S. 40(b) (i) to (v) which prescribe the conditions for deduction of remuneration paid to a partner require that the payment should be authorized by, and be “in accordance with the terms of the partnership deed“. This mandates that the quantum of remuneration or the manner of computing the quantum of remuneration should be stipulated in the partnership deed and should not be left undetermined, undecided or to be determined or decided on a future date

On issue (i), s. 10A was amended by the FA 2000 w.e.f. 1.4.2001 to convert it from an “exemption” provision to a “deduction” provision. S. 10A allows deduction “from the total income“. The phrase “total income” in s. 10A means “the total income of the STP unit” and not “total income of the assessee“. Consequently, s. 10A deduction has to be given before computing the “profits & gains of business” under Chapter IV. This proposition is in line with the form of return. Allowing deduction at the earliest stage of business income computation will blur the difference between “commercial profits” and “tax profits“. Further, though s. 10A was amended to make it a “deduction” provision, it continues to remain in Chapter III and was not moved to Chapter VI-A. The result is that even now s. 10A is in the nature of an “exemption” provision and the profits of the eligible unit have to be deducted at source level and do not enter into the computation of income. Consequently, the losses suffered by non-eligible units cannot be set-off against the eligible profits

The test of enduring benefit is not a certain or a conclusive test which the courts can apply almost by rote. What is required to be seen is the real intent and purpose of the expenditure and whether the expenditure results in creation of fixed capital for the assessee. Expenditure incurred which enables the profit making structure to work more efficiently leaving the source of the profit making structure untouched is expense in the nature of revenue expenditure. Fine tuning business operations to enable the management to run its business effectively, efficiently and profitably; leaving the fixed assets untouched is of revenue expenditure even though the advantage may last for an indefinite period. Test of enduring benefit or advantage collapses in such like cases especially in cases which deal with technology and software application which do not in any manner supplant the source of income or added to the fixed capital of the assessee (Alembic Chemical Works 177 ITR 377 followed)

The assessee’s argument, based on Skycell Communications v/s DCIT 251 ITR 53 (Mad), that the stock exchange does not render “managerial or technical services” is not acceptable because while in that case the subscriber had paid a fixed amount for the use of air time on the mobile phone and was not concerned with the technology or the services rendered by the managerial staff in keeping the cellular mobile phone activated, in the case of a stock exchange, there is direct linkage between the managerial services rendered and the transaction charges levied by the stock exchange. The BOLT system provided by the BSE is a complete platform for trading in securities. A stock exchange manages the entire trading activity carried on by its members and accordingly renders “managerial services”. Consequently, the transaction charges constituted “fees for technical services” u/s 194-J and the assessee ought to have deducted TDS. However, on facts, because from 1995 to 2005 no tax was deducted and no objection was raised by the AO and because from AY 2006-07 onwards the assessee had deducted TDS, no disallowance u/s 40(a)(i) can be made for AY 2005-06

If the creditor discloses his PAN and claims to be an assessee, the AO cannot himself examine the return and P&L A/c of the creditor and brand the same as unworthy of credence. Instead, he should enquire from the creditor’s AO as to the genuineness of the transaction and whether such transaction has been accepted by the creditor’s AO. So long it is not established that the return submitted by the creditor has been rejected by the creditor’s AO, the assessee’s AO is bound to accept the same as genuine when the identity of the creditor and the genuineness of transaction through account payee cheque has been established

The assessee had a “site” or “project” in India. Under Article 5 (3) of the treaty, such a “site” or “project” is a PE only if it continues for a period of more than six months. As the assessee’s contract was completed in two months, there was no PE under Article 5(3). The argument that the Mumbai office was a PE under Article 5(2) is not acceptable because while Article 5(2) is a general provision, Article 5 (3) is a specific provision which prevails over Article 5(2).

There is no finding by the AO that the assessee furnished inaccurate particulars and that its explanation was not bonafide. Accordingly, the imposition of penalty u/s 271(1)(c) was a “complete non-starter”. A mere erroneous claim made by an assessee, though under a bonafide belief that, it was a claim which was maintainable in law cannot lead to an imposition of penalty. The claim for deduction was made in a bona fide manner and the information with respect to the claims was provided in the return and documents appended thereto. Accordingly, there is no furnishing of “inaccurate particulars”. Making of an incorrect claim for expenditure does not constitute furnishing of inaccurate particulars of income (Reliance Petroproducts 322 ITR 158 (SC) followed)