word “turnover” in s. 80HHC explained. Sale proceeds of scrap is not “turnover” for s. 80HHC. Revenue should encourage assessees to bring in foreign exchange

(i) The word “turnover” means only the amount of sale proceeds received in respect of the goods in which an assessee is dealing in. So far as the scrap is concerned, the sale proceeds from the scrap may either be shown separately in the Profit and Loss Account or may be deducted from the amount spent by the manufacturing unit on the raw material. When such scrap is sold the sale proceeds of the scrap cannot be included in the term ‘turnover’ for the reason that the unit is engaged primarily in the manufacturing and selling of steel utensils and not scrap of steel. Therefore, the proceeds of such scrap would not be included in ‘sales’ in the Profit and Loss Account of the assessee (The situation would be different in the case of a person who is primarily dealing in scrap)

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DATE: May 10, 2014 (Date of publication)
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Gains arising from PMS transactions are capital gains & not business profits

The assessee offered LTCG & STCG on sale of shares which had arisen through a Portfolio Management Scheme of Kotak and Reliance. The investments were shown under the head “investments” in the accounts and were made out of surplus funds. Delivery of the shares was taken. The AO, CIT (A) & Tribunal held that as the transactions by the PMS manager were frequent and the holding period was short, the LTCG & STCG were assessable as business profits. On appeal by the assessee, HELD allowing the appeal

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DATE: May 10, 2014 (Date of publication)
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No s. 271(1)(c) penalty for concealment under normal provisions if s. 115JB book profits assessed

No doubt, there was concealment but that had its repercussions only when the assessment was done under the normal procedure. The assessment as per the normal procedure was, however, not acted upon. On the contrary, it is the deemed income assessed u/s 115JB which has become the basis of assessment as it was higher of the two. Tax is thus paid on the income assessed u/s 115JB. Hence, when the computation was made u/s 115JB, the concealment had no role to play and was totally irrelevant. Therefore, the concealment did not lead to tax evasion at all and no penalty u/s 271(1)(c) is leviable (CIT vs. Aleo Manali Hydro Power (attached) & Nalwa Sons Investment 327 ITR 543 (Del) (SLP dismissed) followed)

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DATE: May 9, 2014 (Date of publication)
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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

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DATE: May 9, 2014 (Date of publication)
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Assessee is bound to furnish a return in response to a s. 148 notice. The reasons for reopening can be given only thereafter. A writ involving disputed factual issues cannot be entertained

(i) The petitioner did not file any returns of income in response to the notices issued u/s 148. Even under the judgment of the Supreme Court in G.K.N. Driveshafts 259 ITR 19, the petitioner would get the reasons recorded for reopening the assessment only upon filing the return of income pursuant to the notice issued u/s 148. The conduct of the petitioner has been one of defiance; it did not file returns in response to the notices issued u/s 148. The mere filing of the return can never amount to submitting to the jurisdiction. The filing of the return in response to the notice u/s 148 defines the stand taken by the assessee. S. 148 says that the return called for by the notice issued under that section shall be treated as if such a return were a return required to be furnished u/s 139 of the Act. Under the scheme of the Act, a return of income conveys the position taken by the assessee to the assessing authority – whether he has taxable income or not. It is not a mere scrap of paper. There is a sanctity attached to the return. If the assessing authority calls upon the assessee to file a return of income, the same shall be complied with by the assessee and it is no answer to the notice to say that since in his (assessee’s) opinion there is no taxable income, he is under no obligation to file the return. The petitioner, not having made the Noida officer aware that no income chargeable to tax had escaped assessment and having merely told him that he has no jurisdiction to issue reassessment notices, was not acting strictly in accordance with law. The writ remedy being a discretionary remedy, the discretion can be exercised in favour of the writ petitioner only if his conduct has been in conformity with law. If it is not, the Court may refuse to exercise the discretion in favour of the writ petitioner;

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DATE: May 8, 2014 (Date of publication)
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Tax implications of employee secondment contracts explained

(i) The overseas entities required the Indian subsidiary, CIOP, to ensure quality control and management of their vendors of outsourced activity. For this activity to be carried out, CIOP required personnel with the necessary technical knowledge and expertise in the field, and thus, the secondment agreement was signed since CIOP did not have the necessary human resource. The secondees are not only providing services to CIOP, but rather tiding CIOP through the initial period, and ensuring that going forward, the skill set of CIOP’s other employees is built and these services may be continued by them without assistance. In essence, the secondees are imparting their technical expertise and know-how onto the other regular employees of CIOP. Indeed, it is admitted by CIOP that the reason for the secondment agreement was to provide support for the initial years of operation, till the necessary skill-set is acquired by the resident employee group. The activity of the secondees is thus to transfer their technical ability to ensure quality control vis-à-vis the Indian vendors, or in other words, “make available‟ their know-how of the field to CIOP for future consumption. The secondment, if viewed from this angle, actually leads to a benefit that transmits the knowledge possessed by the secondees to the regular employees. Indeed, any other reading would unduly restrict the Article 12 of the DTAA, which contemplates not only a formal transfer of intellectual property, but also other techniques and skills (“soft” intellectual property) required for the operation of a business. The skills and knowledge required to ensure that the task entrusted to CIOP – quality control – is carried on diligently certainly falls within the broad ambit of Article 12;

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DATE: May 8, 2014 (Date of publication)
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Commission paid to an agent for services rendered abroad and payment by way of reimbursement of expenses are not taxable in India

The assessee paid remuneration to the artists, to the agent and reimbursed the expenses in connection with the visit and performance of the artists in India. The assessee deducted tax at source on fees paid to the international artists in India. Tax was deducted at source on the payment made to artists for performance in India but it was not deducted at source on the commission paid to Mr. Colin Davie who acted as an agent between the assessee and the artists performed in India. Under Article 18 of the India-UK DTAA, the payment made to the artists and by way of reimbursement has been completely misconstrued inasmuch as the agreements with the artists and the understanding with Mr. Colin Davie would indicate that the payment of commission to him is not covered by Article 18. Mr. Colin Davie never took part in the event organised. He did not exercise any personal activities in India. Mr. Colin Davie did not act as a performing artist or entertainer, all that he was concerned are the services which were rendered outside India. He contacted the artists and negotiated with them for performance in India in terms of the authority given by the assessee. The CIT(A) and Tribunal rightly arrived at the conclusion that Mr.Colin Davie did not perform any services in India, but they were rendered outside India. Therefore, commission income to the agent is not liable to tax in India and there was no obligation on the part of the assessee to deduct the tax at source at the time of making of payment. In so far as payment or reimbursement of expenses in connection with the visit and performance of the artists in India, the amount reimbursed to them was towards air travel and was supported by documents. On that tax need not be deducted.