Source: http://aiftponline.org/journal/2016/august-2016/direct-taxes-high-courts-research-team/
Timestamp: 2019-04-24 03:18:34+00:00

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The assessee was a society of ‘Maliks’ who were owners of land (Agar) on which salt was manufactured. The society was formed inter alia to acquire from the ‘Maliks’ their rights and to manufacture salt and its by-products. Assessee manufactured and sold salt and other by-products in its own name. The sale proceeds were being transferred to an account called ‘Distributable Pool Fund Account’ for distribution among the members of the society. After such transfer to the members, the society would offer remaining income to tax. The AO held that such transfer could not be considered as expenditure, accordingly assessed the amount transferred to Distributable Pool Fund Account during the year.
(i) Consequent to the vendor not honouring the agreement dated 18th May, 1980, all that the appellant had was a right to seek specific performance which he sought to enforce by filing the suit. The appellant did not have possession of the said land. It is only on the Consent Terms being filed in Court that the appellant got ownership and possession.
(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits are capital receipts in the hands of the assessee and not revenue receipts chargeable to tax?
(b) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits, cannot be part of book profit u/s. 115JB, as it was held as capital assets?”.
On the basis of above, it held that any amount received from a person in wrongful possession of its property, would be mesne profits and it is capital in nature.
(ii)	We find that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd held that the same is capital in nature. There is no doubt that the issue arising herein is also with regard to the character of mesne profits received by the assessee. In this case also, the amounts are received by the assessee from a person in wrongful possession of its property i.e. after the relationship of landlord and tenant has come to an end. Once the Special Bench order of the Tribunal in Narang Overseas Pvt. Ltd. has taken a view on the character of mesne profits, then unless the Revenue challenges the order of the Special Bench of the Tribunal it would be unfair of the Revenue to pick and choose assessees where it would follow the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. The least that is expected of the State which prides itself on Rule of Law is that it would equally apply the law to all assessees.
(i) It is not in dispute that Article 12(3) of the Double Taxation Avoidance Agreement (“DTAA”) between India and the United States of America (USA) is relevant for deciding the above issue.
(ii) The short question considered by the Court in Director of Income Tax v. Infrasoft Limited (2014) 220 Taxman 273 (Del.) was whether the term “royalty” covered by Article 12(3) of the DTAA would apply in the context of sale of pre-packaged copyrighted software. The Court stated that it has not examined the effect of the subsequent amendment to Section 9(1)(vi) of the Act and also whether the amount received for use of software would be royalty in terms thereof for the reason that the assessee is covered by the DTAA, the provisions of which are more beneficial.
(iii) Section 90(3) of the Act makes it clear in the context of an agreement (‘treaty’) for avoidance of double taxation, that it is only when the provisions of the Act are more beneficial to the assessee the Act will prevail over the treaty. Conversely, where the provision of the treaty is more beneficial to the assessee, the treaty would prevail over the Act. This legal position has been reiterated in Director of Income Tax v. Infrasoft Limited (supra) which was followed in dismissing the Revenue’s appeal in the assessee’s own case for AY 2008-09 i.e. ITA No. 477 of 2014.
The assessee claimed exemption under section 10(23G) in respect of liquidated damages payable by a borrower to the assessee in the event of a borrower committing default in repayment of the loan advanced by the assessee. The AO, held that the liquidated damages were a sort of compensation in nature received from defaulters and hence could not be treated like income arising from the activities of the assessee in respect of infrastructure financing. The Tribunal and CIT(A) affirmed the decision of the AO.
The High Court held that under the terms of a loan agreement, a borrower was imposed with a primary obligation to repay the principal together with interest. An additional obligation was cast upon a borrower to pay interest on interest or penal interest, in the event of borrower committing a default up to a particular level. Irrespective of what the finance company itself may choose to term it, such liquidated damages cannot be excluded from the definition of the expression ‘interest’ under section 2(28A), as the definition is so exhaustive. The definition is so exhaustive as to include even any service fee or other charge that is levied in respect of the monies that remain unutilised. In certain cases, the lenders imposed an obligation on the borrowers to pay the commitment charges, if after the sanction of the loan, the borrower could not make use of the funds up to a particular point of time. The definition of the word ‘interest’ under section 2(28A) includes even such commitment charges. Therefore all the three authorities committed a mistake in understanding the scope of the expression ‘liquidated damages’ and in coming to a conclusion that the same would not come within the purview of the word ‘interest’ under section 2(28A).
The AO held that the debt syndication fee is a fee charged by the assessee from the borrower, when the assessee funded the project not only from out of their own monies, but also by arranging finance from others. Therefore, in his order, the AO held that though what was charged as debt syndication fee may be a service fee, the same would not come within the purview of section 10(23G), on account of the fact that the said fee is not charged for the money that was lent by the assessee themselves. The same was upheld by the CIT(A) and Tribunal. The High Court held that if the second part of the definition in section 2(28A) was carefully looked into, it could be seen that what was included therein is ‘any service fee’. By itself, section 2(28A) does not make a distinction between a service fee charged in respect of the loans advanced by the assessee and those in respect of the loans organised from other financial institutions. In the absence of any indication either in section 2(28A) or in 10(23G), the distinction made out by the revenue could not be approved.
While granting registration to a trust Commissioner is empowered to examine only genuineness of trust. He cannot examine the application of funds or ethical background of settlors called for at that stage. That unethical methods used for collection of funds and no charitable activities carried out cannot be the grounds on which registration can be refused.
The assessee had borrowed huge amount from various group companies and had, in turn, advanced large amount to certain companies at interest rate much lower than the interest rate at which it had borrowed funds. The AO concluded that the assessee had merely acted as conduit and there was no business expediency on part of the assessee and disallowed the differential portion of interest.
The AO had held that the deduction claimed by the assessee under section 36(1)(viia)(c) of the Act would be granted after reducing from the total income the deduction claimed under section 36(1)(viii) of the Act. The CIT(A) and Tribunal had upheld the decision of the AO that the deduction under clause (viii) of section 36(1) would have to be computed first before applying the deduction under clause (viia)(c) of section 36(1).
Madras Industrial Investment Corp. Ltd v. CIT (1997 255 ITR 802 (SC) and India Cements Ltd. v. CIT ( 1966) 60 ITR 52 (SC) and held that the expenditure incurred was deductible in the year of expenditure. Aggrieved Revenue filed an appeal before the High Court.
On writ, the High Court observed that the Revenue had drawn inspiration from the 2013 amendment, whereby clause (iib) of sub-clause (a) of section 40 was inserted by the Finance Act, 2013, with effect from 1-4-2014. This apparently treated by the AO as being clarificatory in nature and had sought to apply it with retrospective effect. Therefore, the primary reasoning of the AO was that the privilege fee imposed was unreasonable and does not take on the characteristic of a privilege fee and it could not be construed as a fee at all and it is merely a device to evade tax.
CIT v. Vatika Township (P) Ltd. ( 2014)(367 ITR 466 (SC) which stated that from the plain reading of the section, it was clearly prospective in nature.
The High Court held that therefore, it could safely be said that the privilege fee payable by the assessee to the State Government would be taxable with effect from 1-4-2014 and not prior thereto. The unreasonableness of the privilege fee payable is also not a ground to hold that it is a device by which the assessee and the State Government are avoiding payment of tax.
(i) On a very fundamental aspect, the revenue was not justified in making addition at the time of reassessment without having first given the assessee an opportunity to cross examine the deponent on the statements relied upon by the ACIT. Quite apart from denial of an opportunity of cross examination, the revenue did not even provide the material on the basis of which the department sought to conclude that the loan was a bogus transaction.
H. R. Mehta v. ACIT (Bom.)(HC); www.itatonline.org.
The assessee was engaged in the business of real estate development. A search and seizure operation under section 132 was carried out at the business premises of the assessee as well as residential premises of its Director. The Revenue seized various materials including inter alia the documents stored in the computer of the employee of assessee which showed working of anticipated sales revenue on account of sale of space in commercial complexes developed by assessee. The AO issued notice under section 158BC to Assessee mentioning that as per documents seized, rate of sale of floor space in commercial complex was higher than rate declared by assessee in its return of income. In response to said notice, assessee submitted that documents seized were mere projections and did not represent any completed or materialised transactions. The AO rejected assessee’s explanation and made addition to taxable income on basis of rates of floor space mentioned in seized documents. The CIT(A) sustained the addition made by AO. The Tribunal however deleted the addition made by AO.
The High Court after hearing the contentions of both parties and going through the material on record held that the documents recovered from file of the computer of the employee of the firm formed the basis for the addition made by AO and CIT(A). However the sheets were in the form of printout which were unsigned and undated. The view taken by the Tribunal that mere fact that the printout stated any rates did not necessarily mean that they were sold at the rates indicated therein was a plausible view that could be taken.
CIT v. ACE Builders (2006) 281 ITR 210 (Bom.)(HC) and Komac Investments and Finance Pvt. Ltd. (2011) 132 ITD 290 (Mum.)(Trib). Aggrieved by the Tribunal decision the Revenue was in appeal before the High Court.
The assessee was a State Co-operative Agricultural and Rural Development Bank. The question that arose before the High Court was whether assessee was a ‘co-operative bank’ which was a ‘primary agricultural credit society’ or not. According to Revenue, assessee was a co-operative bank, other than a ‘primary agricultural credit society’/’primary co-operative agricultural and rural development bank’ and, therefore, section 80P of the Act did not apply to it in view of sub-section (4) of section 80P.
The assessee provides private equity investment advisory services to its AE at cost plus 12.5%. The TPO selected 8 comparables and on application of Transaction Net Margin Method (TNMM) arrived at an arithmetic mean of 39.85% as against assessee operating profit of 13.12%. Dispute Resolution Panel (DRP) confirmed the TPO’s order.
Carlyle India Advisors (P.) Ltd v. ACIT (2012) 53 SOT 267)(Mum.) (Trib.), where it was held that merchant bankers are not comparable to the Assessee and used only one comparable in respect of investment advisory functions of the Assessee (i.e. IDC (India) Ltd). Aggrieved by the Tribunal’s order the Revenue was in appeal before the High Court.
It is held that the single judge of the Karnataka High Court has erred in holding that the Assessing Officer does not have the power to enforce attendance of the assessee by camping at the residence of the assessee and that all that the summons to that extent means is as the Assessing Officer has already entered the premises of the residence, in order to comply with the legal requirement, he has served summons on him calling upon him to depose. To show the place where he should depose, the phrase, “camp at your residence” is mentioned.
During the assessment proceedings for subsequent year (i.e. AY 2011-12), the AO noticed that the cost of construction claimed by the assessee for the project appeared to be less in comparison to similar projects run by other assessees. He, therefore, made a reference to the DVO for determining the cost of construction of the project of the assessee. The DVO determined the cost of construction of the entire project of the assessee at higher figure (report was for the period AY 2007-08 to AY. 2012-13). On the basis of the aforesaid report of the DVO, the AO formed the belief that the assessee had under-reported the cost of investment made by it in the ongoing project and artificially inflated the profit from the project as it was getting benefit of deduction under section 80-IB(10). He, therefore, reopened the assessment for the year under consideration.
The Assessee Company being an undertaking of the Government of Karnataka purchased power after entering into power purchase agreements. For such purchases when there was a delay in payment, the assessee paid interest to suppliers. During the 3 years under consideration, the assessee had created a provision for the interest amount and treated the same as expenditure to arrive at the profit but while filing the return the assessee did not treat the interest as expenditure. As these were book entries towards contingent interest payable for the first 2 years a corresponding reversal entries were made in the books indicating that the provision towards contingent interest would never be paid. However in the third year the said amount though was treated as expenditure in the profit and loss account was not excluded while arriving at the taxable income in the return of income.
The AO held that the assessee was liable to deduct tax at source on the amount of provision made towards likely interest payable and treated the assessee as in default and invoked the provisions of section 201 and 201(1A) of the Act. The same was upheld by the CIT(A) and the Tribunal. Aggrieved the assessee filed an appeal before the High Court.
The parent company (non-resident) had purchased a technical data from a foreign company which was subsequently supplied to its subsidiary in India, i.e. the assessee. The amount was recovered by the parent company from the assessee company in the subsequent year. The AO treated this amount liable for TDS under section 194J of the Act. The CIT(A) confirmed the AO’s action.
On appeal before the Tribunal, it was held that the assessee was merely supplied with ready study data and no services were rendered by the parent company to the assessee and thus payment made on such services which are reimbursement of expenses did not attract TDS. Aggrieved the revenue was in appeal before the High Court.
The Assessee was appointed as the arranger by the State Bank of India (SBI) for mobilizing its Indian Millennium Deposits (IMDS). In turn the Assessee was entitled to appoint sub-arrangers within and outside India. The Assessee in turn received arranger fees and commission and it in turn paid sub-arranger the sub-arranger’s commission. The Assessee had failed to deduct tax at source on the sub-arrangers commission paid and hence the AO invoked the provisions of section 40(a)(i) of the Act and thereby disallowed the expenditure. On appeal the CIT(A) held that the amount paid to the non-resident sub-arranger was in the nature of commission/brokerage and not in the nature of fees for technical services in terms of section 9(1)(vii) of the Act.
The Revenue filed an appeal before the Tribunal wherein the Tribunal analysed the nature of services provided by the Assessee. In this regard, the Tribunal examined whether the services provided by the Assessee were managerial, technical or consultancy in nature. The Tribunal held that the services provided by the Assessee were neither of the three and hence upheld the order of the CIT(A). Aggrieved Revenue filed an appeal before the High Court.
The High Court held that the need to deduct tax would arise if the non-resident would earn any income chargeable to tax in India. Further the High Court also held that the services provided by the Assessee did not fall under the category of Explanation 2 to section 9(1)(vii) of the Act and hence the Assessee was not required to deduct tax at source under section 195 of the Act.
The Petitioner Company had defaulted in repayment of its dues to the bank. Suit was filed in this respect. During the pendency of proceedings before the DRT, a settlement was arrived at, on the basis of which the DRT disposed of the suit. However, the petitioner did not honour the settlement so arrived at. Therefore, the bank initiated the recovery proceedings and obtained a Recovery Certificate from DRT. Such amount was not paid by the petitioner. Accordingly, Recovery Officer auctioned off the mortgaged property and the sale proceeds were deposited. Petitioner moved an application for deferment of the said sale on the ground that one time settlement had been arrived at between the petitioner and the bank. Recovery Officer rejected the said application as it was filed after the confirmation of sale. Petitioner contended that Recovery Officer did not follow provision of Rule 15(2) of Second Schedule to the IT Act, that when the sale is adjourned for more than one month, then a fresh application of sale has to be issued. High Court held that petitioner never challenged the sale of the mortgaged property and the only challenge was against the rejection of application of deferment of sale. It was also held that under Rule 60/ 61, a person interested in the property auctioned can make an application for cancellation of the sale within 30 days of the sale subject to amount sought to be recovered is deposited with the Recovery Officer, and since in the present case, neither any such application was made, nor any amount was deposited, the petitioner cannot invoke Rule 15(2.
The Assessee filed its return declaring certain taxable income. The Assessing Officer completed assessment under section 143(3) determining taxable income at a higher amount. The CIT(A) passed an order that so far as the charging of the interest under section 234B of the Act was concerned, the same was consequential and, therefore, the AO would recalculate the interest while giving effect to order passed by him. The Tribunal, however, held that as in the order of assessment the Assessing Officer had not charged any interest under section 234B of the Act, no such interest was chargeable.
The deductor-company entered into an agreement with a German company for transfer of technical know-how and was required to make the payment of technical know-how fees in three instalments. The deductor-company deducted tax at source on all the three instalments and deposited same in advance with department. Subsequently, the German company was not able to fulfil its obligations and by agreement dated 1-7-1992 agreed to waive the third instalment. The deductor-company filed an application for refund and same was granted. The deductor also made an application for interest u/s. 244A on the said refund which was rejected by CCIT and CBDT on the ground that deductor-company was not assessee in respect of this transaction and therefore, not eligible for interest u/s. 244A. High Court held that deductor-company was in fact the assessee by virtue of section 2(7)(b) r.w.s. 163. Further, it was held that, deductor-company, on failure to deduct tax would have become assessee-in-default and by that angle also deductor qualified as an assessee u/s. 2(7)(c). It was held that refund granted by the CBDT would fall within the provisions of section 240. Further, the High Court relied upon the judgment in case of Union of India v. Tata Chemicals Ltd.  6 SCC 335 for stating that even if there is no express statutory provision for payment of interest on the refund of excess amount/tax collected by the revenue, the Government cannot shrug off its apparent obligation to reimburse the deductor’s lawful monies with the accrued interest for the period of undue retention of such monies. Further, if the contention of the Revenue was accepted it would result in causing great hardship to the honest taxpayers. Held, deductor-company eligible for interest u/s. 244A. However, such interest accrued from the date of making application for refund of tax and not from the date of agreement waiving third instalment, since the deductor-company did not make any application for refund till 2 years after the agreement for waiver.
The Assessee filed an application for settlement of its case before the Settlement Commission. The Settlement Commission proceeded with the application and called for report from the Commissioner. The Commissioner, in the report, objected application on ground that there was no full and true disclosure and requisite tax had also not been paid. The Commissioner argued that the Settlement Commission was required to adjudicate on objection filed by him. The Settlement Commission, however, chose to proceed with further enquiry. On writ, the Commissioner contended that the Settlement Commission could not assume jurisdiction to consider the application without adjudicating his objection at admission stage itself.
The High Court held that it was evident that the Settlement Commission was satisfied that there was a full and true disclosure of the income which was not disclosed before the AO in the application and the manner in which such income had been derived and the additional income tax payable on such income.
Further, High Court held that even assuming that the Settlement Commission had glossed over the initial report submitted by the Commissioner, as the procedure contemplated a further report to be submitted by the Commissioner, after examination of the annexure to the application, statements and other documents accompanying such annexure and on the basis of a further enquiry, if any, all of which was not made available to the Commissioner in the first instance, and the Settlement Commission being in a position to still address the question whether a full and true disclosure of the income which was not disclosed before the AO and being required to pass an appropriate order, the Revenue could not be said to be prejudiced in any fashion. Therefore, no procedural violation was caused by the Settlement Commission. It had only taken a prima facie view that the application was not invalid. A final order will necessarily have to be passed under section 245D(4) only after obtaining the report of the Commissioner under rule 9 and after being satisfied that there is full and true disclosure by the applicant.
Assessee has filed the petition against the stay of recovery. Assessee also moved petition for an early hearing of appeal .The matter was fixed for hearing before the CIT(A) for deciding the quantum appeal, however the assessee requested for adjournments, which was granted. Before the Court it was argued that the stay may be granted. Dismissing the petition the court held that; action of the assessee of filing Writ Petition to seek early hearing of appeal before CIT(A), while simultaneously seeking adjournment before CIT(A) on frivolous grounds is a “delaying tactic” and an “abuse of the legal process”. Petition was dismissed and the assessee was directed to pay the cost of Rs. 20,000. (WP No. 911 of 2016 dt. 20-7-2016 ).
Tulsidas Trading Pvt. Ltd. v. TRO (Bom.)(HC) www.itatonline.org.
The Assessee paid commission (a) to taxi drivers, travel agents etc. to procure more business for Assessee and (b) to its staff for sale of tickets. The AO disallowed the said commission. The CIT(A) examined material and other evidence on record and allowed deduction to the extent amounts were verified and disallowed deduction for amounts which could not be verified. On department’s appeal the Tribunal reversed findings of the CIT(A) without considering the details filed before the lower authorities.
Strictures passed against department for casual and careless representation despite huge revenue implications. Dept. directed to take remedial measures such as updating the website, appointment of meritorious advocates, proper evaluation of work done by the advocates, ensuring even distribution of work amongst advocates etc. Prevailing practice of evaluating competence of advocates on basis of “cases won or lost” deplored. Therefore, the Principal Chief Commissioner of Income Tax who is the head of all the Commissioners at Mumbai was directed to place on record the steps being taken to ensure that a consistent view is taken by the Department. The Principal Chief Commissioner of Income Tax had filed an affidavit dated 5th May, 2016. Today, the learned Additional Solicitor General tenders an affidavit of one Mr. Purshotam Tripuri, Commissioner of Income Tax (Judicial) dated 11th July, 2016 indicating the steps being taken by the department to ensure that the Revenue is properly represented. In particular, it is pointed out that the Officers of the Revenue are being sensitised to maintain consistency in preferring appeals to this court. Further, it is stated that the ‘Legal Corner’ hyperlink on the www.incometaxmumbai.gov.in home page is functional since 10th June, 2016 and entries have been made therein with regard to the questions of law which had been admitted by this Court and/or which are finally decided. This according to the Revenue would make the Assessing Officer as well as the Revenue’s Counsel aware of the questions of law which have been admitted and / or dismissed, to enable them to assist the Court in subsequent appeals. We are certain that this website could be further improved upon on receiving suggestion from the users of the Legal Corner over a period of time. The suggestion made by Dr. Shivaram in para 3 of the affidavit dated 17th June, 2016 of the respondent – assessee should be considered by the Revenue and if found appropriate, could be incorporated in the website. However, on browsing the site, it is evident that the activity of monitoring and updating the site has been outsourced to a private party. One key area that must be borne in mind is authenticity of the information uploaded and updated. If in future the requirements increase the software must be scalable and in any event must be compatible with system of the department. In the event of the third party service provider being different at any point in time, the data available on the site after the change of service provider cannot be put to risk of loss of content and/or authenticity. This will ensure a stable and dependable resource for research and representation. We trust the above concern would have been taken care of by the Revenue.
The original assessment order of the Assessee under section 143(3) was passed on 27-12-2009. Revision application filed by the Assessee under section 264, was allowed and the matter was remanded to the Assessing Officer. The Assessing Officer vide order dated 27-5-2011 had given effect to the order passed by the Commissioner under section 264. Subsequently, the original order passed under section 143(3) dated 27-12-2009 was revised by the Commissioner under section 263 by order dated 22-3-2012. The said order passed under section 263 was challenged by the Assessee before the Tribunal and the revenue filed cross objections against that order. The Tribunal set aside order passed by the Commissioner under section 263 as well as the cross objections filed by the revenue as the same were against a non-existing order.
The Assessee received interest with the amount of income tax refund arising from orders passed by the CIT(A) for the assessment years 1993-94 to 1996-97. The revenue appealed against the order of the CIT(A) before the Tribunal. Since the matter was subjudice, the Assessee did not include the income arising out of the aforesaid amount of interest in his profit and loss account but disclosed the same in the notes to the accounts. The AO rejected the Assessee’s action and subsequently initiated penalty proceedings both for the concealment of income as well as furnishing of inaccurate particulars of income.

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