Monday, October 31, 2011

Transfer Pricing


Arm’s Length Principle — TNMM is the most appropriate method of determining ALP when the services rendered by the assessee falls under the category of installation services, warranty services and after sales services, as held by MumTrib in ACIT v Schlafhorst Marketing Co Ltd — In favour of: The assessee.

The basis of selection of comparables depends upon the quantum of adjustment that it would permit rather than other factors.

Internal comparables with third party transactions should be preferred wherever possible to external comparables.

Decided on: 12 August 2011.

Reassessment



When the orders of the AO merge with that of appellate authorities, the AO loses his jurisdiction to reopen the assessment, as held by MumTrib in ACIT v BSES Ltd — In favour of: The assessee.

The AO was not justified in reopening the assessment of the assessee on the basis of the tariff order of MERC which was for the different purpose, which was not available at the time of completion of original assessment and the assessee cannot be said to have not disclosed full facts.

The parameters for reopening an assessment on the basis of “Reason to believe” has to be at the time of the initiation of the proceedings and not only at the time of the issue of the notice under s 147 read with s 148

Decided on: 30 September 2011.

PIB Press Release, Dated: 20-10-2011 - CBDT Makes Discussion Paper on Tax Accounting Standards Public


The Central Board of Direct Taxes (CBDT) has made public the discussion paper on
accounting standards, to be known as Tax Accounting Standards (TAS), for feedback from
all concerned. The discussion paper is available on the following web-sites:

The proposed TAS, while enabling smooth transition to International Financial Reporting
Standards (IFRS), will provide certainty on accounting issues for tax purposes as it removes
alternatives and will cover all tax accounting issues.

The TAS, applicable only to computation of taxable income under the Income Tax Act 1961,
will be different from accounting standards issued by the Institute of Chartered Accountants
of India (ICAI) and notified by the Ministry of Corporate Affairs under the Companies Act
1956. However, separate books of account are not required to be maintained under TAS, thus
reducing compliance burden on businesses.

A Committee of experts from the government and professionals was constituted by the
CBDT in December 2010 to suggest accounting standards for tax purposes that could be
notified under section 145 of the Income Tax Act 1961. The Committee submitted its interim
report in August 2011, suggesting the above measures. At present, section 145 provides that
the method of accounting for computation of income under the head "Profits and gains of
business or profession" and "Income from other sources" can either be the cash or mercantile
system of accounting. The Finance Act, 1995 empowered the Central Government to notify
Accounting Standards for any class of taxpayer or for any class of income.
 

Deduction of tax at source


Salary — Complete machinery is provided under the Act for recovery of tax deducted at source from the person who has deducted such tax at source, and the revenue is barred from recovering the amount from the person from whose income the tax had been deducted at source — as held by MumHC in Naresh Govind Vaze v ITO — In favour of: Others.

When tax at source is deducted from salary, it is most unlikely that it has not been deposited in the treasury by the State Government and credit for tax cannot be denied merely because Form 16 was not attested by employer. However, the AO is directed to decide whether tax was deducted at source from the salary of the Petitioner.

Decided on: 5 October 2011.

Deduction under s 80HHC


Interest earned on the FDRs, which were given to the bank as security to avail of the credit facility, having direct nexus with manufacturing and export business is assessable as interest on FDR, should not be reduced from the business profits for computation of deduction under s 80HHC — as held by DelHC in CIT v Nectar Life Science Ltd — In favour of: The assessee.

When interest paid on borrowed funds is more than the interest received on FDR, 90% of the gross interest received from FDR should not be reduced from the business income of the assessee for computing deduction under s 80HHC.

Decided on: 20 October 2011.

Disallowance under s 40(a)(ia)


The assessee is not required to deduct tax at source under s 194J and expenditure thereof is deductible under s 40(a)(ia) as the payments are actually made to employees of the company on account of salary due to them — as held by KolTrib in Jayshree Motors Private Limited v ITO — In favour of: The assessee.

Bad debt — Expenditure incurred by assessee engaged in trading of cars on account of discount on the sale value of car, on car insurance, on registration, and on spare parts is commonly written off as irrevocable and is allowable under s 36(1)(vii).

Interest on loan — The onus to establish that the loan funds on which the assessee is paying interest are not utilised in giving the loans to the sister concern is on the assessee. In a case where the assessee fails to discharge its onus, notional interest could be disallowed.

In favour of: The revenue.

Decided on: 23 September 2011.

Deduction under s 35E


The expenses must have been incurred wholly and exclusively for “exploring, locating or proving deposits of any minerals, and includes such operations which prove to be infructuous or abortive” in order to be eligible for amortisation of expenses under s 35E — as held by MumTrib in De Beers India Private Limited v Dy CIT — In favour of: The assessee.

The assessee, even when engaged in the business of prospecting minerals, is eligible for the amortisation of such expenses as are eligible under s 35E(2) read with s 35E(5)(a) and all other expenses are eligible for deduction as in the normal course of the computation of business income.

Business expenditure — Matching principle cannot be invoked to restrict the deductibility of a part of the expenses as a result of the expenses being too high in proportion to the quantum of expenditure; it can at best be invoked to spread over the costs over an entire period in which the revenues as a result of those costs are generated.

Decided on: 5 September 2011.

Deduction under s 80HHC or special deduction


For the computation of deduction under any section under Heading C of Ch VI-A, the profits of business are not to be reduced by the profits in respect of which deduction under s 80-IA has been allowed — as held by MumTrib in Dy CIT v Hindustan Lever Ltd — In favour of: The assessee.

The restriction in s 80-IA(9) relates to the allowance of deduction and not to the computation of deduction.

Reassessment — The reopening of an assessment after the expiry of four years is invalid if there is no failure on the part of the assessee to disclose fully and truly all material facts regarding its claim of deduction.

Decided on: 19 August 2011.

Wednesday, October 19, 2011

Income from House Property

Annual Letting Value — The taxes levied by any local authority in respect of the property shall be deducted in determining the annual value of the property of that previous year in which such taxes are actually paid by the assessee — as held by MumTrib in Saif Ali Khan v ACIT — In favour of: The assessee.

Society charges paid by the assessee in respect of the let out property are allowable while computing the annual letting value of the property under s 23.

Decided on: 29 June 2011.

Business Expenditure


Provision for warranty on eligible sales made during the relevant previous year is an ascertained liability and allowable as a deduction — as held by DelTrib in Woodward Governor India Ltd v Addl CIT — In favour of: Others.

The assessee is entitled to revise the provision for warranty with reference to eligible sales made by it for the period of October, 2004 to March, 2005, and claim deduction of the incremental increase in the provision, if any. On this account, the issue of quantification of such allowable claim is remitted back to the file of the AO.

Decided on: 16 September 2011.

Undisclosed income


Additions on account of extrapolated sales ought to be restricted to the bills found in case of certain unaccounted sales bills — as held by PHHC in V M Spinning Mills v CIT — In favour of: The revenue.

Tribunal was justified in making an addition of Rs 20 lacs on account of unexplained investment made towards the working capital when level of sales made outside the books of accounts have been reduced.

Appeal — Assessee’s appeal which was not bona fide and does not raise substantial question of law is not maintainable under s 260A.

Decided on: 22 September 2011.

Exemption under s 11

Exemption under s 11 cannot be denied to charitable trust/society merely because it is making systematic profit, even though the profit is utilised only for charitable purpose — as held by CuttackTrib in ITO v Silicon Institute of Technology — In favour of: The assessee.

The generation of surplus out of the fees collected would not indicate a profit motive.

Appeal (Tribunal) — The Tribunal may not give its reasons when it agrees with the reasoning given by the CIT(A).

Decided on: 23 September 2011.

Reassessment


Change of opinion — The reopening of assessment by AO is invalid where AO had examined the question whether the loss in F and O transactions could be set off against the short-term capital gains by raising a specific query and it was only on being satisfied by the assessee’s reply that it could be set off, that in the assessment order passed under s 143(3) the AO accepted the assessee’s claim — as held by MumTrib in Chandrashekhar Karundia (HUF) v ITO — In favour of: The assessee.

The reasons recorded by the AO should have nexus or live link with the belief formed by him for reopening assessment.

Decided on: 16 September 2011.

Tuesday, October 18, 2011

Revision



The limitation for exercising jurisdiction under s 263 would not start from the assessment under s 143(1) of the IT Act but would start only from the order passed under s 143(3)/147 of the IT Act, dated 14 December 2007, as held by AhdTrib in Gujarat State Financial Corporation v CIT — In favour of: The revenue.

The AO was empowered to consider the same issue in the reassessment proceedings even if the same was not noted in the reasons for the reopening of the assessment, despite specific material available on record to prove prima facie that the income escaped assessment and, if AO fails to examine them, the order was to be termed as erroneous and prejudicial to the interests of the revenue.

Decided on: 12 August 2011.

Penalty under s 271(1)(c)


 
Once the declaration made in the return of income itself is found to be incorrect, it would amount to furnishing inaccurate particulars of income for the purpose of s 271(1)(c), as held by MumHC in Harish P Mashruwala v ACIT — In favour of: The revenue.


No penalty can be imposed under s 271(1)(c) in the absence of any finding by the AO that the assessee had furnished inaccurate particulars and also that the explanation given by the assessee was not bona fide, as held by DelHC in CIT-Large Tax Payers Unit, New Delhi v Mahanagar Telephone Nigam Ltd — In favour of: The assessee.

Decided on: 10 October 2011.

Deduction under s 80-IA


Manufacture — Merely because excisable products are exempt from the payment of excise duty cannot be a ground to hold that the products in question are not manufactured by the assessee, as held by MumHC in CIT v Kirti Stationers (P) Ltd — In favour of: The assessee.

The activity of producing sharpener blades, glue and lead amounts to manufacture and the assessee is entitled to a deduction under s 80-IA of the Income Tax Act.


Decided on: 26 September 2011.

Monday, October 17, 2011

Assessment



Notice under s 143(2) — Service of notice by post shall be deemed to be effected where the envelope has been properly addressed, proper stamps affixed and posted by registered post unless the contrary is proved — as held by DelTrib in ADIT v Italian Thai Development Public Co Ltd — In favour of: The revenue.

Accounts — Having accepted a particular amount of estimate for expenditure on the whole project, it is not open to the revenue to challenge this cost and thereafter follow a totally different method for assessment.

Neither disallowance nor the profit can be estimated when the books of accounts are duly audited following the percentage completion method for accounting revenues on the basis of the expenditure.


In favour of: The assessee.

Decided on: 22 September 2011.

Registration under s 12AA


Bhubaneswar Development Authority v CIT
ITAT BENCH, CUTTACK
ITA No. 136/CTK/2009
K K Gupta, AM and K S S Prasad Rao, JM

Decided on: 25 August 2011

Counsel appeared:
Shri G Naik and R Kar, ARs for the Appellant
Shri A Bhattacharjee, DR for the Respondent
Order
Per: K S S Prasad Rao, JM:
This appeal is filed by the assessee having been aggrieved by the order of the learned
Commissioner of Income-tax dt.28.11.2008 passed u/s.12AA, refusing registration u/s.12A of
the Income-tax Act, 1961.

2. The assessee has raised the following issues in its grounds of appeal.
“1. The order u/s.12AA of the I.T.Act is against law, weight of evidences and probabilities of
the case.
2. The learned CIT has most arbitrarily rejected the application for registration by denying
the fact that the objects of the authority of “general public utility “ and activities of the
authority are in conformity with its objects are as laid down by the Government of Orissa.
3. The learned CIT has misinterpreted the notifications issued from time to time and in a
hurry has rejected the application for grant of registration.”

3. Both the parties were heard regarding the issues raised by the assessee and their legal
implications.

4. On careful consideration of the materials made available to the Tribunal in the light of rival
submissions of both the parties, the undisputed facts relating to the issues are that the assessee
is a local authority and formed under the Orissa State Govt. Enactment, Orissa Development
Authority Act,1982 which was notified on 31st August, 1983 and effective from 1st
September1983. The main objects of the assessee are to plan, develop and improve the city of
Bhubaneswar and its periphery. Since its inception, it has been engaged in carrying out its
objects consistently and in a fruitful manner and continued so for the last 25 years by doing
many more development I improvement works, such as, developed a number of housing
colonies for all income groups in Bhubaneswar, Khurda and Jatni, generated self employment
opportunities by constructing market complexes inside the Bhubaneswar City as well as in its
neighborhoods, spreading greenery and making Bhubaneswar a beautiful and environment
friendly city by developing a number of parks such as Indira Gandhi Park, Jawaharlal Nehru
Park, Mahatma Gandhi Park, Biju Patnaik Park etc., continuously involved in developing
infrastructure and undertaking various projects in this regard including water supply,
drainage, sewerage, transportation and other several facilities etc., protected and developed
environment in and around heritage areas of the city. The assessee is availing the benefit of
section 10(20A) of the Income Tax Act,1961. The said clause was omitted by Finance
Act,2002 w.e.f. 1st April, 2003 rendering the income of the assessee liable to tax since 2003-
04. Hence, the assessee started filing of return under the jurisdiction of the ACIT, Circle 1(1),
Bhubaneswar. The assessee applied for registration u/s. 12AA of the Income Tax Act,1961
before the learned CIT on 19th May2008. The matter was fixed for hearing and the assessee
appeared through its authorized representative for presenting the explanation in respect of the
objects and activities of the Authority which are covered under the definition of Charitable
purpose as envisaged under section 2(15) of the Income Tax Act,1961. While reviewing the
matter, the learned CIT under certain conjecture and surmises rejected the application for
registration U/s 12AA of the Income Tax Act on the ground that the activities of the assessee
are in the nature of trading, commercial or business. Therefore, the present appeal is filed by
the assessee for quashing the said order of the learned CIT passed rejecting the registration
u/s.12AA of the I.T.Act.

5. During the course of hearing, the learned AR of the assessee has vehemently argued
contending interalia that the object of the assessee falls within the residuary clause “an object
of general public utility” as laid down in section 2(15) of the Income Tax Act, 1961. The
basic objective of the assessee is to ensure planned development of the areas under its
jurisdiction. In order to achieve the objective, the appellant is engaged in preparation of the
activities, such as, preparation of Interim Development Plan (as per section 8 of ODA Act),
preparation of Comprehensive Development plan (as per section 9 of ODA Act), preparation
of Zonal Development Plan (as per section 10 of ODA Act), modification to Development
plan (as per section 14 of ODA Act), controlling development within the City, preparation of
the Town Planning Scheme (as per chapter 6 of the ODI Act). All these activities are no
doubt public in nature, therefore, by carrying out such activities, the assessee not only
controls development, but also brings guided and planned development to improve the
quality of life in the City. Accordingly, the impugned order of the learned CIT cancelling
registration U/s 12AA is incorrect and liable to be quashed by directing the learned CIT to
grant registration to the assessee u/s.12A of the I.T.Act,1961. He further pointed out that the
learned CIT has not appreciated the activities of the assessee in spending the funds collected
by it for carrying out the objects as stated supra for the development of city environment and
thereby giving good developed ecological balanced environments to the inhabitants of the
area covered by Orissa Development authority Act. In doing such activities the assessee is
expending expenditures and it is meeting that expenditure by fees collected by it for granting
approvals for the plans issued by it as per Orissa Development Authority Act and the
remaining balance, if any, formed a fund as per the provisions of Orissa Development
Authority Act and spending them for the purpose for which those funds were constituted by
the Government of Orissa. Therefore, there is no element of trading or commerciality or
business in the activities carried on by the assessee. All objectives are of charitable obligation
cast on it by the Government of Orissa. Therefore, it cannot be termed to have been carrying
on trading, commercial or business activities. The learned CIT(A) has not properly
appreciated the provisions laid down by the Orissa Development Authority Act as well as the
relevant rules framed while incorporating the assessee and for its functioning. In that view of
the matter, the order passed by the learned CIT is not at all justified in law. The learned AR
of the assessee therefore, requested to set aside the order of the learned CIT and direct him to
grant registration u/s.12A of the I.T.Act,1961.

6. Contrary to this, the learned DR has vemently argued contending inter alia that as can be
seen from the economic statement furnished along with the application for registration by the
assessee as well as the information placed by the assessee before the learned CIT for
considering the application of the assessee for registration u/s.12AA disclosed that it is
collecting very huge amounts and accumulated huge amounts after recurring a meager
expenditure for carrying out its objectives and all the activities stated by the assessee before
the learned CIT are nothing but all trading activities involving commercial and business in
nature. Therefore, by no stretch of imagination they can be termed as activities of “general
public utility” as envisaged in section 2(15) of the I.T.Act,1961. Therefore, the learned CIT is
right in rejecting the application of the assessee refusing grant of registration u/s.12A of the
Act. Accordingly, he sought for upholding the impugned order of the learned CIT by
dismissing the appeal of the assessee.

7. On careful analysis of the impugned order passed by the learned CIT, it is seen that the
learned CIT has considered the functioning of the assessee which is there for the last 25 years
availing exemption till 2003 in which year the applicability of section 10(20A) of the I.T.Act
was omitted to be applied to the assessee. Thereafter he considered the activities of the
assessee as envisaged in the Orissa Development Authority Act,1982 which is w.e.f.
September, 1983. Thereafter he considered the applicability of section 2(15) of the I.T.Act.
Thereafter the learned CIT has examined the audited accounts filed by the assessee along
with the application for the year ending 31.3.2006 and 31.3.2007 and found Rs.12,46,12,131
and Rs.12,69,30,988 in the respective years as income and it has only furnished the balance
sheet but and income & expenditure accounts of both these years omitting to furnish the
receipt and expenditure account. From the balance sheet, the learned CIT found that the
assessee is having assets in excess of Rs.332 Crores and Rs.357 Cores respectively for above
mentioned years and there are capital expenditure in excess of Rs.157 Crores, loans and
advances in excess of Rs.1256 Crores on the asset side and loans in excess of Rs.64 Crores,
deposit towards cost of construction in excess of Rs.101 Crores and current liability and
provisions in excess of Rs.149 Cores on the liabilities side. After considering the provisions
of section 2(15) as well as section 12A and analyzing the above facts, the learned CIT found
that many other receipts go into the general kitty of the assessee as receipts of its enterprise as
well. And essentially the general publics are required to pay the cost of planning and
development undertaken by the assessee on way or the other as they become
customer/consumer citizens living in the city. Accordingly, the learned CIT has come to the
conclusion that the activities of the assessee palpably falling under the advancement of any
other object of general public utility, is hit by the proviso to section 2(15) of the I.T.Act as
they are clearly in the nature of trading, commercial or business and rendering services in
relation to trading, commerce or business for a cess or fee or any other consideration or
nature of use or application or retention of income from such activities. Accordingly, he
rejected the application of the assessee for registration u/s.12A. But the learned CIT has not
examined the provisions contained in Chapter 8 of the Orissa Development Authority Act in
particular section 77 thereof which makes an elaborate stipulation regarding the functions of
the assessee which includes all ingredients needed for a commercial venture like dealing of
money, by nature of dependants, levying of fees and charges, raising of money by disposal of
land, building and other properties etc. He further observed that in course of hearing the
assessee was asked to submit categorical details of tasks conducted for general public utility
for which no cost was to be off-loaded to the general public. But the assessee was not able to
furnish these informations. Therefore, the learned CIT has passed the impugned order
rejecting the application of the assessee.

8. Since the assessee has not furnished the full financial statements, such as receipt and
payment account and income & expenditure accounts and necessary informations which
constitute the different funds shown in the balance sheet and the way of utilization of those
funds for general public as general public utility and the learned CIT has not properly
appreciated the activities of the assessee in the light of Chapter 9 in particular section 77 of
the Orissa Development Authority Act, the assessee is under obligation to carry out all these
objectives with the grants received from the State Government and other agencies as well as
the fees/charges it is collecting by granting various permission to the public for which it is
empowered to grant and the margin the assessee is deriving by disposal of land, building and
other properties is also expected to use for those purposes only under the Orissa Development
Authority Act more particularly Chapter 8 thereof. Therefore, we are of the considered view
that, for the default on the part of the assessee in not giving complete financial particulars and
the learned CIT has also not examined the provisions contained in Chapter 8 particularly
section 77 of the Orissa Development Authority Act which envisages the obligation cast on
the assessee as to the disposal of the funds received by it by various grants from Government
as well as collecting the fees and activities carried on by the assessee under the Orissa
Development Authority Act, we feel it to be a fit case to be restored to the learned CIT for
reconsideration of the application of the assessee in the light of the provisions contained in
Chapter 8 of the Orissa Development Authority Act in more particular section 77 thereof and
analyzing the financial statements of the assessee in the light of those provisions and pass
necessary consequential order as per law of course strictly following the principles of natural
justice.

9. During the course of hearing, the learned AR of the assessee has sought for permission to
move necessary petition before the learned CIT for condoning the delay for late filing of the
application for registration u/s.12A of the Act as the learned CIT is now to examine the
application for registration afresh. Considering the totality of the circumstances and the scope
of re-examination/consideration of the application of the assessee for registration u/s.12A, we
are of the considered view that the assessee may be permitted to move necessary application
for condonation of delay in filing the application u/s.12A for registration w.e.f. 1.4.2003, if it
moved so by the assessee and pass necessary orders accordingly.

10. With the above directions, the impugned order of the learned CIT is set aside and the
matter is restored to his file for consideration de novo and to pass necessary consequential
order as per law.

11. In the result, the appeal of the assessee is allowed for statistical purposes.

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