Compilation of few Interesting Income Tax Cases.

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Compilation of few Interesting Income Tax Cases.

S.2(15):Definitions- Charitable purpose – Publication of books, booklets as reference material by the public as well as the professionals in respect of bank audit, tax audit etc cannot  be construed as commercial activities hence approval under section 80G(5)  cannot be denied (S.80G(5).  
The assessee trust is a society  one of the objects of the trust is to publish books, booklets etc. on professional subjects. The  assessee trust filed an application in form 10G for grant of renewal under section 80G  of the Act. The renewal was rejected on the ground that the assessee  was publishing and selling books of professional interest  and its activities are commercial in nature. On appeal the Tribunal held that the activities of selling books could be considered as a part of ongoing education of chartered  accountants , which in turn  would help the society  to get better, well-equipped  and skilled set of chartered accountants for maintaining audit quality. The Tribunal allowed the appeal and held that the assessee is entitled to approval under section 8OG.  On appeal by  revenue the Court up held the order of Tribunal and held that activities of the assessee trust in publishing  and selling books of professional interest which are meant to be used as reference material by general public as well as the professional  in respect of bank audit, tax audit etc. cannot be construed as commercial activities and therefore, assessee trust formed with the object inter alia  to conduct periodical meetings on professional subjects is entitled to approval under section 80G (5).
DIT v. The Chartered Accountants Study Circle ( 2012) 70 DTR 219( Mad) (High Court)

  1. 2(15): Definitions – Charitable Purpose – Expression “education” – Coaching class by open university or distance education cannot be construed as “education” for charitable purpose. (S. 11, 12A)
    A mere coaching class for preparing the students to attend the examination conducted by open university or by the other university or distance education cannot considered to be regular and systematic schooling within the meaning of Section 2(15). For the purpose of section 2(15), the assessee has to necessarily conduct a regular school/ college in which the students are imparted education, knowledge, training which result in confirmament of degree or diploma by government or government agency or university, cannot be considered as Charitable activity within the meaning of section 2(15), therefore the assessee is not entitled to exemption under section 11.   (AY 2005-06)
    Dy. DIT v. Kuttukaran Foundation (2012) 51 SOT 175 ( Cochin) (Trib)

2(22): Definitions-Dividend-Buy back shares-Capital gains- DTAA- India-Mauritius- Scheme for buy back shares to avoid tax in India – Profits arising to be treated as deemed dividend and taxable in India – Hence liable to deduct tax at source [S. 46A, 1150, 195, 245R (2) DTAA-article 10(2) (4) 13(4)]
The applicant  is a company incorporated in India , 48.87 percent , of whose shares  were held by a group holding company in the U.S.A, 25.06  percent  by a group holding in Mauritius , 27.37 percent  by a group holding company in Singapore and 1.76 percent  by the general public. On June 15 , 2010 , the board of directors of the applicant passed a resolution proposing a scheme of buy back of its shares from its existing share holders in accordance with section 77A of the Companies Act 1956. Mauritius company which acquired the shares sought advance ruling on whether the capital gains that may arise , were chargeable to tax in India  in the context of the Double Taxation Avoidance  Agreement between India  and Mauritius and whether  it would have the obligation to with hold the tax  in terms of section 195 of the Income-tax Act ,1961.The authority for advance ruling while admitting the application under section 245R(2)  of the Act for a ruling, held that the Authority can look in to avoidance of tax  and whether the  transaction  is colourable. On the facts  of the case the Authority held that the applicant had not paid dividend to any of the share holders after April 1, 2003 ,on which date section 115-0  of the Act was introduced .Neither the holding company in the U.S.A .nor that in Singapore accepted the offer of buy- back  for obvious reasons that it would have been taxable in India as capital gains .There was no proper application on the part of the applicant why no dividends were declared subsequent 2003, when the company was regularly making profits and when dividends were being, distributed before the introduction of section 115-O of the Act. Therefore, the proposal of buy-back was a scheme devised for avoidance of tax, a colourable devise for avoiding tax on distributed profits as contemplated in section 115-O of the Act. The arrangement could only be treated as a distribution of profits by a company to its share holders satisfying the definition of dividend which includes any distribution by a company of accumulated profits to its  share holders. The payments in question would also satisfy the definition of dividend in the article 10(4) of the DTAA between India and Mauritius. Under Article 10(2) of the DTAA, dividend paid by a company which is a resident of India, to a resident of Mauritius, may also be taxed in India, according to the laws of India but subject to the limitation contained therein. The proposed payment would be taxable in India in terms of article 10(2) of the DTAA between India and Mauritius hence the applicant was required to withhold tax on the proposed remittance of the proceeds to the Mauritius company.
A ( 2012) 343  ITR 455 /  XYZ India ( 2012) 206 Taxman 631  (AAR)          

  1. 2(22) (e):Definitions-Dividend-Deemed dividend-Loan to partnership- Since the partnership firm  which has purchased the shares through its partners though not registered share holder , being beneficial owner  is to be treated as share holder and loan advanced by company  to such partnership is liable to tax as deemed dividend.
    The Assessing Officer has held that loan received by partnership firm from Bharti Enterprises (P) Ltd should be treated as deemed dividend  as two partners hold more than   10 percentage shares  in Bharti Enterproses (P) Ltd . CIT (A) and Tribunal decided the issue in favour of assessee. On appeal, the High Court following the Judgment  in National Travel services (2012) 249 CTR 540 (Delhi ) held the issue in favour of revenue  holding that  partnership firm is to be treated as the share holder and it is not necessary that it has to be “registered  shareholder”. The question was answered in favour of revenue. As regards the accumulated profits the matter is set aside to the Tribunal by giving a reasonable opportunity to both the parties. (A.Y. 2004-05)
    CIT v. Bharati  Overseas Trading Co. (2012) 249 CTR 554 (Delhi) (High Court)
  2. 2(22)(e) : Definitions-Dividend- Deemed dividend- Unsecured loans from other Company – Provisions of section 2(22)(e) cannot be invoked if the assessee does not possess the prescribed voting rights in that company
    S. 2(22)(e) cannot be invoked in respect of the unsecured loans taken by the assessee from the other company if the assessee does not possess the prescribed voting rights in that company; shareholding of the common shareholder or director cannot be taken into consideration for the purpose. (AY 1994-95, 1996-97 & 1997-98)
    CIT v. Gopal Clothing Co. Ltd. (2012) 71 DTR 358 (Delhi)(High Court)

S.4: Charge of income-tax- Diversion by overriding title- Amount transferred to Transport Infrastructure  Utilisation Fund did not stand diverted at source by way of overriding title and it is includible in  the taxable income of the assessee.
The assessee was given license to conduct and carry on liquor trade in Delhi. On the basis of the minutes of the meeting  construction of flyovers etc was a precondition or an obligation imposed and had to be complied with to enable the assessee to conduct business of sale of country liquor in Delhi.

The assessee on the directions of f the  Delhi Administration had got flyovers and  infrastructure facilities constructed . As per resolution   out of 95 paisa from Re 1 which  the assessee was entitled to retain and keep. The balance 5 paise per bottle was to meet the administrative expenses including corporate expenses . The said 95 paise was not transferred or paid by the assessee to the Delhi Administration. Accordingly the Court held that the amount standing in TIUF was not diverted at source by way of overriding title and it was to be included in the taxable income of the assessee. The interest earned on transferred to TULF is also income and is taxable. (A.Ys. 1990-91 to 1992-93, 1994-95 & 1996-97)
CIT v. D.T.T.D.C. LTD (2012) 71 DTR 115 / 206 Taxman 507 (Delhi) (High Court) 
D.T.T.D.C. LTD v.CIT (2012) 71 DTR 115 / 206 Taxman 507 (Delhi) (High Court)

S.4:  Charge of income-tax- Diversion by overriding title- Sale proceeds deposited in other general economic service fund did not have the character of income earned  by the assessee and it has to be excluded from the profit.
The assessee was given license to conduct and carry on liquor trade in Delhi. On the basis of the minutes of the meeting  construction of flyovers etc was a precondition or an obligation imposed and had to be complied with to enable the assessee to conduct business of sale of country liquor in Delhi.
The assessee on the directions of f the  Delhi Administration had got flyovers and  infrastructure facilities constructed . As per the terms of letter  the sale proceeds under the head Other General Economic Services (OGES)  head  was transferred to the Delhi Administration. Till the said date, the amount under OGES was retained by the assessee. The Court held that these receipts did not have character of income earned by the assessee and it has to be excluded from the profit. (A.Ys. 1990-91 to 1992-93, 1994-95 & 1996-97)
CIT v. D.T.T.D.C. LTD (2012) 71 DTR 115 / 206 Taxman 507 (Delhi)(High Court) 
D.T.T.D.C. LTD v.CIT (2012) 71 DTR 115 / 206 Taxman 507 (Delhi)(High Court)

  1. 9 : Income deemed to accrue or arise in India – Foreign agent – Commission – Business connection -Permanent establishment. (S. 4(1), 40(a)(ia), 195)
    Where a  foreign agent of an Indian exporter operates in his own country and his commission is directly remitted to him, such commission is not received by him or in his behalf in India. Such agent is not liable to income tax in India on commission received by him. As there was no right to receive income in India nor there was any business connection between assessee and Evon Technologies UK,(ETUK) therefore, when income was not chargeable to tax in India under section 4(1), there was no question of invoking provisions of section 195 hence no disallowance be made under section 40(a)(ia). (A.Y. 2007-08).
    CIT v. Eon Technology (P) Ltd. (2011) 203 Taxman 266 / 64 DTR 257 / (2012) 343 ITR 366 (Delhi)(High Court).
    Editorial:  Affirmed  view of Tribunal in Dy.. Eon Technology (P) Ltd. (2011) 46 SOT 323 (Delhi)(Trib.)

S.9(1(i): Income deemed to accrue or arise in India –Business connection-Composite contract- AOP-Contract is indivisible and consortium is to be taxed as an AOP, the amount receivable for supply of equipment, material and spares allegedly outside India is taxable in India. [S. 2(31) (V), 5 (2)]
The applicant which consisted the consortium of two members for executing offshore activities. According to the applicant  it is a divisible contract and its obligations under the contract are well defined, the offshore activities are not taxable in India. APE  would come into existence in India  in terms of art 5.2(1) of DTAA  between India and Germany only after the equipment reaches the site in India. The applicant approached the Authority for determination of tax liability. The  Authority held that applicant is assessable as an AOP notwithstanding the internal division of responsibility by the consortium members and reognition thereof or by making separate payments to two members. On the facts part of design and engineering work for manufacture and procurement  of equipment done outside India being inextricably linked with the erection and commissioning of the project undertaken by the consortium , amount payable in respect of design  and engineering is liable to be taxed in India  as situs of the contract is in India . Amount receivable for supply of equipment  material and spares allegedly outside India is also taxable in India .
ABC/ 70 DTR 49 ( 2012) 249 CTR 329 (AAR)

  1. 9(1) (IV): Income deemed to accrue or arise in India- Reimbursement-Fact that third party invoices are paid does not necessarily show “reimbursement”
    The assessee, a Netherlands company, was awarded a dredging contract to be carried out at Port Mundra. It assigned the contract to its fully owned Indian subsidiary. It also entered into a “cost allocation agreement” under which it agreed to provide to the subsidiary all services necessary to execute the dredging contract in return for a reimbursement of the costs. It received Rs. 11.53 crores from the subsidiary towards invoices raised by third parties and claimed that as it was a “reimbursement of expenditure” incurred by the assessee it was not chargeable to tax. The AO & DRP assessed the receipts as “fees for technical services”.  It was also held that the subsidiary was a “Dependent Agent Permanent Establishment”. On appeal by the assessee, held  dismissing the appeal:
    (i)        While it is true that reimbursement of expenditure is not income, the payment made by the subsidiary to the assessee cannot be regarded as a “reimbursement” because (a) the subsidiary had no technical expertise to carry out the contract & the assessee had rendered technical services to it such as arranging the dredgers from abroad & choosing appropriate parties to execute the work. The facilities arranged by the assessee to support the operations of the subsidiary are not layman’s activities and require technical know-how. The argument that the dredgers were simply brought from outside India and taken back is over-simplified, (b) though it is claimed that the expenses were reimbursed at par with the invoices issued by third parties, there is nothing on record to show that the price negotiated between the assessee and the third parties are prices comparable to similar services provided by international parties. It is not established that the assessee offered services to the subsidiary on cost to cost basis at best reasonable and competent prices available at that point of time. Therefore, an element of profit in the invoices raised by third parties cannot be ruled out even though what was paid by the subsidiary to the assessee is the amount reflected in the invoice. Therefore, the fact that what has was paid by the subsidiary to the assessee was only the amount reflected in the invoices issued by the third parties, does not go to support the argument that the payments were only reimbursement of expenditure and there was no element of profit in those amounts. As the subsidiary had no technical expertise, the inevitable conclusion is that the assessee rendered technical services to its subsidiary and the payments are in the nature of fees for technical services;

(ii)        The subsidiary constituted a dependent agent PE (DAPE) of the assessee because de facto the assessee was carrying on the contract work on behalf of the subsidiary and if we pierce the veil of the assignment contract and go to the root, there is interlacing of activities and interlocking of funds between the assessee and the subsidiary in executing the dredging contract. There is a relationship of agency and a PE is created. ( A.Y. 2003-04)
Van Oord ACZ Marine Contractors BV v. ADIT (Chennai)(Trib.) www.itatonline.org

 S.9(1)(vi):Income deemed to accrue or arise in India –Royalty – Despite retrospective law By Finance Act 2012, “Royalty” is not taxable as DTAA prevails. (S. 40(a)(ia). 195 ) 
The assessee, a Mauritius company, made payment to Panamsat, USA, for hire of a “transponder satellite”. The AO held that the said hire charges constituted “royalty” and that the assessee ought to have deducted TDS u/s 195 and that as it had not done so, the amount was to be disallowed u/s 40(a)(ia). Before the Tribunal, the department argued that though as per Asia SatelliteTelecommunications Co. Ltd. (2011) 332 ITR 340 (Delhi)(High Court), the hire charges were not assessable as “royalty”, this verdict was no longer good law in view of the amendment to s. 9(1)(vi) by the Finance Act 2012 w.r.e.f. 1.4.1976 to provide that such hire charges shall be assessable as “royalty”. Held by the Tribunal:

(i) In Asia Satellite Telecommunications Co. Ltd. v. DCIT (2011) 332 ITR 340 (Delhi)(High Court) it was held that in order to constitute “royalty”, the payer must have the right to control the equipment. A payment for a standard service would not constitute “royalty” merely because equipment was used to render that service. A similar view was taken in Skycell Communications Ltd v.Dy. CIT (2001) 251 ITR 53 (Mad.)(High Court). In De Beers India Minerals  (www.itatonline.org)(Kar.) & Guy Carpenter & Co. Ltd. (www.itatonline.org) (Delhi)(High Court)  it was held that to “make available” technical knowledge, mere provisions of service was not enough and the payer had to be enabled to perform services himself. The department’s argument that the amendments by the Finance Act, 2012changes the position is not acceptable because there is no change in the DTAA between India and USA and the DTAA prevails where it is favourable to the assessee;

(ii) Even otherwise as the payment is made from one non-resident to another non-resident outside India on the basis of contract executed outside India, s. 195 will not apply as held in Vodafone International Holdings B.V. v. UOI (2012 ) 341 ITR 1 (SC). As s. 195 did not apply, no disallowance can be made u/s 40(a)(i);

(iii) Further, as prior to the insertion of s. 40(a)(ia) in AY 2004-05, payments to a resident did not require TDS, under the non-discrimination clause in the DTAA, the disallowance u/s 40(a)(i) in the case of non-residents cannot be made as held in Herbalife International India (P) Ltd (2006) 101 ITD 450 (Delhi)(Trib.), Central Bank of India & Millennium Infocom Technologies Ltd v. ACIT (2008) 21 SOT 152 (Delhi)(Trib). (A.Y. 2002-03)
B4U International Holdings Ltd v. DCIT (Trib)(Mum)www.itatonline.org

S.9(1)(vi):Income deemed to accrue or arise in India –Royalty –Information through internet-DTAA-India-Singapore- Subscription received by  Indian subscriber would be royalty. (S. 195,Art 12 )
The applicant is a Singaporean company engaged in providing social media monitoring services for a company, brand or product. It is a platform for users  to hear and engage with their customers brand ambassadors etc across the internet. The applicant offered services on charging a subscription. The clients who subscribed can log into its website to search on what is being spoken about  various brands and so on. The applicant raised the  two question  before the Authority ;
(a) Whether the amount received by offering subscription bases services is taxable in India?
(b) Whether tax is required to be deducted from such amount by the subscribers  who are resident in India?
The Authority for Advance Rulings held that the applicant being engaged in providing social media monitoring service by generating reports with analytics on the basis of the inputs given by the clients which amounts to business of gathering collating and making available or imparting information concerning industrial and commercial knowledge , experience and skill and therefore , the subscription received by it form the Indian subscribers would be  royalty in terms of clause (iv) of Explanation 2 to section 9(1) (vi) as well as para 12 of the India –Singapore DTAA , consequently  tax is required to be deducted in terms of section 195 from the payment made to it by the subscribers who are resident in India.
Thoughtbuzz (P) Ltd. (2012) 250 CTR 1 / 71 DTR 105 (AAR)   

S.9(1(VI ): Income deemed to accrue or arise in India-  Royalty- Deduction at source- DTAA-India- Canada- Rendering of services is not “supply of knowledge or information” to be “royalty”. ( S. 40 (ia), 195, art. 12 ) 
The assessee was engaged as a consultant by Essar Oil Ltd to provide consultancy services in connection with sale of its energy business. As the consultancy required high level technical and industry knowledge, the assessee engaged KPMG LLP, USA & KPMG Consulting LP, Canada for rendering professional services and paid Rs. 20 lakhs & Rs. 13 lakhs respectively. The AO held that the said fees constituted “royalty” u/s 9(1)(vi) & Article 12 and as there was no TDS, the amount was to be disallowed u/s 40(a)(i). This was reversed by the CIT(A). On appeal by the department, held dismissing the appeal:

The professional services rendered does not fall in the definition of “royalty” in Article 12 of the DTAA. It was purely a professional service for consultancy which were rendered outside India and not for supply of scientific, technical, industrial or commercial knowledge or information. Thus, there was no liability to deduct TDS and consequently no disallowance u/s 40(ia) can be made. (A.Y. 2001-02)
KPMG India Pvt. Ltd v. DCIT (Mum.)(Trib) www.itatonline.org.

  1. 9(1)(vii)(b): Income deemed to accrue or arise in India- Fees for technical services-Export sales is not a “source of income outside India”. Expenditure on fully convertible debentures is deductible
    The assessee, an Indian company, paid Rs. 14.71 lakhs to a US company for ‘KEMA’ certification which was necessary to enable it to sell its products in the European markets. The assessee claimed that though the said amount was ‘fees for technical services’ u/s 9(1)(vii), it was paid “for the purpose of earning income from a source outside India” (i.e. the exports) and so it was not taxable in India u/s 9(1)(vii)(b). The AO & CIT (A) rejected the claim though the Tribunal upheld it. On appeal by the department, held  reversing the Tribunal:

(i) S. 9(1)(vii)(b) provides that fees for technical services payable by a resident in respect of services utilised in a business or profession carried on by such person outside India or for the purposes of making or earning any income from any source outside India shall not be taxable in India. The term “source” means not a legal concept but one which a practical man would regard as a real source of income. It is a spring or fount from which a clearly defined channel of income flows. The assessee manufactured goods in India and concluded the export contracts in India. The source of income is created the moment the export contracts are concluded in India. The customer located outside India is not the source of the income though he is the source of the monies received. There is a distinction between the source of income and the source of receipt of monies. In order to fall u/s 9(1)(vii)(b), the source of the income, and not the receipt, should be situated outside India. Further, though the profits arise both from the manufacturing activity and from the sale, bifurcation of the fees is not permissible (CIT v. Aktiengesllschaft Kuhnle  Kopp  and Kausch (2003 )  262 ITR 513 (Mad) not followed); (A.Y. 2005-06)
 CIT v. Havells India Ltd (Delhi) ( High Court) www.itatonline.org

S.9(1)(Vii): Income deemed to accrue or arise in India-Fees for technical  services-Managerial services-DTAA- India- France-Article 7 &13- Payment made for advisory  services is fees for technical services hence tax there on is not to exceed 10 percent of the gross amount of fees and tax deduction at source under section 195(1) has to be on that basis. (S.90, 195) 
The applicant and its parent company in France, are both in the business of manufacturing electrical components. Under the service agreement, Mersen  has undertaken to provide the applicant with services  in the nature of assistance, professional and administrative consultation and  training. The issue raised for consideration was whether the payment by the applicant is towards fees for technical services as per art 13(4) of the India-French DTAA read with the protocol to the said DTAA. If  yes what is the rate of tax to be deducted under section 195(1). The Authority for Advance ruling held that advisory services rendered by a French company to the applicant an Indian company, under service agreement in the field of management, international  relationship, finance financial control and accounting, taxation and law insurance ,purchase and sales environment and safety and human resources issues are in the nature of managerial as well as consultancy services which are made available  to the applicant and therefore ,payment made by the applicant to the French company towards such advisory services is  fees for technical services in terms of art 13 of India – France DTAA read with Protocol thereto . The Authority also held that in terms of para 2 of Art 13, tax thereon is not to exceed 10% of the gross amount of fees and consequently TDS under section 195(1) has to be on that basis.
Mersen India (P) Ltd. ( 2012) 70 DTR 121 / 249 CTR 345 (AAR) 

S.9(1)(vii): Income deemed to accrue or arise in India-Fees for technical  services- Make available-Fees received for IVTC  services are  chargeable to tax as fees for technical services under section 9(1)(vii). (S.90, 139 195)
The applicants are engaged in the business of inspection, verification, testing and certification (IVTC)  services .The applicants approached the Authority for Advance  Rulings  on the question whether they are liable to be taxed on these transactions in India  as “fees for technical services”  or “royalty “ in the absence of PE in India, whether there was obligations on the Indian customer to with hold the tax under section 195, whether the applicants have an obligation to file a return of income . The Authority for Advance Rulings held that payments received or receivable by the applicants in connection with IVTC services rendered to Indian customers are chargeable to tax as fees for technical services  under section 9(1) (vii) but not under the provisions of the article on “Royalties and fees for technical services” under respective DTAAs or when the said article is read with the most favoured  nation clause;  Since technical services do not “make available”  technical knowledge, experience, skill knowledge  or process while preparing reports. Since the applicants do not have a tax presence in India , Indian customers are not required to with hold taxes under section 195, however the applicants are bound to file returns in India under section 139.
XYZ ( 2012) 249 DTR 241/ 206 Taxman 494 (AAR ) 

  1. 9(I) (Vii)(b): Income deemed to accrue or arise –Fees for technical services- Payment for Inspection, Verification, Testing and Certification (IVTC) services is chargeable as fees for technical services.(S. 139, 195 )
    Section 9(1)(vii)(b) shows that, when a resident of India is engaged in a business carried on outside India or earns any income from any source outside India, makes a payment by way of a fee falling under the definition of FTS, then such payment despite being in the nature of FTS is out of charge to tax in India. In the instant case, the payment received in connection with Inspection, Verification, Testing and Certification (IVTC) services are taxable as FTS u/s 9(1)(vii) and exceptions u/s 9(1)(vii)(b) are not available. As the applicant has tax presence in India. Indian Customers are required to with hold taxes under section 195 at the rate in force mentioned in the Finance Act for the relevant year on the payment made / proposed to be made to the applicant. The applicant has taxable income in India it is required to file to tax return under the provisions of Section 139.
    XYZ Ltd., In re (2012) 206 Taxman 416  (AAR)
  2. 10(20): Exempt income-Local authority-U.P. Jal Nigam is not a local authority and not entitled to exemption-(Constitution of India Arts 243(d) 243P &245 , General clauses Act  S.3) 
    There was conflict of opinion between the Judges of Division Bench  whether the U.P. Jal Nigam  which is created  by the State Legislatures  under U.P.Water supply and Sewerage Act  1975  is not a “local authority” for the purpose of section 10 (20) even prior to insertion of the Explanation  by the Finance Act, 2002, the matter was referred to third  Judge . The third Judge also held that U.P.Nigam established under the U.P. Water Supply and Sewerage Act ,1975 is not a local authority for the purpose of section 10 (20) even prior to insertion of Explanation there to by Finance Act , 2002 , therefore not entitled to exemption under section 10 (20). The Court held that Article 254 of the Constitution of India to the extent of repugnancy ,the provisions contained in section 10 (20) of the Income-tax Act shall prevail over the provisions of U.P. Water supply and Sewerage Act 1975 . (A.Y.2002-03).
    CIT v. U.P. Jal Nigam (2012) 70 DTR 65 / 249 CTR 467 (All.)(High Court)
  3. 10(23C) (iiiad) : Exempt incomes-Educational institution- term ‘existing’ – From construction period educational institution are held to be existing eligible for exemption 
    The main emphasis of the assessee is that expression ‘existing’ employed in section 10(23C)(iiiad) does not convey the meaning of actual functioning of the institution. The term ‘existing’ is associated with the society and not functionality of the institution. It was held in Doon Foundation (1985) 154 ITR 208 (Cal) and Sree Narayana Chandrika Trust (1995) 212 ITR 456 (Ker)that it is from construction period that the educational institution is existing and thus eligible for exemption. (A.Ys. 2002-03 & 2003-04)
    Nitya Education Society v. Jt. CIT (2012) 51 SOT 103 (Delhi)(Trib.)

S.10A:  Newly established undertakings- Free trade Zone-Splitting up-Allocation of expenses-Support services -Acquiring a division  on slump basis cannot be considered as splitting up or reconstruction, exemption under section 10A cannot be denied. Support services allocation on the basis of turnover is justified.
Assessee acquired  a software division of Indian Organic Chemicals Ltd  as a going concern on a slump sale basis. Assessee made claim under section 10A. The Assessing Officer rejected the claim on the ground that (1) if an STP undertaking was already engaged in manufacture of software programs before 1st  April 1994 the benefit of section 10A cannot be extended  (ii), it should not be formed splitting  up or reconstruction of a business already in existence  and it should not be formed by the transfer to new business of plant and machinery previously used for any purpose. The Assessing Officer also held that the undertaking was carrying on same business before 1995-96. The finding of Assessing Officer was confirmed  by Commissioner (Appeals). On appeal to the Tribunal the Tribunal the Tribunal held that the entire software division was transferred as a going concern by an agreement dated  19th October, 1994. The soft ware unit has two sources of income viz. from the non STP activity and the STP activity . The assessee has made a claim only in respect  Activity  which was set up only on 24th May, 1994, hence  the requirement of commencement of  production on or after 1st  April 1994 was fulfilled. The Court also affirmed the view of Tribunal.  As regards concept of reconstruction  of a  business  implies that  the original business is not to cease functioning and its identity is not lost. Where  the ownership of a business or undertaking changes hands that would not  be regarded as reconstruction. As regards the splitting up of a business, the relevant test is whether an undertaking is formed by splitting  up of a business already in existence. Unless the formation of the undertaking takes place by the splitting  up of a business  already in existence, the negative prohibition would not be attracted. In the present case, the  entire  business of the software undertaking was transferred to the assessee. The undertaking of the assessee was not formed by the splitting up of the business. Tribunal was therefore justified in holding that the assessee was entitled to exemption in respect of profits derived from the STP  undertaking on the basis that conditions of section 10A(2)  are fulfilled. As regards allocation of expenses the Court held that the Tribunal was justified in remanding the case with the direction allocate interest and depreciation of the support services division in the ratio of turnover   between the section 10A  and non  section  10A  activities. (A.Y. 1998-99).
CIT v. Sonata Software Ltd. (2012) 343 ITR 397 / 249  CTR 441 / 70 DTR 369 (Bom.) (High Court)     

S.11: Charitable purpose-Members club- Providing cultural and educational activities for its members does not detract from the position that it advances a general public utility. [S.2(15)]
The assessee is a trust registered under the Bombay Public Trusts Act, 1950, and also registered under  section 12 of  the  Income-tax Act. The Assessing Officer held that the assessee being mutual association computed the income as not charitable. In appeal the Commissioner (Appeals) confirmed the view of Assessing Officer. Tribunal reversed the finding of Commissioner (Appeals) and held that the activities of the club being to encourage or promote and to advance games, sports, athletic activities and cultural activities of the assessee  which are of general public  utility hence the requirement of section 2(15) is met and entitled to exemption. On appeal by the revenue the High Court also confirmed the order of Tribunal and held that the fact that the assessee provides services to its members does not detract from the position that it advances a general public utility. (A.Y. 1996-97)
DIT v. Chembur  Gymkhana (2012) 70 DTR 163 (Bom.)(High Court) 

S.11: Charitable or religious purposes- Exemption – Charitable Trust – Development Authority engaged in charitable activities is entitled to exemption if books of accounts are maintained for construction business
The grant of registration under section 12AA is not an empty formality as it has to be granted after satisfying that the objects are charitable in nature. The assessee, development authority is engaged on charitable activities and construction business of the assessee is merely incidental to the main object of town planning and therefore is entitled to exemption under section 11 if separate books have been maintained for construction business in accordance with the stipulation in section 11(4A). (A.Y. 2007-08)
ITO v. Moradabad Development Authority (2012) 145 TTJ 746 (Delhi)(Trib.) 

  1. 12A:Trust or institution-Charitable purposes-Contributions-Rejection of registration by Assessing Officer is without jurisdiction. 
    Once the registration is granted under section 12A by the Commissioner, the AO as subordinate authority cannot cancel the registration. The commissioner can cancel the registration on satisfaction of conditions laid down in Section 12AA(3). Thus, cancellation of registration under section 12A and completion of assessment under AOP by the AO is  without jurisdiction. (A.Y. 2005-06)
    Dy. DIT v. Kuttukaran Foundation (2012) 51 SOT 175 (Cochin)(Trib.)
  2. 12A:Trust or institution-Charitable purposes-Contributions-Registration – Merely a surplus in one year over gross receipts not ground for rejecting registration 
    The assessee’s application under section 12AA for grant of registration under section 12A was rejected on the ground that assessee had shown a surplus over gross receipts in a particular year; that aims and objectives were not in charitable nature. Therefore, merely a surplus in one year cannot be a consideration for rejecting an application for grant of registration under Section 12A.
    Make the Future of Country Education Society v. Dy. CIT (2012) 51 SOT 98 (Delhi) (Trib.) 

S.14A: Business expenditure-Disallowance-Exempt income – Firm- Partner -Interest-Disallowance  cannot made if there is no tax-free income. [S. 10(2A, 36(I)(iii)] 
The assessee, a partner in a firm, borrowed funds and advanced it to the firm on terms that the firm would pay interest if it made a profit. For one year, the firm paid interest which was offered as income by the assessee while for the second year it did not pay interest as it made a loss. The assessee claimed the interest paid on the borrowing as a deduction u/s 36(1)(iii). The AO disallowed the claim on the ground that as the borrowings had been invested in the firm and the income from the firm was exempt u/s 10(2A), the interest expenditure was not allowable u/s 14A. This was reversed by the CIT (A). On appeal, the Tribunal upheld the CIT(A) on the ground that as there was no exemption claimed u/s 10(2A) by the assessee and there was no tax-free income, s. 14A could not apply. The department filed an appeal in the High Court in which it argued that as the profits derived by the assessee from the firm was exempt u/s 10(2A), the interest on the borrowed funds used to invest in the firm was disallowable u/s 14A.  The court  dismissing the appeal, held :
In so far as Question (A) is concerned, on facts we find that there is no (tax-free) profit for the relevant assessment year. Hence the question as framed would not arise.
CIT v. Delite Enterprises (Bom.)( High Court) www.itatonline.org

  1. 14A: Business expenditure – Disallowance- Exempt income- Rule 8D prospective from AY 2008-09 
    Rule 8D is applicable prospectively w.e.f. A.Y.2008-09 and therefore, disallowance u/s 14A could not be made with reference to R. 8D in the relevant AY 2004-05; neither the assessee nor the revenue having challenged the estimation of the amount disallowable under section 14A as made by the AO @ 1% of the total exempt income, it is not open to the Tribunal to go into question of quantification of said amount disallowable and, therefore, the amount disallowable under section 14A is sustained to that extent. (AY 2004-05)
    Dy. CIT v. Philips Carbon Black Ltd. (2012) 146 TTJ 175( TM )(Kol)(Trib))
  2. 14A:Business expenditure-Disallowance-Exempt income – Firm- Partner – Depreciation – Disallowance applies to partner’s share of profits. Depreciation is not “expenditure” & cannot be disallowed u/s 14A. (S.10(2A), 28(v), 32 )
    The Special Bench had to consider two issues: (i) given that a firm pays tax on its profits, whether the share of profit received by a partner from the firm, which is exempt in his hands u/s 10(2A), can be said to be not “tax-free” so as to not attract s. 14A & (ii) whether depreciation can be said to be “expenditure” so as to be disallowable u/s 14A. Held  by the Special Bench:
    (i)         Though a firm and its partners are not different entities in general law, under the Act, they are treated as separate entities. The salary and interest paid by the firm to the partners is deductible in the hands of the firm and taxable in the hands of the partners u/s 28(v). The balance profits are taxed in the hands of the firm and exempt in the hands of the partners u/s 10(2A). As s. 10(2A) provides that the share of profit of the partner shall not be included in his total income, it is not possible to hold that the share income is not excluded from the total income of the partner because the firm has already been taxed thereon. When s. 10(2A) speaks of its exclusion from the total income it means the total income of the person whose case is under consideration i.e. the partner. As the share income is excluded from his total income, s. 14A would apply and any expenditure incurred to earn the share income will have to be disallowed (Dhamasingh M. Popat v. ACIT(2010 )127 TTJ 61 (Mum) approved; Sudhir Kapadia & Hitesh Gajariareversed);
    (ii)        However, s. 14A applies only to “expenditure” incurred by the assessee. Depreciation u/s 32 is an “allowance” and not “expenditure” and so cannot be disallowed u/s 14A (Hoshang D. Nanavati approved) (A.Y. 2006-07)
    Vishnu Anant Mahajan v. ACIT (SB)(Ahd)(Trib). www.itatonline.org.

S.22: Income from house property – Business income- Builder-Property dealer- Stock in trade-Unsold flats being house property rental income should be assessed as income from house property  and not as business income ( S. 28(i) )
The assessee is a property developer and builder , in course of its business activities constructed a building for sale , in which some flats  were un sold. During the year the assessee received rental income from letting out of the unsold flats which was  shown as stock in trade in the balance sheet. It disclosed  the rental income from letting out of the unsold flats as income from  house property  and claimed  the statutory  deduction. The  Assessing Officer held that in the wealth tax proceedings the assessee had shown the unsold flats a stock in trade and not taxable for the purpose of wealth tax. The Assessing Officer assessed the rental income as business income. Commissioner (Appeals) has accepted the contention of assessee. On appeal to the Tribunal by revenue, the Tribunal  restored the order of Assessing Officer. The Assessee filed an appeal to the High Court. The High Court held that under the Act the income of an assessee is one and various sections of the Act direct  the modes in which the income is to be levied. No one of the sections can be treated  as general or specific for the purpose of any one particular source  of income. They all specific and deal with various heads in which an item of income, profits and means of an  assessee falls. These sections are mutually exclusive and where an item of income falls specifically  under one head, it has to be charged under that head and no other. On the facts since  unsold  flats being house property, rental should  be assessed under the head ‘income from house property’. Appeal is decided in favour of assessee. (A.Y. 1998-99)
Azimganj Estate (P) Ltd. v. CIT (2012) 206 Taxman 308 (Cal.)(High Court)            

  1. 23: Income from house property – Notional Interest – Not to be added as the rent received by the assessee more than the reasonable expected value, the actual rent received should be the annual value of the property under section 23(1)(b ).
    The assessee had shown the actual rent received, which was far more than the municipal ratable value. As the rent received by the assessee was far more than the sum for which property might reasonably be expected to let from year to year, the actual rent received should be the annual value of the property under section 23(1)(b). Notional interest on interest free security deposit / rent received in advance should not be added to the same in view of the decision of Bombay High Court in case of J.K. Investors (2001) 248 ITR 723 (Bom). (A.Y.2004-05)
    ACIT v. Monisha R. Jaisingh (2012) 51 SOT 182 (Mum.)(Trib.)
  2. 28(i):Business income- Business loss-Amalgamation- Advances to employees- Security deposit- Advances to employees by amalgamating company which could not be recovered allowable as business loss. Security deposit for obtaining lease of business premises is not allowable as a business loss.
    The assessee company was Amalgamated with Gangeshwar Ltd. As per approved scheme the assessee wrote off unrecoverable advances paid to employees and security deposits given to land lords for lease of premises. The Assessing Officer disallowed the expenses written off. In appeal the Commissioner (Appeals) allowed the  amount written off as business loss under section 28 of  the Income-tax, which was confirmed by the Tribunal. On appeal to the  High Court by revenue the Court held that, advances were given to the persons who had been employed by the assessee company and if they  became irrecoverable, it would clearly be treated as business loss. As regards the security deposits were not given in the ordinary  course of business. These were given for securing the premises on rent, albeit for the purpose of carrying on business therein, hence the amount written off was not a revenue loss and hence not allowable as deduction. (A.Y. 2000-01)
    CIT v. Triveni Engineering and Industries Ltd. (2012) 343 ITR 245 / 250 CTR 277 (Delhi)(High Court)     
  3. 28(i): Business Income – Lease- Hostel facilities-Lease of hostel building with provision for hostel facility  is assessable as  business income 
    Where the assessee had constructed hostel for being let to lessee and under agreements, it had undertaken to provide hostel facilities to the lessee, entire income, the net of expenses, has to be treated as business income; even if lease agreement could not be considered in isolation, i.e. as independent and apart from the other agreements, all of which are qua and toward a single arrangement for the provision of hostel facilities to, the lessee. (A.Ys.2004-05 & 2006-07)
    Kenton Leisure Services Pvt. Ltd v. DCIT (2012) 71 DTR 329 / 146 TTJ 589 (Cochin)(Trib.) 
  4. 32:  Depreciation – Sale and lease back -Sale & lease back transactions are not “sham” transactions
    The assessee purchased an igni-fluid boiler from its sister concern and on the same day leased it back. The AO & CIT(A) relied on McDowell & Co Ltd v.CTO (1985)154 ITR 148 and held the sale and lease back arrangement to be a sham & camouflage for a loan by the assessee to the sister concern and rejected the assessee’s claim for depreciation. However, the Tribunal allowed the claim on the ground that the transaction was not a “sham”. On appeal by the department, held dismissing the appeal:

(i) Though the machinery was embedded and was in possession of the seller, the assessee took constructive delivery of the machinery. As the law recognises constructive delivery as an acceptable mode of delivery and possession, physical possession is not necessary. Thus there is no material on record to show that the sale was a sham transaction and so its genuineness cannot be questioned. As regards the lease, the fact that some part of the funding came from Wipro Finance & that the lessee paid directly to Wipro in satisfaction of the assessee’s obligation does not make the agreement a sham because it is a matter of pure commercial understanding between the parties as to the modalities of lease rental payment. Given the freedom to enter into agreements with parties and guided by commercial considerations, even to invoke the theory of tax evasion, the Revenue must have sufficient material to draw an inference of what had been shown as an understanding on an agreement between the parties, is not, in fact, so.
(ii) In Vodafone International Holdings (2012) 341 ITR 1 (SC), McDowell was considered extensively and it was held that there is no conflict between McDowell & Co. Ltd. vs. Commercial Tax Officer (1985) 154 ITR 148 (SC);   UOI v. Azadi Bachao Andolan & Anr.  (2003) 263 ITR 706 (SC) & Mathuram Agarwal 8 SCC 667. It was pointed out that the task of the Revenue / Court is to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt a dissecting approach. It was pointed out that “the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment / saving device but that it should apply the “look at” test to ascertain its true legal nature. Genuine strategic tax planning has not been abandoned by any decision of the English courts till date.” It was held that while colourable devices cannot be a part of tax planning, it cannot be said that all tax planning is illegal /  impermissible. Applying this ratio, the mere fact that what had been purchased had been leased out to the vendor or that vendor had undertaken to pay the hire charges on behalf of the assessee to the hire purchase company does not per se lead to a conclusion that the transaction is a sham one.
CIT v. High Energy Batteries (India) Ltd. (Mad)(High Court) www.itatonline.org

S.32:Depreciation – Tippers-Road transport vehicle-Tippers used by assessee in its construction work is entitled to depreciation at 40% .
Assessee is in the business of civil construction and contract work. The assessee claimed depreciation on Tippers, vibrator and vibrator soil compactor at 40% because the said vehicles are registered under Motor Vehicles Act, 1988  as road transport vehicles. The Assessing Officer allowed the depreciation at 15% as applicable to plant and machinery. In appeal Commissioner (Appeals) and Tribunal accepted the contention of the assessee. On appeal by the revenue , the Court held that Tippers , vibrator and vibrator soil compactor registered  as  road transport  vehicles under the Motor Vehicles Act , 1988 are commercial vehicles  entitled to depreciation @ 40 percent  and not @ 15 percent applicable to plant and machinery. (A.Ys. 2006 -07 & 2007-08)
CIT v. Rakesh Jain (2012) 70 DTR 1 (P&H) (High Court)      

  1. 32: Depreciation – Lease-merely because the vehicles were used by the lessee in their business, the assessee cannot be denied the depreciation.
    Assessee engaged in the business of leasing, producing bills showing consideration paid by him for acquiring vehicles as also lease agreement was owner of vehicles entitled to depreciation; merely because the vehicles were used by the lessee in their business, the assessee cannot be denied the depreciation. (A.Y. 1996-97)
    Prakash Leasing Ltd. v. Dy. CIT (2012) 71 DTR 156 (Kar.) (High Court)
  2. 32: Depreciation –Intangible- Website- Website is not a software hence  CBDT Notification No. 890(E), dated 26/9/2000 cannot be applied to section 32 hence  depreciation is allowable at the rate of 25% as intangible asset.
    The CBDT Notification No. 890(E), dated 26/9/2000 including website services in software. Notified definition for purpose of sections 10A, 10B and 80HHE is for the specific purpose of those sections and cannot be imported for the purposes of depreciation under section 32 or Old Appendix- I applicable for A.Y. 2003-04 to 2005-06. Thus, website cannot be treated as software. It would fall under the definition of intangible asset on which depreciation at the rate of 25% is allowed. (AY 2004-05)
    Makemytrip (India) P. Ltd v. Dy. CIT (2012) 51 SOT 19 (Delhi)(Trib.)
  3. 32A:Investment Allowance- Machinery and plant-Job work-Investment allowance is allowable in respect of machinery and plant used in job work.
    The assessee is in the business of manufacturing of forging products. They also undertake job work from Republic forge and other companies. The assessee claimed the investment allowance under section 32A. The Assessing Officer disallowed the investment allowance on the ground that the assessee is not manufacturing the products and they are engaged only on job works. The Commissioner (Appeals) also confirmed the view of Assessing Officer. On further appeal the Tribunal allowed the appeal of assessee. On appeal by revenue the Court  up held the order of Tribunal and held that  investment allowance can be claimed in respect of machineries and plant used in job work ( A.Ys. 1983-84, 1984-85)
    CIT v. Firma Hi-Tech (2012) 343 ITR 507 (AP)(High Court)   
  4. 36(1)(iii):Deductions-Interest on borrowed capital-Wholly owned subsidiary – Borrowed funds  not used  by the assessee for purposes of investment in the shares of subsidiary or for making advances to RIL hence  disallowance was  not justified.
    The assessee was engaged in the business of providing telecommunication infrastructure which mainly consisted of a Pan India Fibre Optic Network R. Ltd., wholly owned subsidiary of the assessee which is engaged in the business of providing telecommunication services. The CIT(A) and Tribunal held that the investment made by the assessee in its wholly owned subsidiary and the interest free advances given to RIL were for furthering the business interest of the assessee apart from their concurrent finding of fact that borrowed funds were not used  by the assessee for purposes of investment in the shares of subsidiary or for making advances to RIL. There was no justification to make pro-rata disallowance out of deduction which is otherwise allowable u/s 36(1)(iii). (A.Y. 2003-04)
    CIT v. Reliance Communications Infrastructure Ltd (2012) 71 DTR 237 / 207 Taxman 319 (Bom.)(High Court)

S.37(1):Business expenditure-Capital or revenue- Software expenditure- Expenditure for indigenization of software is revenue expenditure.
The assessee had undertaken expenditure for indigenization of software . The Tribunal noted that software is a product subject to high absolescence hence the same is allowable as revenue  expenditure. High Court affirmed the view holding that no substantial question  of law arises. (A.Y. 1998-99)
CIT v. Sonata Software Ltd. (2012) 343  ITR 397 / 249 CTR 441 / 70 DTR 369 (Bom.)(High Court)

S.37(1): Business expenditure- Fully convertible  debenture   Expenditure on issue of debentures is allowable as deduction.
Expenditure on fully convertible debentures could not be treated as expenditure on equity and was deductible even though the time and conversion price was fixed (CIT v. Secure Meters Ltd. (2003) 321 ITR 611 (Raj)(SLP dismissed) followed)
CIT v. Havells India Ltd (Delhi) (High Court) www.itatonline.org

 S.37(1): Business expenditure- Capital or revenue- Construction of flyovers, pedestrain facilities – Expenditure on construction of flyovers, is of revenue expenditure.
The assessee was given license to conduct and carry on liquor trade in Delhi. On the basis of the minutes of the meeting  construction of flyovers etc was a precondition or an obligation imposed and had to be complied with to enable the assessee to conduct business of sale of country liquor in Delhi. The Assessing Officer has held that the said expenditure is capital in nature. Tribunal held that the said expenditure is revenue in nature. On appeal by revenue the Court held that  the assessee a corporation established by the Government  NCT Delhi having constructed flyovers, etc as a precondition or obligation imposed by Delhi Administration  for permitting it to carry on country liquor trade in Delhi  which were to be transferred to the Delhi Government, no enduring benefit or advantages has accrued to the assessee and therefore, expenditure incurred by the assessee on the construction of flyovers etc. was revenue expenditure and not capital expenditure. (A.Ys. 1990-91 & 1991-92 )
CIT v. D.T.T.D.C. LTD ( 2012) 71 DTR 115 / 206 Taxman 507 (Delhi)(High Court) 
D.T.T.D.C. LTD v.CIT ( 2012) 71 DTR 115 / 206 Taxman 507 (Delhi)(High Court)

S.37(1): Business expenditure- Education expenses of director- Expenditure could not be regarded as wholly and exclusively incurred for purpose of business hence not allowable.
The assessee company incurred certain  expenditure on education of one of its directors , who had undergone a course at United Kingdom from University of Nottingham , and claimed  deduction of the same as business expenditure. The Tribunal held that the expenditure in question was not expenditure wholly and exclusively incurred for the purpose of business. On appeal the High Court held that expenditure could not be regarded as wholly and exclusively incurred for the purpose of business. Accordingly the appeal was dismissed. (A.Y. 2006-07)
Natco Exports (P) Ltd. v. CIT ( 2012) 206 Taxman 491 (Delhi) (High Court) 
CIT v. Career Launcher India Ltd. (2012) 71 DTR 161 / 207 Taxman 28 / 250 CTR 240 (Delhi)(High Court)

  1. 37(I):Business expenditure-Expenditure-Know–how–Preliminary survey- agreement providing for preliminary survey in respect of existing facilities of the assessee and feasibility of proposed project , as no transfer of technical know-how  section 35AB cannot be made applicable ,however the expenditure is allowable under section 37(1). ( S. 35AB ).
    The agreement provided for a preliminary  survey in respect of the existing facilities of the assessee and on feasibility of a proposed project. Commissioner (Appeals) and Tribunal held that, as there was no transfer of know how involved  provisions of section 35AB cannot be applicable, however  the same is  deductible u/s 37(1). On appeal to the High Court, also confirmed the view of Tribunal (A.Y. 1994-95)
    CIT v. Raymond Ltd. (2012) 71 DTR 258 (Bom.)(High Court))
  2. 37(1): Business expenditure – Capital or  revenue

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