S. 153A: In case of completed assessments, addition can be made only if incriminating document found during search

There are three possible circumstances that emerge on the date of initiation of search u/s 132 (1): (a) proceedings are pending; (b) proceedings are not pending but some incriminating material found in the course of search indicating undisclosed income and/or assets and (c) proceedings are not pending and no incriminating material has been found. In circumstance (a), since the proceedings are pending, they are abated and the AO gets a free hand to make the assessment. In circumstance (b), there is no question of abatement as the proceedings are not pending and the AO has to pass an assessment order u/s 153A to assess the undisclosed income. In circumstance (c), the AO has to pass an assessment order though as there is no incriminating material no income can be assessed. On facts, as the assessments were completed and there was no incriminating material found during the search, the AO was not entitled to make any addition (All Cargo Global Logistics 137 ITD 287 (Mum)(SB), Anil Kumar Bhatia 80 DTR 169 (Del), Pratibha Industries & Gurinder Singh Bawa followed)

S. 32: Sale & lease transactions by banks are genuine and eligible for depreciation

S. 32 allows depreciation if the asset is “owned, wholly or partly, by the assessee and used for the purposes of the business“. There is no requirement that the asset must be used by the assessee himself. It is sufficient if the asset is utilized for the purpose of business of the assessee. The argument, relying on McDowell 154 ITR 148 (SC), that Sale & Lease Back transactions are a devise for lowering the tax effect cannot be accepted. Sale & Lease Back transactions are genuine and cannot be considered to be sham. By virtue of the judgement in Cosmo Films Ltd 338 ITR 266 (Del), the contrary judgements in MidEast 87 ITD 537 (Mum) (SB) and Induslnd Bank 135 ITD 165 (Mum) (SB) are impliedly reversed (ICDS Ltd 350 ITR 527 (SC) & Development Credit Bank Ltd (ITAT Mum) followed)

The real object of the entering into the sale and lease back transaction so far as Konkan Railway is concerned is to raise funds. The transaction of sale of the asset to the assessee bank and its lease back to Konkan Railway cannot be separated. It was not possible for Konkan Railway to sell out the railway system. Thus, the sale transaction was merely on paper and to facilitate the financial arrangement by the assessee to Konkan Railway without involving any real intention of transfer of the assets. The terms of the lease agreement are only to secure the interest of the bank till the recovery of the full amount along with the interest. The assessee cannot exercise the real and actual ownership over the asset keeping in view the facts and circumstances and nature of the asset in question. Further, under the Banking Regulation Act, 1949 read with RBI circular dated 19.2.1994, banking companies can undertake the activities of equipment leasing but these are required to be treated on par with loans and advances. Therefore, the activity of equipment leasing permitted by the RBI is only in the nature of finance lease. The terms and conditions specified by the RBI for income recognition of lease transactions are also on par with the manner in which a loan transaction is treated. In view of the said circular, there is no scope for treating the instant lease agreement as that of an operating lease (IndusInd Bank 135 ITD 165 (Mum) (SB) followed; ICDS 350 ITR 527 (SC) distinguished on the basis that the lease there was not by a Bank but by a NBFC).

There is a distinction between a case where the software is supplied along with hardware as part of the equipment and there is no separate sale of the software and a case where the software is sold separately. Where the software is an integral part of the supply of equipment, the consideration for that is not assessable as “royalty”. However, in a case where the software is sold separately, the consideration for it is assessable as “royalty”. On facts, the assessee had received a license to use the copyright belonging to the non-resident. The non-resident supplier continued to be the owner of the copyright and all other intellectual property rights. As there was a transfer of the right to use the copyright, the payment made by Reliance to Lucent was “for the use of or the right to use copyright” and constituted “royalty” under s. 9(1)(vi) and Article 12(3) of the India-USA DTAA.

Law on non-taxing foreign PE profits no longer good law after insertion of s. 90(3) & Notification dated 28.08.2008 (which has clarificatory effect)

The law laid down by the Courts on the interpretation of the expression “may be taxed” that once the tax is payable or paid in the country of source, then the country of residence is denied of the right to levy tax on would no longer apply after the insertion of s. 90 (3) w.e.f. 1.4.2004, i.e. AY 2004-05 pursuant to which Notification dated 28.08.2008 has been issued. The said Notification is clarificatory in nature and hence the interpretation given by the Central Government through the Notification is effective from 1.4.2004. Also, as the phrase “may be taxed” is not appearing in the statute but is appearing in the DTAA, the interpretation as understood and intended by the negotiating parties should be adopted. Here one of the parties i.e., Government of India has clearly specified the intent and the object of this phrase and the meaning assigned by the Government of India for a phrase or term used in the DTAA notification will prevail. The result is that the business income from the P.E. in Oman and Qatar and also the capital gain from sale of assets in these countries will be chargeable to tax in India

Expl 5 to s. 271(1)(c): Undisclosed income offered in belated return filed u/s 139(4) eligible for immunity from penalty

Explanation 5A to s. 271(1)(c) provides that if during the course of search, the assessee is found to be the owner of any asset or income which has not been shown in the return of income which has been furnished before the date of search and the “due date” for filing the return of income has expired, the assessee is deemed to have concealed the particulars of his income or furnish inaccurate particulars of income and liable for penalty u/s 271(1)(c). In other words, if the income is offered in the return is filed by the “due date”, no penalty can be imposed. The question is whether the “due date” in Explanation 5A encompasses a belated return filed u/s 139(4). The “due date” can be very well inferred as due date of filing of return of income u/s 139(4) because wherever the legislature has provided the consequences of filing of the return of income u/s 139(4), then the same has also been specifically provided. E.g., s. 139(3) which denies the benefit of carry forward of losses u/s 72 to 74A if the return of income is not filed within the time limit provided u/s 139(1). In absence of such a restriction, the limitation of time of “due date” cannot be strictly reckoned with s. 139(1). Even a belated return filed u/s 139(4) will be entitled to the benefit of immunity from penalty (Rajesh Kumar Jalan 286 ITR 276 (Gau) & Jagriti Aggarwal 339 ITR 610 (P&H) & Jagtar Singh Chawla (decisions in the context of s. 54) followed)

The assessee’s claim that the effect of the assignment of the work of customs clearance and installation by Tellabs Denmark to the assessee is that an independent contract came into existence between the assessee and Power Grid and that as both parties were residents, the transfer pricing provisions cannot apply is not acceptable because it is clear from the various agreements that there has been only an assignment of the portion of an onshore contract by Tellabs Denmark to the assessee and not a novation of the portion of the onshore contract between Tellabs Denmark and PGCIL. The consequences in the event of an assignment and novation are different. Since there has only been an assignment and not novation of the contract in the present case, the transaction of assignment between the assessee and Tellabs Denmark cannot be said to be a transaction between two persons either or both of them were not non-residents. It is a very strange situation because if Tellabs Denmark had not assigned the portion of the onshore contract, the transfer pricing provisions would not have been applicable because Tellabs Denmark and PGCIL are not Associated Enterprises. Though the assignment of the portion of the onshore contract has taken place exactly at the same consideration for which Tellabs Denmark agreed to render services to PGCIL, nevertheless, the assignment agreement between Tellabs Denmark and the assessee has all the ingredients of an international transaction within the meaning of s.92 of the Act. However, the ALP will have to be determined afresh because the international transaction is the assignment between Tellabs Denmark and the assessee and not the agreement between the assessee and PGCIL. The TPO should also consider whether as the assignment of the contract had taken place due to business restructuring and on the same terms as agreed between Tellabs Denmark and PGCIL, it could be said that this transaction itself would constitute a comparable uncontrolled transaction (Swarnandhra IJMII Integrated Township (ITAT Hyd) distinguished).