Messages

[ABN AMRO Bank vs. A.D.I.T]

Hi vdboss,

Welcome.

The answer is in the negative because the transactions between the company and its own branch can never give rise to income. A man can never trade with himself.

This issue has been considered in detail in ABN AMRO Bank vs. A.D.I.T 98 TTJ (Cal) (SB) and it was held that payment by the Indian permanent establishment to its foreign head office, which is not an independent entity, cannot be treated as anything but a payment to oneself. Such payment is not chargeable to tax and there is accordingly no scope for the applicability of sections 195 or 40 (a) (i) of the Act.

Hope this answers your question.

Regards,

Probal.

Bhavesh Ji,

Once it is accepted that the AO's decision is justiciable, it has to follow that he has to give reasons for his decision. If the AO does not give reasons, how can an appellate authority decide whether his grounds for rejection are justified or not.

So, I agree with you that the AO has to record his reasons in writing before invoking rule 8D.

Probal. 

I totally agree with your interpretation. The jurisdiction to apply Rule 8D arises only after the AO shows in what way he is unable to accept the Assessee's computation. Obviously, the AO's rejection of the Assessee's computation is justiciable.

I read an article on this site titled  New Rule 8D – A lesson in tight rope walking?  where the author has stated:

"9. The Assessing Officer has to be first dissatisfied with the correctness of disallowable expenditure calculated by the Assessing Officer. It is a mandatory condition in section 14A that this dissatisfaction is reached "having regard to the accounts of the assessee". Even Rule 8D agrees that the Assessing Officer should be dissatisfied "having regard to the accounts". In short, he cannot disregard the accounts in making his inquiry whether the disallowance worked by the assessee is correct. If, having regard to the accounts, he feels that the disallowance calculated by the assessee can be corrected by reworking it scientifically, he need not invoke the provisions of rule 8D. This is more particularly so, when the books of account provide the means to work out the disallowance correctly. If, there are no accounts or the accounts are unreliable and requires to be rejected, rule 8D cannot be invoked as this rule itself depends on accounts [the balance sheet figures] for its calculation.

10. According to me, Rule 8D can be invoked only when it is not possible to work out the disallowance correctly having regard to the accounts, say due to the complexity involved in the accounts or lack of some vital information. This interpretation, I feel, will assign due weightage and justice to the expression "having regards to the accounts".

Rule 8D is meant as a measure of last resort only; i.e., when it is not possible to work out the disallowance correctly having regard to the accounts. Even if the working of the disallowance made by the assessee is wrong, the Assessing Officer must take due regard to the accounts and find out whether the disallowance can be worked on basis of accounting principles. This, he is expected to do so honestly and only when this possibility is exhausted, he must resort to the determination by Rule 8D."


Probal.

It must be remembered that registration u/s 12A is a neceessary pre-condition to the grant of exemption u/s 11.

I assume the delay in filing the application has been condoned by the CIT. If not, the Q of exemption does not arise.

Whatever may be the fate of the first year (assumiong the delay has not been condoned), in the subsequent years, where you have s. 12A registration, you have very little to worry about. 12A confers jurisdiction upon the CIT to make enquiries and satisfy himself as to the nature and genuiness of activities before granting registration. Once he has done so, the AO has no jurisdiction to say that the same activities are not charitable. The decision of the CIT by way of granting registration is binding upon the AO. The AO's jurisdiction is confined to ensuring that the other requirements of ss 11 and 13 are complied with by the trust.

The CIT has power to cancel the jurisdiction but only if he comes to the conclusion that the activities are not "genuine" or are not "being carried out in accordance with the objects of the trust".

The ITO is definitely not justified in being so arbitrary in his approach - in ignoring the real nature of the activities of the trust and the record of the subsequent years.

If the Rule is interpreted this way it would be ultra vires s. 14A. A Rule cannot go beyond the ambit of the statutory provision. There are lots of authorities in support of this.

[CIT vs. Punjab Tractors]

Hi Researcher,

Welcome to the Forum.

There are a number of judgements laying down the law that an amount is assessable as income only when the assessee has dominion over it. If an amount is received subject to fulfilment of a condition, then the amount does not assume the charecter of income till the condition is satisfied.


See CIT vs. Punjab Tractors 234 ITR 105 where it was held:

"12. As has been seen from the facts arising in the case of the assessee in hand, the assessee had
made adjustment of the amount received from the PWS Advances Account to the Workshop
Income Account during the quarter in which the work of repairs and servicing was done. The
amount, received one year earlier, was thus not relevant to the assessee's income and was
dependent upon the services rendered by the assessee. The assessee did not become the owner of
the amount and could not appropriate it till service was rendered in lieu of which it was received in
advance. The assessee could legally claim the amount after rendering the services. Part of the
amount could be treated as income in the year under assessment on the basis of the accrual of
the right to appropriate the money. The deposited amount was transferred as income as soon as
service was rendered. The assessee treated the amount received as income by transferring it to
the Workshop Income Account. Thus, adjustment of the advance money towards income was
made, keeping in view the period in which actual services were rendered. The question is as to
when the money is to be treated as income. Since the receipt was relatable to a particular period
in future, it would fructify and mature into income during that period and not earlier. The assessee
was regularly following the system of adjustment. The money received from the buyers could not
be treated to be income unless right to appropriate it towards the services had accrued or arisen.
So long as the right did not exist, the money received from the buyers remained advance money.
It is the appropriation of the money towards the object and purpose for which it was received,
which is relevant.

13. Deposits or advances received by the assessee became trading receipts when the assessee
became entitled to appropriate the same to its income at the time of rendering the service."

Another useful judgement is that of the Guj HC in Ashaland Corp 133 ITR 55 where it was held:


"All receipts are not income. In order to partake of the character of income, receipt must be part of the profits earned
by the assessee. In other words, the receipt must assume the character of income before it
becomes exigible to income-tax. The assessee undoubtedly received a total sum of Rs. 2,13,772
in advance towards the sale price of the land which it had agreed to sell to the society, but can this
receipt be considered to be its income ? The answer must be emphatically "no". Business of the
assessee, as pointed out above, is to purchase and sell land. Unless the title of the assessee is
extinguished, the title of the purchaser cannot arise...".

However, the more difficult question is whether the amount received by you is at all in the nature of an advance. The relevant issues are:

(i) What are the conditions that you were required to comply? How many of those conditions were fulfilled during the year. How serious are the unfulfilled conditions and could they realistically have given the payer a claim for refund?

(ii) In which are the conditions fulfilled and the income offered to tax/claimed exempt u/s 11?

(iii) What is the accounting treatment?

(iv) Any other funds received from the payer and the treatment given to them?

Regards,

Probal.   

[There is a judgement of the Bombay Tribunal I found on itatindia.com which holds that goodwill is not an intangible asset.]

There is a judgement of the Bombay Tribunal I found on itatindia.com which holds that goodwill is not an intangible asset.

ITAT, MUMBAI BENCHES 'H', MUMBAI

R. G. KESWANI

v

ACIT

ITA NO. 1463/Mum./2005

February 19, 2008

RELEVANT EXTRACTS:

**        **        **        **        **        **        **        **        **        **        **        **

12.       We heard both sides in detail and considered the matter. The statutory expression of the provision granting depreciation on intangible asset is that -

            " knowhow, patents, copyrights trademarks, licences, franchise or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998."

(Emphasis provided by us)

13.       A reading of the above statutory expression brings home the point that the law has specified items of intangible assets eligible for depreciation in the following categories:-

            (i)         Knowhow

            (ii)        Patents

(iii)               Copyrights

(iv)              Trade marks

(v)                Licences

(vi)              Franchises



14.       As seen above, the law has specified six categories of intangible assets entitled for depreciation. Therefore, it is very obvious that all intangible assets are not eligible for depreciation allowance.

15.       In the present case, the amount of Rs.25,00,000 was paid by the assessee  towards the acquisition of goodwill. Therefore, the said payment does not come under either knowhow, patents, copyrights, trademarks, licences, franchises. The only remaining category is the residual one "any other business or commercial rights of similar nature". It is to be seen that any other business or commercial rights are not by themselves intangible asses eligible for depreciation. Those rights must be of similar nature; all similar nature to knowhow, patents, copyrights, trademarks, licences, franchises. Any business or commercial rights not similar in nature to the above mentioned six items cannot be treated as intangible assets qualified for depreciation.

16.     This is because "any other business or commercial rights of similar nature" provided as a residual category is found in the company of expression like knowhow. patents, copyrights, trademarks, licences, franchise:-, and therefore, in view of the principle of ejusdem generis, the above expression '"any other business or commercial rights"' has to be read in the company of the preceding words. Ejusdem generis rule is the rule of generic words following more specific one. The rule is that when general words follow specific words of same nature, the general words must be confined to the things of the same kind as those specified. This rule of interpretation makes an attempt to reconcile incompatibility between the specific and general words. The first category of words like knowhow, patents, copyrights, etc. form a distinct genesis or category inasmuch as all those items are specific and elucidated rights of business or commercial nature. In such circumstances, the expression "any other business or commercial rights of similar nature" also must be in the same genesis or category with specific and elucidated identity of commercial or business nature. Therefore, in the light of the statutory provisions contained in Sec.32(1)(ii), the goodwill acquired by the assessee does not come under the expression of any other business or commercial rights of the nature similar to knowhow, patents, copyrights, etc.


On the issue as to whether non-compete consideration constitutes an intangible asset, there is an adverse judgement of the Bombay ITAT. I'll try and pull it out soon.

Regards,

Probal.

[Sagauli Sugar Works]

Hi Folks,

The leading judgement on the subject is that of the Supreme Court in Sagauli Sugar Works 236 ITR 518 where the Court held that a unilateral write back of a liability does not mean that the liability has ceased or that the amount can be assessed as income.

To overcome the judgement, the Explanation to s. 41 (1) has been added to provide that a unilateral write back can be assessed as income.

Of course, if the liabilities are not written back, the Explanation does not apply and Sagauli Sugar holds good.

If the amounts writen back are not liabilities (e.g. deposits or advances received from a customer) than the case will be governed by T. V. Sundaram Iyengar 222 ITR 334 (SC) where it was held that an amount bearing the charecter of a capital receipt when received may become a revenue receipt if treated as such by the assessee.

Both judgements have been put in their proper perspective by the SC in Kesaria Tea 254 ITR 434 (SC). See also: Abdul Ahad 247 ITR 710 (J&K) where the Court has nicely explained the import of the said two judgements.

Hope this helps,

Probal.

[Honda Siel]

The question whether non-consideration of a co-ordinate bench judgement constitutes a mistake apparant from the record is covered by the judgement of the SC in Honda Siel 295 ITR 466. The Court held:

"Non-consideration of a decision of co-ordinate Bench placed before the Tribunal amounts to mistake apparent from record within the meaning of s. 254(2); Tribunal was therefore justified in exercising its powers under s. 254(2) when it was pointed out that an order of the co-ordinate Bench placed before the Tribunal was not considered by it while passing the original order."

On a side note, it may be noted that an order which does not consider a coordinate bench judgement is "per incuriam" and of no binding judgement. The entire law on this is nicely summed up by the Hyd and Bom benches in the following judgements:

Mangal Dayak Chit Fund 92 ITD 258 (Hyd)
Mehratex India Ltd (2005) 3 SOT 539 (Mumbai)
JKT Fabrics (2005) 4 SOT 84 (Mumbai)

..Hope this helps.

Regards,

Probal.

[Venkatachalam vs. Bombay Dyeing]

Hi Vyakul and Sivaiah,

I agree with Sivaih.

A retrospective amendment always creates a mistake that is apparant from the record. This law was laid down way back in Venkatachalam vs. Bombay Dyeing 34 ITR 143 (SC) and holds the field to day.

The fact that the assessee voluntarily disallowed the expenditure on the basis of the then-existing law makes no difference to the position. There is no estoppel against a statute - so what the assessee did or did not do cannot be held against his entitlement under the law.

Revision u/s 264 is another option.

The assessee is definitely entitled to the deduction and the procedure cannot come in the way. In the recent judgement of the SC in Saurashtra Kutch it was held that non-consideration of a binding judgement is a mistake apparant from the record.

It was held:

"Rectification of an order stems from the fundamental principle that justice is above all. It is exercised to remove the error and to disturb the finality.

Justice is a virtue which transcends all barriers. Neither the rules of procedure nor technicalities of law can stand in its way."

Regards,

Probal.

[Re VGM Holdings]

Hi Vipul,

I have been researching the law but without much luck. Gopal Jalan refers to an English judgement in Re VGM Holdings (1942) 1 AER 224 where also it was held that an allotment of shares is not a "purchase" or "sale". There is also brief discussion on the subject in Kanga & Palkhivala, 8th Edn, Vol. I, page 1139 and another English judgement in Kirby vs. Thorn 183 ITR 503 has been referred to therein.

Janak Rangwala 11 SOT 627 turns on the basis that the dept had accepted the gains to be on capital account in the earlier years and that a different view could not be taken in the current year. I don't suppose that would be your fact situation.

I think our case boils down to this:

(a) The assessee is not a regular dealer in shares (he is a ship breaker);

(b) Investment in an IPO is ordinarily on investment account;

(c) It is a one-time tranasction;

(d) The fact that loans were taken does not detract from the investment motive (Is there anything to show that the borrowing was meet a temporary funding gap i.e. that he had his own resources but could not access it temporarily and therefore had to reort to short-term borrowings? It would also help if the loans were repaid before the sale of the shares.

(e) The investment was intended for the long-term though events happened which prompted an immediate sale  (Courts have underlined the intention to invest for the long-term as an important indicia). Anything to show the events?

Does the past or the future show similar transactions? If not, that may be used as a talking point that the assessee is not a regular dealer.

Regards,

Probal.

[AMP Spg & Wvg Mills]

Hi vips,

Welcome to the forum. I haven't seen the A'bad CA journal and so am not aware of the context in which the author has discussed the case. However, on the point whether an allotment of shares is a purchase or not, there is a judgement of the A'bad Special Bench in AMP Spg & Wvg Mills 100 ITD 142 (Ahd) (SB). They have referred to the judgement of the SC in Gopal Jalan A 1960 SC 250.

If you could tell us the context of your query, we may be able to help more.

Regards,

Probal.

[Rupenjeli Tea]

Sir,

Taking a cue from your point, I would like to refer to the judgement of the Calcutta HC in Rupenjeli Tea 186 ITR 301 in the context of s. 44C. S. 44C provides that an assessee would be entitled to a deduction of the lowest of three items. One of the items postulated that an assessee was carrying on business outside India.

The question was what would happen to an assessee who had no overseas business operations. The Court followed Srinivasa Setty and held that:

"In CIT vs. B. C. Srinivasa Setty (1981) 21 CTR (SC) 138 : (1981) 128 ITR 294 (SC) : TC20R.148, the Supreme Court held that the charging section and the computation provisions together constitute an integrated code. When there is a case to which the computation provisions cannot apply at all, it is evident that such a case was not intended to fall within the charging section. Referring to s. 48(ii), the Supreme Court further observed that this section contemplated an asset in the acquisition of which it was possible to envisage a cost. None of the provisions pertaining to the head "Capital gains" suggests that they include an asset in acquisition of which no cost at all can be conceived. Further, the date of acquisition of the asset was a material factor in applying the computation provisions pertaining to capital gain; but in the case of goodwill generated in a new business, it was not possible to determine the date when it came into existence. In view of these observations of the Supreme Court, we are inclined to hold that if any one or more of the base figures forming part of computations under cls. (a), (b) of (c) of s. 44C are not conceivable in a particular case, it must be held that the non obstante provisions contemplating disallowance of "head office expenditure" under s. 44C would not apply. On a fair reading of cl. (c), it appears that the expression "so much of the expenditure... as is attributable to business....in India" contemplated that at least a part of the expenditure is referable to a business outside India. In the case before us, it is an admitted position that the assessee-company did not have any business operations outside India and the entire expenditure incurred at its London head office was wholly attributable to its business activities in this country. If that be so, it is clear that cl. (c) cannot have any application in this case and, therefore, no disallowance can be made under s. 44C in the facts and circumstances of this case."

This has been followed by the Bombay HC in Deutsche Bank 284 ITR 463.

Regards,

Probal.

I agree with the views of the earlier poster. In my view, it is not so much a question of case law as it is a question of fact. The questions that I would look at are:

(i) Is there evidence to show that the sums were advances? Was there such a practice in the earlier years? Accepted by the AO? Are the parties willing to give confirmations and come for examination before the AO?

(ii) If the AO did not give enough time, the same ought to have been given before the CIT (A). Why was that not done? Any extentuating circumstances?

(iii) Is it possible to provide the evidence even now? It can be produced as additional evidence with an explanation as to why it could not be produced earlier.

(iv) Was the alternate plea raised by way of a ground of appeal or in the written submissions. If not considered by the CIT (A), the simple solution is to seek a remand to the CIT (A) or even the AO.

The difficult question on merits is how to urge that an amount that is otherwise falling within s. 68 should be treated as "sales". If this argument is accepted then everyone will claim that instead of a 68 addition only the GP should be assessed. So, i see this as a big hurdle.

I think one would have to go through the facts meticulously to find an answer to the problem instead of straightaway jumping at case law  ;)

Regards,

Probal.

[Mafatlal Holdings]

I have not looked up the case law on the subject but on first principles - a firm and a partner are different entities under the Act. The partner has borrowed money to receive a stream of income - his share of profits under the Act. That stream of income is admittedly not chargeable to tax. Then why should s. 14A not apply? Why should the interest on the borrowed moneys not be disallowed?

The only argument is that as the firm has paid tax on the profits, the distribution to the partners should be considered to have borne tax. However, this flies in the face of s. 10 (2) which declares that the distribution is exempt from tax.

Of course, the argument was made in the context of dividend - that dividend income should be regarded as having borne tax as DDT is paid - and accepted in Mafatlal Holdings 85 TTJ 821 (Mum).

Of course, the case of a partnership is far superior to that of a company. So it is definitely worth arguing IMHO.

Regards,

Probal.