- Assessment year 1992-93 - Whether it is not right to say that provisions of sections 36 and 43 are to be read in isolation - Held, yes - Whether in terms of Explanation 8 to section 43(1), interest on capital borrowed for acquisition of an asset for period before asset is first put to use is to be added towards its actual cost and for period thereafter it is not permitted to be added towards its actual cost - Held, yes - Whether language of section 43(1), Explanation 8, makes out no distinction in acquisition of an asset when a new business is being set-up or when expansion is being carried out - Held, yes - CIT v. Vardhman Polytex Ltd. (Punj. & Har.) (FB)

Appellate Tribunal

Powers of

- Assessment year 1994-95 - Whether application for rectification under section 254(2) has to be made by an aggrieved party within four years from date of order passed by authority concerned - Held, yes - Whether mere use of expression ‘fraud’ in application filed under section 254(2) by assessee does not take case of assessee outside purview of section 254(2) - Held, yes - Ajit Kumar Pitaliya v. ITO (MP)

Assessment

Additions to income

- Assessment year 2001-02 - Assessee was engaged in manufacturing herbal products - During relevant accounting year, it physically destroyed some stocks of perishable goods, and, correspondingly, value of these stocks was written off in its accounts - As assessee was unable to explain discrepancy in accounts, Assessing Officer made a lump sum addition of Rs. 5 crores to income of assessee - Tribunal though found that assessee had not carried out any sales outside books of account, yet sustained an ad hoc addition of Rs. 3 crores - Assessing Officer as well as Tribunal had not given any basis for making impugned addition - Whether matter was to be remitted to Assessing Officer to consider entire issue afresh - Held, yes - Herbalife International India v. CIT (Delhi)

Time-limit for completion of

- Assessment year 1989-90 - Whether though no time-limit is prescribed for exercise of power under section 153(3), yet it should be exercised within a reasonable time - Held, yes - Tribunal remanded matter to Assessing Officer for fresh consideration - Assessee made several representation but Assessing Officer did not responded - After six years of order of Tribunal, Assessing Officer initiated assessment proceeding - Whether assessment proceedings initiated by Assessing Officer after a lapse of six years could not be allowed to continue when delay was inordinate and unexplained - Held, yes - M. Srinivasa Rao v. Asstt. CIT (Mad.)

Business disallowance

Cash payment exceeding prescribed limits

- Whether where assessee had not been able to show that there were some exceptional reasons for it to make payment in cash, Tribunal was justified in upholding disallowance of said expenditure by invoking provisions of section 40A(3) - Held, yes - Jhunjun Wala & Co. v. CIT (Delhi)

Charitable or religious trust

Denial of exemption

- Assessment years 1976-77 and 1977-78 - Whether bonus shares received by a trust cannot be said to be funds invested by trust for purposes of section 13(4) - Held, yes - Whether it is not possible to read section 13(3) as bringing within fold of term prohibited persons, an HUF, which is a taxable entity by itself - Held, yes - Whether even if property of trust is being held for benefit of yet to be born person, it cannot be said that requirement of section 13(2)(h), read with section 13(3), is not met - Held, yes - Whether death of a spouse would result in ceasing of legal capacity of that spouse - Held, no - CIT v. Narinder Mohan Foundation (Delhi)

Exemptions of income from property held under

- Assessment years 1997-98 and 1998-99 - Assessee trust claimed exemption - Assessing Officer held that amount so accumulated or set apart was not invested by assessee as provided under section 11(5) and denied exemption - Tribunal had observed that since assessee had not complied with provisions of Foreign Contribution (Regulation) Act, 1976, an order was passed under section 12 thereof, prohibiting bank in which amount was deposited from dealing with it and, consequently, no income was received by assessee - Whether assuming that income was received by assessee even then, because of supervening facts, namely, that an order was passed under section 12 of 1976 Act prohibiting utilization of amount, assessee could not have utilized amount for purpose for which it was accumulated; moreover, assessee could not have been expected to violate law and utilize amount disregarding a prohibitory order -Held, yes - Whether, therefore, Tribunal was justified in reversing view of Assessing Officer - Held, yes - DIT v. Mitsui & Co. Environmental (Delhi)

- Assessment years 1997-98 and 1998-99 - Assessee, a charitable trust, filed an application in terms of rule 17 for permission to accumulate certain sum in relevant assessment years - It was stated in application that amount would be utilized for objects of trust - Assessing Officer rejected said application on ground that purpose of accumulation was not specified, but only mentioned in a general manner, and, therefore, primary condition of section 11(2) was not fulfilled - Whether Assessing Officer was justified - Held, no - DIT v. Mitsui & Co. Environmental (Delhi)

Circulars and Instructions

- Circular No. 700, dated 23-3-1995

Deductions

Royalty, etc., from certain foreign enterprises

- Assessment year 1996-97 - Whether Circular No. 700, dated 23-3-1995 makes it clear that key element in section 80-O is not so much location where services are utilised but fact that it is rendered to an entity outside India - Held, yes - Assessee entered into an agreement with ‘W’ for providing consultancy services against consultancy fee payable in US Dollars - It was to support W’s operations located at Faridabad, India - Assessing Officer denied deduction under section 80-O since no services had been rendered outside India - Whether Commissioner (Appeals) was right in holding that even though services may be utilized in India, by foreign recipient of services, it would still qualify for deduction under section 80-O - Held, yes - CIT v. Eicher Consultancy Services Ltd. (Delhi)

Discovery, production of evidence power regarding

- Assessment year 1984-85 - Assessee firm was carrying on business as commission agent in raw hides and skins - Said goods were brought to market by traders and were sold through commission agents by paying certain specified commission - Assessee filed its return declaring certain amount as its total income as commission agent - Assessing Officer issued summons to ten traders under section 131(1) - In response to same, five traders appeared and gave evidence in favour of assessee that transactions with them were conducted by assessee on commission basis - However, remaining five traders did not appear because they could not be served with summons as they were residing outside State - Consequently, Assessing Officer assessed total income treating transaction with absentee traders as having been done by assessee in capacity of ‘trader’ and not as ‘commission agent’ - Whether Assessing Officer was justified - Held, no - Anis Ahmad & Sons v. CIT (SC)

Export markets development allowance

- Assessment year 1982-83 - Tribunal held that assessee was entitled to weighted deduction under section 35B on expenditure of Rs. 95,212, even though nature of assessee’s business was only to procure orders for export of goods - Whether since tax liability was not substantial, question under reference had to be returned unanswered - Held, yes - CIT v. Arvind Dumra Sons (Delhi)

Housing boards or authority

- Assessment years 1989-90 to 1992-93 - Assessee, a State Government undertaking, was incorporated under provisions of Companies Act and was engaged in promotion of industrial activities and making provision for infrastructure to industries - It claimed exemption under section 10(20A) - Whether since assessee was not an authority constituted in India by or under any law enacted either for purpose of dealing with and satisfying need for housing accommodation or for purpose of planning, development or improvement of cities, towns and villages, or for both, it could not claim benefit under section 10(20A), though it might come within ambit of later part of provisions of said section - Held, yes - CIT v. State Industries Promotion Corpn. of Tamil Nadu Ltd. (Mad.)

Income escaping assessment

General

- Assessment year 1999-2000 - Assessee raised various objections against reopening of assessment - However, without passing any separate order on said objections, Assessing Officer passed an assessment order - Whether since objections raised by assessee were not at all adverted to by Assessing Officer and no speaking order had been passed, impugned order was to be quashed directing Assessing Officer to consider objections and pass a separate speaking order - Held, yes - SICA Educational Trust (Regd.) v. Union of India (MP)

Income from house property

Chargeable as

- Assessment year 1999-2000 - Whether mere letting out property and earning income from it should be assessed only under head ‘Income from house property’ - Held, yes - Assessee-firm was engaged in constructing commercial complexes and running them as business centers - It also provided occupants services in nature of providing security, supervisor, etc., under an agreement and occupants had to pay service charges to assessee - Assessing Officer assessed entire receipt as income from house property and not under head ‘Business’ - Assessee’s case was that authorities should bifurcate receipts which also included service charges and quantified portion of receipts for rendering services and such apportioned amount should be assessed under head ‘Income from business’ or ‘Income from other sources’ - Whether since there was no proper consideration of details regarding providing services as well as amount received for same by authorities below, matter was to be remanded to Assessing Officer - Held, yes - A.R. Complex v. ITO (Mad.)

Income-tax Act, 1961

- Section 10(20A)

- Section 11

- Section 13

- Section 22

- Section 35B

- Section 36(1)(iii)

- Section 40A(3)

- Section 43(1)

- Section 80-O

- Section 131

- Section 139(8)

- Section 143

- Section 147

- Section 153

- Section 254

- Section 263

- Section 271(1)(c)

- Section 271D

- Section 282

Interest on borrowed capital

- Assessment year 1992-93 - Whether interest paid on capital borrowed for purpose of acquisition of an asset can be allowed as revenue expenditure only when such asset is first put to use and starts yielding income and not for any period prior thereto - Held, yes - Whether proviso to section 36(1)(iii) added by Finance Act, 2003, is merely clarificatory as it has made explicit what was already implicit - Held, yes - CIT v. Vardhman Polytex Ltd. (Punj. & Har.) (FB)

Interpretation of statutes

- Rule of purposive interpretation

- Rule of strict interpretation

Penalty

For concealment of income

- Assessment year 1985-86 - Whether where even on a detailed perusal of assessment order no satisfaction of Assessing Officer that penalty proceedings were required to be initiated against assessee was discernible, penalty proceedings could be sustained - Held, no - CIT v. H.L. Malhotra (Delhi)

- Assessment year 1997-98 - For block assessment pertaining to period prior to assessment year in question, Assessing Officer had disallowed assessee’s claim of interest on loan by rejecting assessee’s contention that it had taken a loan - For assessment year in question, assessee took same stand by claiming amount as loan - Assessing Officer disallowed interest and levied penalty under section 271(1)(c) - Whether since assessee’s stand in regard to loan was consistent with its stand taken in appeal in regard to block assessment, it could not be said that explanation on appeal by assessee was not bona fide and, therefore, there was no reason for Assessing Officer to conclude that assessee had concealed income or furnished inaccurate particulars - Held, yes - CIT v. Prakash Chandra Yadav (Delhi)

- Assessment year 1995-96 - Whether where from reading of assessment order it was not possible to discern any satisfaction recorded by Assessing Officer that penalty proceedings should be initiated, penalty proceedings could be sustained - Held, no - CIT v. Delhi Crockery House (Delhi)

For failure to comply with section 269SS

- Assessment year 1993-94 - Assessing Officer found that assessee had availed cash borrowings exceeding Rs. 20,000 for about 36 times during year - Considering assessee’s act to be in violation of section 269SS, Assessing Officer imposed penalty upon assessee under section 271D - Tribunal found that there was business exigency forcing assessee to take cash loans for purpose of honouring its cheque commitments; creditors were genuine persons and transactions were satisfactorily explained by assessee; and there was no revenue loss to State exchequer - Tribunal accordingly, set aside penalty - Whether Tribunal was justified - Held, yes - CIT v. Balaji Traders (Mad.)

Return of income

Interest for late filing of

- Assessment years 1986-87 and 1987-88 - Whether where Commissioner while rejecting assessee’s waiver of interest petition, had not considered various circumstances projected by assessee in its waiver petition and explanations offered on question of its financial difficulties and hardship faced, matter was to be remitted back to him for de novo consideration - Held, yes - Kanchipuram Silk Handloom Weavers’ Co-op. Marketing Society Ltd. v. CIT (Mad.)

Revision

Of orders prejudicial to interests of revenue

- Assessment year 1992-93 - Whether it is incumbent on Commissioner to consider explanations offered by assessee in response to show-cause notice issued under section 263 and on that basis to record his opinion/conclusion as to whether he still considered assessment order in question to be erroneous and prejudicial to interests of revenue and, if so, reasons therefor - Held, yes - Smt. Lila Choudhury v. CIT (Gau.)

Service of notice

General

- Whether where notice under section 143(2) sent by registered post at correct address of assessee had not been received back ‘unserved’ within period of thirty days of its issuance, there was a presumption under law that said notice had been duly served upon assessee within period of limitation - Held, yes - CIT v. Yamu Industries Ltd. (Delhi)

magazine

features

q taxation of capital gains

m.n. srinivasan, Jt. CIT (Retd.)

- Interpretation of section 54(2) - Does decision in the case of Rajesh Kumar Jalan need reconsideration ?

q tax administration

shyam sunder mansinghka, Advocate

- Absence of accountability - Harassment of taxpayers

q general concepts

ranvir singh, Jt. CIT (Retd.)

- Winnings from lotteries

q personal taxations

pl. subramanian, Chartered Accountant

- Tax paid by employer is non-monetary perquisite - Implications

q miscellanea

- Key to Literature

case digest/itat

q table of cases digested

Ranbaxy Laboratories Ltd. v. Addl. CIT (Delhi - Trib.)

q subject index to cases digested

Income-tax

Circulars and Instructions

- Instruction No. 3 of 2003, dated 20-5-2003

Transfer pricing

Computation of Arm’s length price

- Assessment year 2004-05 - Whether reference to Transfer Pricing Officer (TPO) under Instruction No. 3/2003, dated 20-5-2003 is mandatory in nature and it is not right to contend that in not referring question of determination of Arm’s Length Price to TPO as required by Instruction No. 3/2003, Assessing Officer has merely committed a procedural error - Held, yes - Whether in determination of Arm’s Length Price, specific characteristics of transaction, of property transferred or services provided are required to be seen as a first step and, thereafter, functions performed, assets utilized or risk assumed (FAR) would have to be considered - Held, yes - Whether initial burden to prove that international transaction was carried out at arm’s length price is on taxpayer - Held, yes - Whether tested party should be party in respect of which reliable data for comparison is easily and readily available and fewest adjustments in computations are needed; it may be local or foreign entity - Held, yes - Whether it is also true that generally least of complex controlled taxpayer should be taken as a tested party, but where comparable or almost comparable, controlled and uncontrolled transactions or entities are available, it may not be right to eliminate them from consideration because they look to be complex; if taxpayer wishes to take foreign associated enterprise (AE) as a tested party, then it must ensure that it is such an entity for which relevant data for comparison is available in public domain or is furnished to tax administration - Held, yes - Whether taxpayer is not then entitled to take a stand that such data cannot be called for or insisted upon from taxpayer - Held, yes - Assessee/taxpayer was a multinational company carrying on business of manufacture and sale of pharmaceuticals - During relevant previous year it had undertaken international transactions with its overseas associated enterprises (AEs) by providing goods and services to them and charged price from its AEs in respect of goods and services at Arm’s Length Price (ALP), determined by applying Transactional Net Margin Method (TNMM) taking operating profit upon sales as profit level indicator - Assessing Officer accepted ALP as shown by assessee and completed assessment - Subsequently, Commissioner taking view that assessment made was erroneous insofar as it was prejudicial to interest of revenue initiated action under section 263 - In notice under section 263, Commissioner, inter alia, stated that (1) issue of determination of ALP was not referred to Transfer Pricing Officer as required by Instruction No. 3 of 2003, dated 20-5-2003 of CBDT; (2) Transactional Net Margin Method (TNMM) was used by assessee taking Operating Profit upon Sales as Profit Level Indicator (PLI); for this purpose, assessee had taken overseas entities as ‘tested parties’ and their margins on mean basis and compared same with mean of identified comparables; approach of assessee was not in consonance with rule 10B(2) and rule 10B(3), considering diverse conditions in which AEs were operating; hence, treating tested parties to be AEs of assessee bunched in a group did not go well with law and spirit of Transfer Pricing legislation in force in India; and thus, method of determining of ALP employed by assessee did not appear to be correct; and (3) overseas AEs, instead of taxpayer were wrongly taken as a tested party when reliable data for comparison in respect of taxpayer was available in India; there were several other pharmaceutical companies engaged in a similar business and undertaking similar transactions - Whether in view of facts, namely,

(1) even though there was good and reliable evidence for taking assessee as a tested party for comparison with Indian companies, foreign companies with different market conditions and economic realties were taken for comparison to apply transfer pricing regulations;

(2) assessee in audit report filed along with return did not give details and specific characteristics of transactions, of property transferred or services provided except for giving amount of transactions merely mentioning that pharmaceuticals were sold either in shape of dosages, etc., and Assessing Officer did not bother that basic and fundamental information, i.e., specific characteristics of transaction, to consider application of transfer pricing formulation was not available in instant case;

(3) no detail whatsoever of overseas comparable companies taken into account was given in audit report and there was no evidence that FAR analysis was carried out;

(4) claim of taxpayer for aggregation of all AEs as tested parties in taking their margin of profit for comparison with some American companies and six other companies with location not disclosed was very difficult to understand;

(5) without examination of cogent material, claim of taxpayer that uncontrolled transactions were not comparable was wrongly accepted by Assessing Officer;

(6) taxpayer failed to give specific details of International transactions carried out with 17 AEs although required to be given as per US Transfer Pricing Regulations; and

(7) uncontrolled transaction carried out by taxpayer were available but not considered as comparable because with related AEs additional risks were undertaken by taxpayer;

it could be said that there was patent lack of application of mind by Assessing Officer to requirement of transfer pricing regulations and, therefore, Commissioner was justified in invoking section 263 - Held, yes - Ranbaxy Laboratories Ltd. v. Addl. CIT (Delhi - Trib.)

Income-tax Act, 1961

- Section 92C

special leave petitions decided by supreme court of india

q Table of cases

CIT v. Escorts Tractors Ltd.

CIT v. Goyal Tyres

CIT v. Mac Agro Industries Ltd.

CIT v. Nalanda Housing Devt. Ltd.

CIT v. Packwell Products

CIT v. Plash Food (P.) Ltd.

CIT v. Punjab Tractor Ltd.

CIT v. Sanmar Footwear Ltd.

CIT v. Saraswati Kunj Co-op. House Build Soc.

CIT v. Saraswati Kunj Co-op. House Build Sty.

CIT v. Sharp Refills Co. (P.) Ltd.

CIT v. Vikas Agencies

TAXMAN

Vol. 167, Part 1, for the week of February 9 – February 15, 2008