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2025 (8) TMI 1605 - ITAT KOLKATA Income Tax

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ISSUES PRESENTED AND CONSIDERED

1. Whether interest expenditure claimed under section 57 can be disallowed where assessee borrowed at a higher rate and advanced loans at a lower rate, and whether the doctrine of "real income" limits allowance of such interest.

2. Whether an assessee holding mixed funds (interest-bearing and interest-free) has the right of appropriation to allocate interest-free funds to advances, thereby precluding proportionate disallowance of interest.

3. Whether proportional disallowance of interest should be computed by applying an average rate of interest on borrowed funds to loans advanced, and the proper methodology for recomputation where some advances appear to be funded by borrowed (interest-bearing) funds.

4. Whether the assessing authority must be directed to recompute interest under section 234A from an extended due date of filing (where extension is applicable) rather than the original due date.

ISSUE-WISE DETAILED ANALYSIS

Issue 1: Allowability of interest expenditure under section 57 where borrowed funds were lent out at lower rates; application of "real income" doctrine

Legal framework: Section 57 allows deduction of expenditure (not being capital) "wholly and exclusively for the purpose of making or earning such income". The "real income" doctrine is invoked where the actuality of situations prevents accrual of real income.

Precedent treatment: The Tribunal considered principles invoked in prior decisions (including those addressing mixed funds and disallowance mechanics) but distinguished cases concerning section 14A (relating to exempt income) as not directly determinative for section 57 issues involving borrowed funds used for earning taxable interest income.

Interpretation and reasoning: The Tribunal accepts that interest is allowable only to the extent it is laid out wholly and exclusively for earning the relevant income. Where the assessee borrowed at an overall average rate (~12%) but advanced funds at a materially lower rate (~5%), and where parties receiving advances include entities prima facie related to the assessee, the arrangement "defies logic" prima facie and indicates that borrowed (interest-bearing) funds were used to provide lower-yielding advances. The Tribunal emphasises the need for tracing/identifiability: here loans taken and loans given are identifiable by parties and dates, but assessee failed to provide a cash-flow statement and details of loans squared off during the year to rebut the AO's prima facie conclusion. Consequently, for specified advances to certain entities, there was no justification to apply the higher borrowing rate in full, and a disallowance proportionate to the differential is warranted.

Ratio vs. Obiter: Ratio - interest deduction under section 57 is disallowed to the extent that borrowed interest-bearing funds were used to make advances that yielded lower or no interest, unless the assessee satisfactorily demonstrates that interest-free own funds were actually applied. Obiter - general observations on what "makes business sense" are ancillary but not decisive.

Conclusions: The Tribunal upholds disallowance in principle. It directs recomputation of disallowance in respect of specific interest-bearing advances (to named categories of entities) by applying the differential between borrowing rate and rate charged on advances (7% in the facts), and upholds the AO's addition for that portion.

Issue 2: Applicability of the "right of appropriation" and mixed-fund principle

Legal framework: Where an assessee holds mixed funds (interest-free own funds and interest-bearing borrowed funds), revenue practice and some judicial pronouncements recognise the assessee's right to appropriate funds; however, the entitlement under section 57 requires that expenditure be wholly and exclusively for earning the income.

Precedent treatment (followed/distinguished): Tribunal considered authority holding that proportionate disallowance under a counterpart provision (section 14A) is not warranted where interest-free own funds exceeded the investments, and that an assessee has the right of appropriation in mixed-fund situations. The Tribunal distinguished that authority because it concerned section 14A and tax-exempt income in the banking context, not the use of borrowed capital to earn taxable interest income under section 57.

Interpretation and reasoning: The Tribunal recognises the right-of-appropriation principle but requires factual demonstration (cash-flow, details of loans squared off) when the ledger shows both interest-bearing loans taken and interest-free advances given. In the present case the assessee did not furnish sufficient documentary proof to show that interest-free own funds were actually used to make the interest-free advances; several advances appear prima facie funded by high-cost borrowings and made to related entities. Thus the mixed-fund principle cannot be accepted without supporting evidence.

Ratio vs. Obiter: Ratio - right of appropriation cannot be operated as a conclusive defence where the assessee fails to adduce contemporaneous cash-flow or transactional detail tying particular advances to interest-free own funds; in such circumstances the AO may disallow interest to the extent borrowed funds were routed to interest-free advances. Obiter - general endorsement of the mixed-fund principle for section 14A contexts is acknowledged but held not automatically controlling for section 57 disputes.

Conclusions: The Tribunal directs the assessee to furnish a detailed cash-flow statement and particulars of loans squared off. Pending satisfactory demonstration, AO shall recompute disallowance only in respect of interest-bearing funds received which were advanced as interest-free advances. Prima facie, interest-free funds received largely match interest-free advances, but further verification is required and some disallowance may remain.

Issue 3: Methodology for computation of disallowance - average rate vs. itemised tracing; recomputation directions

Legal framework: Deduction under section 57 requires direct nexus between expenditure and earning of income; where tracing is possible, itemised allocation controls; otherwise, a reasonable method to compute disallowance is permissible.

Precedent treatment: The Tribunal relies on established accounting/tracing principles and on the need for evidence when an assessee asserts appropriation; it does not adopt a mechanical application of a single average rate across all transactions without verification.

Interpretation and reasoning: The AO applied an average rate approach (allowing interest at 4.79% on interest-bearing funds used for earning interest) and disallowed the balance. The Tribunal upholds disallowance in respect of specific advances where borrowing cost exceeded rate charged, but directs itemised recomputation by AO: (a) compute disallowance for identifiable interest-bearing advances advanced as interest-free or at lower rates (specifically five entities identified), (b) obtain cash-flow and squared-off loan details for other loans to assess whether interest-bearing funds financed interest-free advances, and (c) restrict disallowance only to the extent interest-bearing funds were so used.

Ratio vs. Obiter: Ratio - AO may compute disallowance by isolating identifiable instances where borrowed funds were used to make lower/no-interest advances and apply differential in rates to quantify disallowance; blanket averaging without factual tracing is not appropriate. Obiter - commentary on the plausibility of certain lending patterns as "not making business sense".

Conclusions: Grounded disallowance stands in part; AO is directed to recompute disallowance in accordance with the Tribunal's factual findings and the requirement for the assessee to supply a cash-flow statement and particulars. Several grounds are partly allowed to this limited extent.

Issue 4: Interest under section 234A - applicability of extended due date

Legal framework: Interest under section 234A is chargeable for delay in filing return, normally from the due date; where the due date is extended by competent authority, interest should be charged from the extended due date.

Precedent treatment: The Tribunal applies statutory principle that interest should be computed from the actual due date of filing (as extended) where extension has been granted.

Interpretation and reasoning: The Tribunal directs the AO to examine whether an extended due date applied and, if so, to compute interest under section 234A from that extended date rather than the original statutory due date.

Ratio vs. Obiter: Ratio - interest under section 234A must be charged from the due date actually applicable (including any extension), not automatically from the original due date. Obiter - none.

Conclusions: Grounds relating to section 234A are partly allowed; AO to recompute interest in accordance with any valid extension of the filing due date.

Overall disposition

The appeal is partly allowed. The Tribunal upholds the principle that interest deduction under section 57 requires demonstrable nexus/appropriation; it affirms disallowance in respect of identified instances where borrowed high-cost funds were advanced at lower or nil rates (directing AO to quantify disallowance by applying the rate differential), directs the assessee to produce cash-flow and squared-off loan details to support appropriation claims, and instructs recomputation of section 234A interest from any validly extended due date.

Assessee must prove source of advances under s.57; 7% interest disallowance ordered, AO to recompute; s.234A interest limited
ITAT allowed in part. Applying s.57, it held the assessee must prove source of advances by filing a cash-flow/loan-squared-off details; where funds were borrowed at 12% and re-advanced at 5% for five entities, a 7% interest disallowance is warranted and is to be worked out by the AO. For purported interest-free advances, disallowance is limited to the portion of interest-bearing funds actually advanced interest-free, pending submission of records. AO must recompute accordingly. AO is also directed under s.234A to levy interest only from any extended due date of filing; grounds partly allowed.

Deduction claimed u/s 57 - AO allowed interest at the rate of 4.79% on the interest-bearing loans and disallowed a sum - HELD THAT:- The assessee had advanced interest free as well as interest-bearing loans. He also had interest-free as well as interest-bearing loans which were taken from several parties and on which interest was debited. The direction had been claimed u/s 57 of the Act and as per the provision of clause (iii) to section 57 of the Act, any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income is allowed. The assessee did not file any cash flow statement so as to explain whether all the loans were given out of interest-free funds or were also out of interest-bearing funds. In case the assessee had given loans out of interest-free funds, there was no occasion for the AO to disallow the interest relating to such advances having no interest liability. Where the loans were given out of the borrowed funds, which prima facie appears to be the case as in the case of 4 entities which appeared to be investor companies and prima facie relatable to the assessee, lower interest of 5% interest has been charged. The assessee has given details of only the loans at the end of the year but the details of loans squared off has not been filed, some of which may also be interest-free loans. Thus, out of the interest-bearing advances in respect of the following 5 entities, there was no justification to charge interest at the rate of 5% when the assessee had taken loans at the rate of 12% from five parties. Since the assessee had borrowed funds at the rate of 12% and given interest-bearing loans at the rate of 5%, therefore, disallowance of 7% of the interest on this amount was liable to be worked out and such disallowance should be worked out by the Ld. AO and the same is upheld. Other interest-free funds - Prima facie, the interest-free funds advanced match the interest-free funds received; however, the assessee is also required to furnish the details of loans squared off during the year and the interest in respect of loans received as well as loans given if any and the AO is required to work out the disallowance only in respect of interest bearing funds received which were advanced as interest-free loans. The assessee is also directed to give a cash flow statement of the interest-free loans received which have been advanced as interest-free advances. Prima facie since loans were received from relatives and were also advanced to some of the related parties, there was no reason why the assessee should have routed the interest-free funds through its books of account to advance to the set of related parties. The assessee shall furnish the required details and the Ld. AO shall recompute the disallowance in respect of the balance amount and only to the extent of interest-bearing funds/loans received which were advanced as interest-free advances. Interest u/s 234A - AO is directed to examine the extended due date of filing the return of income and charge the interest from the due date so extended only. Hence these Grounds are also partly allowed.

2025 (8) TMI 993 - Supreme Court Indian Laws

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Composite trade mark comparison defeats interim injunction where common element lacks secondary meaning and overall trade dress differs.
Interim injunction in a composite-mark dispute depends on a holistic comparison from the standpoint of the average consumer with imperfect recollection. The court held that the marks, labels, packaging, colour scheme, typography, bottle design and overall trade dress of the rival products were materially different, so there was no prima facie deceptive similarity, infringement or passing off. The shared word "PRIDE" was common to trade and had not been shown to have acquired exclusive source significance or secondary meaning in favour of the appellants. Claims based on embossing and on combining features from different marks were also found unreliable, so interlocutory relief was refused.

Infringement of trademark and passing off - discussion on appropriate analytical framework for evaluating competing trademarks - respondent has dishonestly adopted trademarks deceptively similar to the appellants’ well-known and registered marks, namely, ‘BLENDERS PRIDE’, ‘IMPERIAL BLUE’, and ‘SEAGRAM’S’, used for whisky, which enjoy significant commercial reputation in India and internationally - seeking a decree of permanent injunction restraining the respondent from trademark infringement, passing off, copyright violation - main suit instituted by the appellants before the Commercial Court is still pending adjudication - similarity and dintinctiveness of name, colour, scheme and trade dress - rule of anti-dissection - dominant feature test - no exclusive right over common or descriptive terms - average consumer test and imperfect collection. Similarity and dintinctiveness of name, colour, scheme and trade dress - HELD THAT:- It is not persuaded that the respondent’s mark is deceptively similar to the appellants’ registered trademarks, when viewed in totality. The appellants’ marks – ‘BLENDERS PRIDE’, ‘IMPERIAL BLUE’, and ‘SEAGRAM’S’ – are inherently distinctive. By contrast, the respondent’s mark ‘LONDON PRIDE’ uses the term ‘PRIDE’ in a distinct commercial context and overall presentation. The term ‘PRIDE’ being a common and laudatory expression, cannot be claimed exclusively in isolation. Although both parties’ trade dress and colour schemes feature elements of blue and gold, such similarities are insufficient to establish deceptive similarity. The placement of elements, design of labels, font styles, and emblems differ in material respects. Viewed holistically, the competing marks do not create such an overall resemblance as is likely to cause confusion or deception in the mind of an average consumer exercising imperfect recollection. Rule of anti-dissection - HELD THAT:- In the present case, the appellants’ attempt to isolate the word ‘PRIDE’ as the basis of comparison is legally untenable. Trademark similarity must be assessed by considering the mark as a whole, and not by extracting a single component for comparison. When viewed in their entirety, the appellants’ marks – ‘BLENDERS PRIDE’, ‘IMPERIAL BLUE’, and ‘SEAGRAM’S’ – are structurally, phonetically, and visually distinct from the respondent’s mark ‘LONDON PRIDE’. The mere presence of the common word ‘PRIDE’ which is a generic and laudatory term, does not render the competing marks deceptively similar in the absence of an overall resemblance. Thus, under the anti-dissection rule, no case for infringement or passing off is made out. Dominant feature test - HELD THAT:- The dominant feature of a mark is typically identified based on factors such as its visual and phonetic prominence, placement within the mark (with initial components often carrying greater perceptual weight), inherent distinctiveness, and the degree of consumer association it has generated. The dominant element functions as the “hook” that captures the consumer’s attention and facilitates brand recall. For instance, in composite marks such as ‘BLENDERS PRIDE’ or ‘IMPERIAL BLUE’, the terms ‘BLENDERS’ and ‘IMPERIAL’ may be regarded as dominant, owing to their distinctive and less frequently used character. In contrast, elements such as ‘PRIDE’ or ‘BLUE’ are relatively generic, descriptive, or commonplace in the liquor industry, as evidenced by other marks like ROCKFORD PRIDE, ROYAL PRIDE, or OAK PRIDE. Such shared or non- distinctive terms cannot be monopolized, unless it is established that they have acquired secondary meaning through extensive and exclusive use, and are uniquely associated with the plaintiff’s goods in the minds of the public. In the present case, the appellants contend that the respondent’s use of the mark ‘LONDON PRIDE’ infringes their marks ‘BLENDERS PRIDE’ and ‘IMPERIAL BLUE’. However, upon a holistic comparison, the overall commercial impression of ‘LONDON PRIDE’ is substantially different from either of the appellants’ marks. The trade dress, label design, colour scheme, typography, and brand presentation are all distinctive and unrelated. Moreover, the term ‘LONDON’ introduces a geographical identifier that conveys a distinct brand identity, divergent from ‘BLENDERS’ or ‘IMPERIAL’. The respondent’s mark, therefore, does not imitate the dominant features of the appellants’ marks. No exclusive right over common or descriptive terms - HELD THAT:- In the present case, the appellants have failed to produce cogent evidence – such as consumer surveys, brand recognition studies, or consistent third-party references – to demonstrate that the term ‘PRIDE’ has acquired secondary meaning exclusively pointing to their product. Mere duration of use, turnover, or marketing expenditure is insufficient to displace the term’s inherent descriptive or laudatory character. As judicial precedent makes clear, even extensive use of a descriptive term does not justify exclusivity unless such use has displaced the word’s primary meaning, so that it now serves as a source identifier in the minds of the consuming public. Applying the settled legal principles, it is evident that the marks ‘BLENDERS PRIDE’ and ‘LONDON PRIDE’ are visually, phonetically, and conceptually distinct. The appellants cannot assert monopoly over the common term ‘PRIDE’, and no actionable similarity arises merely from its use in the respondent’s mark. In the absence of demonstrable confusion or misrepresentation, the respondent’s use does not amount to infringement under Section 29 nor does it constitute passing off. Average consumer test and imperfect collection - HELD THAT:- The rival marks are not deceptively similar. The appellants’ trademarks – ‘BLENDERS PRIDE’, ‘IMPERIAL BLUE’, and ‘SEAGRAM’S’ – convey distinct commercial impressions, when compared with the respondent’s mark ‘LONDON PRIDE’. The overall visual appearance, phonetic structure, and trade dress – though sharing some generic elements such as use of blue and gold – are sufficiently different. These structural and conceptual dissimilarities between the marks outweigh any incidental similarities, negating the likelihood of confusion in the mind of a consumer of average intelligence and imperfect recollection. The rival marks, when assessed in their entirety, do not exhibit such visual, phonetic, or structural similarity as would give rise to a real and tangible likelihood of confusion in the mind of an average consumer possessing imperfect recollection. The overall trade dress, distinctive components, and market presentation of the respondent’s product serve to sufficiently distinguish it from that of the appellants. Accordingly, the allegation of deceptive similarity is not borne out on a prima facie assessment, and no case is made out warranting the grant of interim relief. Thus, it is a settled principle of trademark law that deceptive similarity does not necessitate exact imitation. What is material is the likelihood of confusion or association in the minds of consumers arising from an overall resemblance between the competing marks. The applicable standard is that of an average consumer with imperfect recollection - The dominant feature of a mark may assist in crossing the preliminary threshold of analysis, but the ultimate inquiry must focus on the overall impression created by the mark – especially in the context of the relevant goods, trade channels, and target consumers. The proper test is not to place the two marks side by side to identify dissimilarities, but to determine whether the impugned mark, when viewed independently, is likely to create an impression of association or common origin in the mind of the average consumer. Even if a particular component of a mark lacks inherent distinctiveness, its imitation may still amount to infringement if it constitutes an essential and distinctive feature of the composite mark as a whole. The allegation regarding the embossing of “Seagram Quality” on the respondent’s bottle was rightly rejected by the Commercial Court. The bottle produced as evidence by the appellants lacked such embossing, and this finding remains unchallenged. The appellants themselves admitted that they failed to furnish any invoice or produce a witness to support their claim, thereby rendering the allegation unreliable and lacking in bona fides. The appellants’ contention that the Commercial Court dissected the marks mechanically is belied by the High Court’s holistic analysis. The High Court correctly noted that ‘BLENDERS PRIDE’ uses a round bottle, whereas ‘LONDON PRIDE’ adopts a cylindrical form. The labels, cartons, and design motifs are entirely different. These variations eliminate the possibility of confusion - The comparison between ‘IMPERIAL BLUE’ and ‘LONDON PRIDE’ reveals even greater divergence. The marks differ in word arrangement, label structure, and packaging. No similarity exists – visual, phonetic, or structural – that can support a claim for infringement or passing off. Since resemblance is a sine qua non for both causes of action, the appellants’ claim must fail. There are no ground to interfere with the concurrent findings of the Commercial Court and the High Court. The appellants have failed to establish a prima facie case of deceptive similarity that could justify the grant of interim injunction. The Commercial Court is directed to proceed with the trial and dispose of the suit on merits, in accordance with law, uninfluenced by any observations made by this court or by the courts below, within a period of four months from the date of receipt of a copy of this judgment. It is clarified that the present judgment is confined to the adjudication of the application for interim injunction, based solely on the materials available at this interlocutory stage. Appeal dismissed.

2025 (8) TMI 915 - ITAT JAIPUR Income Tax

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1. ISSUES PRESENTED and CONSIDERED

1. Whether jurisdiction under Section 153C of the Income Tax Act, 1961 was validly assumed by the Assessing Officer (AO) based on proper satisfaction note and incriminating material specifically relating to the assessee for the relevant assessment year (AY) 2015-2016.

2. Whether issuance of a single satisfaction note covering multiple AYs (2015-16 to 2021-22) without year-wise specification of incriminating material is legally sustainable.

3. Whether the proceedings initiated under Section 153C for AY 2015-2016 are barred by limitation, considering the date of recording satisfaction note and the threshold of escaped income required for extended limitation.

4. Whether additions under Section 69 of the Act for alleged 'on-money' paid in cash for purchase of flat in AY 2015-2016 and other years are justified based on incriminating material found during search and subsequent assessment proceedings.

5. Whether the Dispute Resolution Panel (DRP) was justified in enhancing income by Rs. 1,20,10,610/- under Section 69 for payments made through banking channels, in absence of incriminating material and despite evidence furnished by the assessee.

6. Whether the application of percentage completion method for spreading additions over multiple AYs by AO and DRP was appropriate in the facts of the case.

7. Whether the assessee was denied principles of natural justice, including adequate opportunity to cross-examine third-party witnesses and sufficient time to respond to DRP's enhancement notice.

8. Whether the documents and digital data relied upon (loose sheets, WhatsApp chats, images) constitute valid incriminating material to justify additions in the hands of the assessee.

9. Whether additions can be made beyond the scope of incriminating material found during search under Sections 153A/153C.

10. Whether the assessment order passed under Section 153C read with Section 144C(13) is barred by limitation considering the time taken during DRP proceedings and statutory time limits.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 & 2: Validity of Jurisdiction under Section 153C and Single Satisfaction Note for Multiple AYs

- Legal Framework and Precedents:

Section 153C empowers the AO to initiate assessment proceedings against a person other than the searched person only after recording satisfaction that the seized books, documents or assets have bearing on the determination of total income of such other person for relevant AYs. The satisfaction note must specify the incriminating material and the AYs to which it relates.

Judicial precedents emphasize that mere receipt of material does not automatically confer jurisdiction; the AO must be satisfied that the material is likely to impact the income assessment for specific AYs.

Supreme Court and High Court decisions have held that issuance of a single satisfaction note covering multiple AYs without year-wise application of mind and specification of incriminating material is illegal and vitiates the proceedings.

- Court's Interpretation and Reasoning:

The Court observed that the AO recorded a single satisfaction note dated 27.03.2023 covering AYs 2015-16 to 2021-22 without specifying incriminating material year-wise or explaining how the material relates to each AY. This reflects lack of application of mind and absence of jurisdiction for AY 2015-16.

Reliance was placed on authoritative judgments holding that satisfaction must be recorded for each AY separately and the material must have a bearing on the income of the assessee for that year.

- Key Evidence and Findings:

The satisfaction note and related documents did not specify incriminating material for AY 2015-16 distinctly. The AO's assumption of jurisdiction appeared mechanical and without proper satisfaction.

- Application of Law to Facts:

The Court held that the jurisdiction assumed under Section 153C for AY 2015-16 is illegal and void ab initio due to defective satisfaction note. The issuance of a single satisfaction note for multiple AYs without year-wise reasons is impermissible.

- Treatment of Competing Arguments:

The Revenue's contention that the AO had jurisdiction over all years in the block was rejected based on settled law and judicial precedents.

- Conclusion:

The proceedings under Section 153C for AY 2015-16 are quashed for want of jurisdiction due to defective satisfaction note.

Issue 3: Limitation Bar on Proceedings for AY 2015-16

- Legal Framework and Precedents:

Section 153C read with Section 153A and Explanation 1 thereto prescribes limitation periods for assessment proceedings triggered by search. The relevant assessment year for the 'other person' is the year in which the incriminating material is received and satisfaction recorded, not the year of search on the searched person.

Extended limitation beyond six years applies only if escaped income exceeds Rs. 50 lakhs.

Supreme Court decisions clarify that the search year for the other person is the year of receipt of material and satisfaction note, and limitation must be computed accordingly.

- Court's Interpretation and Reasoning:

The Court noted that the satisfaction note was recorded on 27.03.2023 (AY 2023-24), and notices were issued the same day. The search at the premises of the searched person was in AY 2021-22, but for the 'other person', the relevant year is AY 2023-24.

Since the alleged escaped income for AY 2015-16 was below Rs. 50 lakhs, extended limitation beyond six years could not be invoked.

- Key Evidence and Findings:

The escaped income alleged for AY 2015-16 was Rs. 27.50 lakhs as per satisfaction note, below the Rs. 50 lakh threshold.

- Application of Law to Facts:

Proceedings initiated for AY 2015-16 are barred by limitation and hence void.

- Treatment of Competing Arguments:

The Revenue's presumption that limitation should be computed from year of search was rejected following binding judicial precedents.

- Conclusion:

Assessment proceedings for AY 2015-16 are barred by limitation and are quashed.

Issue 4 & 8: Validity of Additions for 'On-Money' Based on Incriminating Material (Loose Documents, WhatsApp Chats, etc.)

- Legal Framework and Precedents:

Additions under Section 69 require credible evidence of unexplained cash payments. Incriminating material must be tangible and corroborated. Loose sheets, images, WhatsApp chats, and third-party statements without corroboration are considered "dumb documents" lacking evidentiary value.

Judicial precedents hold that assessment cannot be based solely on third-party statements without opportunity for cross-examination and without corroborative evidence.

- Court's Interpretation and Reasoning:

The Court found that the AO and DRP relied heavily on an image found on a mobile phone, WhatsApp chats, and statements of third parties without providing opportunity for cross-examination or verifying the authenticity and relevance of such material.

The documents were loose, not part of regular books of account, and lacked direct connection to the assessee's payments.

- Key Evidence and Findings:

The assessee furnished bank statements, agreement to sale, and other documents to prove payment through banking channels. No direct incriminating evidence was found linking the assessee to cash payments.

- Application of Law to Facts:

The Court held that additions based on such "dumb documents" and third-party statements without cross-examination are unsustainable.

- Treatment of Competing Arguments:

The Revenue's reliance on digital data and third-party statements was rejected for lack of proper evidentiary foundation.

- Conclusion:

Additions based on alleged 'on-money' paid in cash without credible incriminating material are deleted.

Issue 5 & 6: DRP's Enhancement of Income for Payments Made Through Banking Channels and Application of Percentage Completion Method

- Legal Framework and Precedents:

Enhancement of income by DRP under Section 144C(8) must be within the scope of incriminating material found during search. Additions cannot be made on post-search material or assumptions without evidence.

Percentage completion method is generally applicable for revenue recognition in real estate but must be applied correctly and with reference to the facts.

- Court's Interpretation and Reasoning:

The DRP enhanced income by Rs. 1,20,10,610/- for payments made through banking channels, alleging non-explanation of source, despite assessee furnishing bank statements and registered sale deed evidencing source from Capital Gains Account Scheme.

The DRP also directed spreading of additions across AYs based on percentage completion method, which the Court found inappropriate as payment dates were ascertainable and payments were completed by March 2015.

- Key Evidence and Findings:

The assessee's payments through banking channels were documented and source explained. The DRP gave only one day to respond to enhancement notice, which was inadequate.

- Application of Law to Facts:

The Court held that DRP's enhancement beyond incriminating material is illegal. The percentage completion method was misapplied, and additions should be confined to AY 2015-16, the year of payment completion.

- Treatment of Competing Arguments:

The Revenue's justification on non-submission of source was rejected due to evidence on record and procedural unfairness.

- Conclusion:

Enhancement of income for banking channel payments is quashed; additions to be restricted to AY 2015-16 without spreading over multiple years.

Issue 7 & 9: Violation of Principles of Natural Justice and Scope of Additions Beyond Incriminating Material

- Legal Framework and Precedents:

Principles of natural justice require opportunity to cross-examine witnesses whose statements form basis of additions. DRP must provide reasonable time for submissions. Additions under Sections 153A/153C must be based solely on incriminating material found during search.

Supreme Court rulings emphasize that no additions can be made on mere suspicion or post-search material without incriminating documents.

- Court's Interpretation and Reasoning:

The Court found that the assessee was given only one day to respond to DRP's enhancement notice, which is manifestly inadequate, especially for a non-resident Indian.

Repeated requests for adjournment and submissions were ignored. No opportunity for cross-examination of third-party witnesses was granted.

Additions made beyond incriminating material found during search are impermissible.

- Key Evidence and Findings:

Assessee submitted detailed bank statements, sale deed, and other documents. DRP ignored these and proceeded to enhance income arbitrarily.

- Application of Law to Facts:

The Court held that DRP's actions violated natural justice and exceeded its jurisdiction.

- Treatment of Competing Arguments:

Revenue's reliance on procedural compliance was rejected in view of lack of fair opportunity and statutory limitations.

- Conclusion:

Additions made beyond incriminating material and without fair hearing are quashed.

Issue 10: Limitation on Assessment Order Passed Under Section 153C Read with Section 144C(13)

- Legal Framework and Precedents:

Section 153B of the Act prescribes time limits for completion of assessments. Sections 144C(4) and 144C(13) prescribe time limits for passing assessment orders after draft order acceptance or DRP directions respectively, but do not provide exclusion of time during DRP proceedings.

Tribunal decisions hold that assessment orders passed beyond prescribed time limits without valid extension or exclusion are barred by limitation.

- Court's Interpretation and Reasoning:

The Court observed that the assessment order dated 24.01.2025 was passed beyond the statutory time limits considering the time taken for DRP proceedings and absence of any statutory exclusion.

- Key Evidence and Findings:

Timeline of notices, draft orders, DRP directions, and final assessment order showed delay beyond permissible period.

- Application of Law to Facts:

The Court held the assessment order is barred by limitation and therefore void.

- Treatment of Competing Arguments:

The Revenue did not file written submissions to counter limitation argument.

- Conclusion:

Assessment order under Section 153C read with Section 144C(13) is barred by limitation and quashed.

Proceedings under ss.153A/153C quashed for cryptic satisfaction note; s.69 additions deleted, builder payment explained, escaped income threshold unmet
ITAT, JAIPUR (AT) set aside AO's proceedings under ss.153C/153A, finding the satisfaction note cryptic and insufficient to confer jurisdiction for A.Y.2015-16 to 2021-22; notices related to escaped income could not be tied to specific assessment years and total alleged escaped income fell below the threshold for extended limitation. The tribunal held revenue failed to prove on-money or link incriminating material to the contested years, and absence of cross-examination vitiated proceedings. Additions under s.69 and related DRP directions were deleted, the payment to the builder was held explained from sale proceeds and CGAS funds.

Assessment u/s 153C - recording of satisfaction note by the AO - AO assumed jurisdiction in the case of the assessee without recording proper satisfaction, alleging payment of on-money for the purchase of a flat - HELD THAT:- As perused the material available on record, it is apparent that recording of satisfaction note by the AO is not a simpliciter procedural requirement in order to issue notice u/s. 153C of the Act. The notices can be issued only for those years which have a bearing on the alleged escaped income based on the incriminating material found during the course of search. It is true at the time of recording of satisfaction note, the AO does not have to come to conclusion in definite form of the escaped income, however, the same should be reflected from the reasons assigned in the satisfaction note. In the instant case a single satisfaction note was recorded for A.Y. 2015-2016 to 2021-2022. From perusal of excel sheet containing details as on 17.04.2013, how, the ld. Assessing Officer came to the conclusion that escaped income relates to A.Y. 2015-2016 to 2021-2022 cannot be deciphered. The jurisdiction assumed based on such ‘satisfaction note’ beset with vital infirmities cannot be countenanced in law. The documents/assets searched need to be specified against each year covered in the satisfaction note to depict application of mind and initiation of action u/s 153C of the Act qua such assessment years. Ld. AO has failed to do so in the present case. The objections raised by the ld. A/R towards lack of jurisdiction based on a cryptic and non-descript satisfaction note thus deserves to be accepted. As perused 4th proviso to section 153A(1) alongwith Explanation 1 to section 153A(1) r.w.s. 153C of the Act. Assessing Officer can invoke extended period of limitation beyond the 6th year only under the condition that the alleged escaped income is more than Rs. 50.00 lacs. Admittedly total alleged escaped income qua assessee as per satisfaction note itself is Rs. 27.50 lacs for A.Y. 2015-2016 to 2021-2022, which too has been restricted by the DRP at Rs. 11,69,050/- for A.Y. 2015-2016 only. In the instant case, it shall be A.Y. 2023-2024 & it will not relate back to A.Y. 2021-2022, i.e., the year in which search was carried out at the premises of searched person. As indisputable fact that while in the case of the searched person, the six year or the ten-year block period is to be computed with reference to the date of search, however, in the case of the other person, the six year or the ten-year block period is to be computed with reference to the date when the incriminating material is handed over to the jurisdictional AO of the “other person” & on the basis whereof the satisfaction note is recorded by him - Ground No. 1 of the assessee is thus allowed. Incriminating material found during search or not? - It is settled law that burden lies upon the revenue to prove the payment of on-money on the part of the assessee. Assumption & presumption have no place. It can be seen that on the basis of similar incriminating material, different stands have been adopted by different AO with regards to the payment of on-money relates to which year. No material is forthcoming from the builder reflecting the date of receipt of on-money. No opportunity of cross examination has been granted to the assessee, which vitiates entire assessment proceedings as held in CIT v. Sunita Dhadda [2017 (7) TMI 1164 - RAJASTHAN HIGH COURT] As a corollary, there is no basis to make allege that the incriminating material has any bearing in relation to A.Y. 2015-2016 and the addition made by the ld. Assessing Officer deserves to be deleted. Ground No. 3 of the assessee is thus allowed. Addition u/s 69 - Enhancement has been proposed by the DRP on the ground that source of payment made by the assessee to the builder as per agreement to sale has not been explained - As the said document is not incriminating material, thus we hold that the directions so issued by the DRP u/s. 144C(8) is bad in law. We have further perused the bank statements & registered sale deed executed by the assessee. The source of funds paid to the builder is the sale proceeds received by the assessee on sale of immovable property and the amount kept in the Capital Gains Account Scheme wherefrom the amount has been paid to the builder. The source is fully explainable. As a corollary, there is no basis to allege that the source of Rs. 1,20,10,610/- paid by the assessee to the builder is not explained and accordingly the addition so made deserves to be deleted. Ground of the assessee is thus allowed.

2025 (9) TMI 163 - ITAT MUMBAI Income Tax

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1. ISSUES PRESENTED AND CONSIDERED

1. Whether additions under Section 69 (unexplained investment) and consequential notional interest under Section 56 can be sustained in assessments framed under Section 153A where the purported incriminating material relied upon was seized from a third party and no incriminating material was found in the searched assessee's premises.

2. Whether statements recorded under Section 132(4) (including confrontations) or third-party seized documents, without corroborative material discovered in the searched assessee's premises, constitute "incriminating material" for the purpose of making additions under Section 153A in respect of unabated/completed assessments.

3. Whether a taxpayer may raise, at the appellate stage (or in proceedings under Section 153A), a fresh claim that certain export incentives (FPS/MEIS) are capital receipts not chargeable to tax, and if so, whether such claims are admissible and on what footing in (a) abated assessments, (b) unabated/completed assessments, and (c) regular assessments.

4. Ancillary: whether derivative additions (e.g., under Section 56 for notional interest) survive if the foundational additions under Section 69 are deleted.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1 - Validity of additions under Section 69/56 based solely on third-party seizure material in Section 153A assessments

Legal framework: Section 153A empowers assessment/re-assessment of total income for six years following a search on a person, but the statutory scheme distinguishes between material found in the searched person's premises and material found in searches of other persons (with Section 153C providing a procedure to assess income of a person not searched based on incriminating material found in another's search).

Precedent treatment: The Court relied on the ratio of the highest-court authority (stating that no addition can be made under Section 153A in respect of unabated/completed assessments unless incriminating material is found in the course of search in the searched assessee's premises) and on coordinate-bench Tribunal decisions holding that third-party material cannot be used under Section 153A unless Section 153C procedure is invoked.

Interpretation and reasoning: The Tribunal examined the assessment record and found (i) no incriminating material was unearthed from the assessee's premises; (ii) the AO's additions were founded exclusively on loose sheets, coded ledgers and statements seized from a third party; and (iii) the statutory route for using third-party seized material against another person is Section 153C, which was not followed. The mere confrontation of the assessee with third-party material or recording of statements during search does not convert third-party documents into incriminating material found in the searched person's premises.

Ratio versus obiter: Ratio - additions under Section 153A for unabated/completed years cannot be based on incriminating material seized from third parties; Section 153C procedure is the exclusive route. Obiter - observations on broader consequences for assessment practice and cross-references to analogous Tribunal decisions.

Conclusion: Additions under Section 69 (and consequential Section 56 estimates) that were based solely on third-party seizures were legally untenable and were deleted across the assessment years under appeal.

Issue 2 - Evidentiary value of statements under Section 132(4) and need for corroboration

Legal framework: Section 132(4) statements constitute information and may be used where corroborated by material discovered during search; standalone statements lack the evidentiary sufficiency to sustain assessments or additions.

Precedent treatment: The Tribunal relied on binding and persuasive authorities holding that statements under Section 132(4), without supporting incriminating material discovered in the searched premises, cannot alone sustain additions; courts have required corroboration and voluntary, authenticated recording.

Interpretation and reasoning: The Court reviewed the recorded statement(s) and material circumstances (retraction, lack of signatures/authentication, absence of corroborative documents from the assessee's premises) and held that the statements relied upon were uncorroborated and, in some respects, unauthenticated or retracted. The law treats such statements as information only; in absence of independent material discovered in the searched premises, they do not constitute incriminating material sufficient to disturb completed assessments under Section 153A.

Ratio versus obiter: Ratio - uncorroborated Section 132(4) statements (especially retracted or unauthenticated ones) cannot by themselves justify additions in Section 153A proceedings for unabated years. Obiter - procedural observations about proper conduct of search, recording and authentication of statements.

Conclusion: Additions premised on uncorroborated Section 132(4) statements were unsustainable; consequential deletions followed.

Issue 4 - Survival of derivative additions under Section 56 when foundational Section 69 additions are deleted

Legal framework: Additions under Section 56 for notional interest are derivative and depend on an antecedent finding of unexplained investment under Section 69.

Interpretation and reasoning: The Tribunal found that Section 56 additions were purely consequential estimates premised on the Section 69 findings. Once the foundational unexplained investment additions were deleted for lack of admissible incriminating material, there remained no independent basis to sustain the Section 56 estimates.

Ratio versus obiter: Ratio - derivative additions collapse when the primary finding on which they rest is quashed. Obiter - none significant.

Conclusion: All Section 56 additions were deleted as they were derivative of and dependent upon the deleted Section 69 additions.

Issue 3 - Admissibility and merits of fresh appellate claim that FPS/MEIS incentives are capital receipts (abated, unabated and regular assessments)

Legal framework: Appellate authorities possess plenary powers to admit and decide fresh legal claims under Section 254/appeal jurisdiction; Section 153A and its provisos distinguish abated assessments (where pending assessments abate and a fresh return is furnished) from unabated/completed assessments (where finality may restrict AO's power to reopen except on incriminating material). Judicial tests (purpose test) govern characterisation of receipts as capital or revenue.

Precedent treatment: The Tribunal reviewed decisions of High Courts and coordinate Benches (holding FPS/MEIS-type export incentives to be capital receipts where the object is market promotion/industrial development) and authorities clarifying that Goetze limits the Assessing Officer, not the appellate authority, from entertaining fresh claims. The Bombay High Court's interpretation of Section 153A (abated assessments open for fresh claims; unabated assessments restricted by Abhisar Buildwell principle) was treated as authoritative for the forum.

Interpretation and reasoning: The Tribunal made a two-fold analysis: admissibility and merits. On admissibility it held: (a) for abated assessments (where earlier pending assessments abated under the proviso to Section 153A(1)), fresh claims (including claims not made in original returns) are admissible and the assessee may raise new grounds; (b) for regular/search-year assessments completed under Section 143(3), fresh claims in appeal are admissible and ought to be examined on merits by the AO if not finally barred; (c) for unabated/completed assessments, Abhisar Buildwell restricts the AO from disturbing finalized assessments absent incriminating material - but the Tribunal directed that the AO should examine whether the assessee's fresh claim could nonetheless be entertained in law and on facts, and the issue was restored for consideration rather than summarily rejected. On merits (substantive characterisation), applying the purpose test and precedent, the Tribunal found persuasive authority that FPS/MEIS incentives are capital receipts aimed at promotion/market expansion and not compensatory revenue, and that the statutory definition in Section 2(24)(xviii) (which lists "subsidy/grant/incentive/etc." but not the word "reward" used by MEIS) supported a conclusion that MEIS rewards were not captured as taxable assistance; consequently, the MEIS receipt for AY 2020-21 and like items were held to be capital and not taxable.

Ratio versus obiter: Ratio - (i) in abated Section 153A proceedings an assessee may raise new claims and appellate authorities/AO must entertain them; (ii) export incentives of the FPS/MEIS character, on the facts before the Tribunal and applying the purpose test and precedent, may be capital receipts not exigible to tax; (iii) where assessments are unabated and final, the AO's power under Section 153A is limited by Abhisar Buildwell, but a reasoned adjudication on whether a fresh claim can be entertained must be undertaken rather than automatic exclusion. Obiter - detailed policy observations on legislative language ("reward" v. "subsidy") and broader equitable considerations.

Conclusion: (a) For the abated year(s) and regular assessment year(s) the Tribunal admitted the additional claims and restored matters to the AO to decide merit and quantify. (b) For unabated/completed years, the Tribunal directed restoration to AO for reasoned examination of admissibility under Section 153A (given Abhisar Buildwell) and allowed the assessee liberty to present contentions; (c) For AY 2020-21 the MEIS receipt was held capital and the addition deleted; associated mechanical/accounting duplication was to be rectified.

Disposition and consequential directions

1. Deletion of additions under Section 69 and consequential deletions under Section 56 in the appeals decided on that ground.

2. Admission and remand for de novo adjudication by the AO of additional claims regarding FPS/MEIS for the abated year (and restoration for unabated years to determine permissibility under Section 153A), with directions to afford opportunity of hearing and to pass reasoned orders on law and facts; MEIS addition for AY 2020-21 deleted as capital receipt.

3. Other technical grounds pleaded but not argued remained unadjudicated or declared academic.

AO directed to reassess FPS/MEIS scrips as capital receipts; MEIS rewards held capital, deletions ordered under s.2(24) and s.153A
For A.Y.2017-18 (abated) and A.Y.2018-19 (regular), the ITAT admitted the assessee's additional contention that FPS/MEIS scrips are capital receipts and restored the matter to the AO to examine, quantify and decide afresh after hearing. For A.Ys.2012-13 to 2016-17 (unabated), the issue is likewise restored to the AO to determine whether such a claim can be entertained in s.153A proceedings in the absence of incriminating material. On merits the Tribunal held MEIS rewards to be capital receipts outside s.2(24) charging provisions and directed deletion of additions treating them as revenue.

Assessment u/s 153A - incriminating material as found during the search or not? - whether the incentives granted in the form of the Scrip (FPS&MEIS) to the assessee as per the FTP Policy of 2010 to 2014 and 2015 to 2020 respectively being an eligible exporter under the FTP Policy is chargeable to the tax or not? - HELD THAT:- For A.Y. 2017–18 (abated assessment) and A.Y. 2018–19 (regular assessment under Section 143(3)), the additional claims made by the assessee for treating the export incentives under the Focus Product Scheme (FPS) and the Merchandise Exports from India Scheme (MEIS) as capital receipts not chargeable to tax are admitted, and the matter is restored to the file of the AO. AO shall examine the claims on merits, quantify the amounts involved, and decide the issue afresh in accordance with law after granting due opportunity of hearing to the assessee. In respect of A.Ys. 2012–13 to 2016–17 (unabated assessment years), the issue relating to admissibility of the assessee’s additional claim is also restored to the file of the AO. AO shall determine, based on law and facts, whether such a claim can be entertained in the context of Section 153A proceedings in absence of incriminating material. The assessee shall be at liberty to raise all relevant contentions, and the Assessing Officer shall pass a reasoned order in accordance with law. Whether the export incentive received under the MEIS scheme is liable to tax as a revenue receipt, or whether it partakes the character of a capital receipt outside the purview of the charging provisions of the Act? - The legislature, in its wisdom, has adopted a wide and inclusive language in Section 2(24)(xviii), covering a range of governmental aids from subsidies to reimbursements. Yet, despite its expansive sweep, the provision does not include “reward.” The use of the phrase “by whatever name called” in clause (xviii) does not automatically encompass every form of State support, especially where the scheme itself is distinct in substance and form. MEIS scheme was conceptualised not as a profit-linked assistance or cost-reimbursement mechanism, but as a policy instrument to reward exports to incentivised markets, framed under the Foreign Trade Policy. This distinction is not merely semantic but structural. The tradable duty credit scrips awarded under MEIS are not calculated based on cost, loss, or business exigency, but rather as a fixed percentage of FOB value of eligible exports. Such scrips, granted to stimulate economic activity and trade flows, partake the nature of a capital accretion rather than a revenue inflow. In interpreting a charging provision like Section 2(24), it is well-settled that strict construction must apply. One cannot presume a legislative intention to tax a class of receipts unless such inclusion is unambiguously expressed or implied by necessary and inescapable construction. As the Hon’ble Supreme Court observed in Ponni Sugars and Chemicals Ltd. [2008 (9) TMI 14 - SUPREME COURT] where a subsidy or grant is linked not to trading operations but to a capital outlay or economic policy, it must be viewed as capital in nature. Contemporaneous introduction of both the MEIS scheme and clause (xviii) of Section 2(24), and the absence of any attempt to align their terminology, reinforces the conclusion that MEIS rewards were not meant to be covered under this clause. A taxing provision cannot be extended by analogy or inference especially where the Legislature has shown itself capable of articulating inclusivity through expansive language. The omission of “reward,” despite its repeated and specific usage in the MEIS framework, cannot be treated as accidental. Government's own notifications and subsequent discontinuance of the scheme reinforce the view that MEIS was neither a recurring nor a revenue-based benefit. In fact, the decision to retrospectively withdraw MEIS benefits for certain sectors affirms that such rewards were viewed as a one-time policy tool rather than an income stream. Alleged double- counting was not a matter of controversy arising from concealment or non-disclosure, but from an inadvertent accounting classification, which was transparently explained and rectified through a revised computation. AO's refusal to entertain such correction is unsustainable and contrary to the principles of natural justice and equity. The Tribunal, being the final fact-finding authority, is not precluded by the procedural technicalities of return filing from rendering substantial justice. Thus, after a holistic appraisal of the factual matrix, scheme provisions, statutory context, and judicial precedents, we hold that the MEIS “reward” received by the assessee is a capital receipt, not forming part of taxable income under section 2(24) of the Act. The Assessing Officer is directed to delete the addition made by treating the same as revenue income.

2025 (9) TMI 565 - ITAT MUMBAI Income Tax

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ISSUES PRESENTED AND CONSIDERED

1. Whether beneficial DTAA rate applies to tax paid on dividend (assessment years under consideration).

2. Whether rural advances made by a transferor NBFC during the period between the appointed date and effective date of a court-sanctioned amalgamation can be treated as advances of the transferee bank for the purpose of deduction under section 36(1)(viia), and whether the 8.5% baseline percentage or NBFC ceiling applies.

3. Whether loss on sale of immovable properties acquired in satisfaction of loans is taxable as business loss (profits and gains of business) or as capital loss.

4. Whether provisions made for standard assets (RBI classification) can be taken into account in computing deduction under section 36(1)(viia) for banks.

5. Whether additional ESOP cost (difference between market value at exercise and market value at grant) is deductible / requires adjustment at exercise.

6. Whether ESOP expenditure (claimed by the assessee) is allowable as business deduction (revenue) or disallowable as capital / not wholly and exclusively for business.

7. Whether disallowance under section 14A read with Rule 8D is permissible for investments/ exempt income of a bank (including investments held as stock-in-trade).

8. Whether preliminary/QIP subscription expenses qualify for amortisation under section 35D(2)(c)(iv) (i.e., whether QIP is a "public subscription").

9. Whether bad debts in respect of credit card business are allowable as business deduction under section 36(1)(vii).

10. Whether interest on Innovative Perpetual Debt Instruments / perpetual bonds is allowable as deduction (section 36(1)(iii) / alternatively under section 37) or is akin to equity and non-deductible.

11. Whether amortisation of premium on Held-to-Maturity (HTM) securities is allowable as deduction.

12. Whether broken period interest paid on acquisition of securities is revenue deductible or capital in nature.

ISSUE-WISE DETAILED ANALYSIS

Issue 1 - DTAA beneficial rate on dividend

Legal framework: Claim to apply beneficial DTAA rate to tax on dividend.

Precedent treatment: Issue conceded to be covered adverse to assessee by a Special Bench decision of coordinate Tribunal.

Interpretation and reasoning: Parties invited the Tribunal to follow binding coordinate bench Special Bench jurisprudence.

Ratio vs. Obiter: Ratio - the Tribunal follows on point; no separate reasoning recorded.

Conclusion: Ground dismissed following the Special Bench precedent.

Issue 2 - Inclusion of NBFC (transferor) rural advances for section 36(1)(viia) post-amalgamation and applicable percentage

Legal framework: Section 36(1)(viia) allows deduction to banking companies for provisions for bad and doubtful debts computed as per prescribed methodology and compared to book provisions; provides minimum of 8.5% of total income and 10% of aggregate rural advances (subject to s.36(2)(v)).

Precedent treatment: Reliance on Supreme Court authority on effect of sanction of scheme of amalgamation (Marshall Sons & Co.) and on scheme clauses deeming transferor to have carried on business for and on behalf of transferee from the appointed date.

Interpretation and reasoning: Tribunal examined the NCLT-approved scheme which specified an appointed date and clauses deeming the transferor company to have carried on business for the transferee from that date; noted that the assessee filed revised returns including income of transferor and paid tax at bank rates; held that where a court-sanctioned scheme prescribes an appointed date and the scheme provides transferor carried on business for transferee, the advances made by transferor in that interim are to be treated as advances of transferee (bank). Distinction drawn from literal reading that s.36(1)(viia) applies to banks - held effect of sanctioned scheme is to make transferor's interim business that of bank. On percentage, held same logic applies and 8.5% baseline is applicable (because total income is that of the transferee including transferor income from appointed date).

Ratio vs. Obiter: Ratio - assets and advances made by transferor during appointed date-to-effective date fall within transferee's business for s.36(1)(viia) where NCLT scheme so provides; 8.5% percentage applies to combined total income. (This forms the legal holding remitting quantum to AO.)

Conclusion: Claim allowed in principle; issue remitted to Assessing Officer for factual/verificatory exercise regarding quantum and correctness of amounts, and to apply s.36(1)(viia) read with s.36(2)(v) accordingly.

Issue 3 - Treatment of sale of immovable properties (acquired in satisfaction of loans) as business loss

Legal framework: Taxability under heads "Capital Gains" v. "Profits and gains of business or profession"; principles recognizing character of asset determined by manner and purpose of acquisition and use.

Precedent treatment: Followed jurisprudence of High Courts and Tribunal (L.M. Devere / Andhra Pradesh decisions, Karumuru Venkata, Madras decisions) holding that immovable properties acquired in satisfaction of debts by money-lending/banking business are in the nature of stock-in-trade / business assets and gains/losses on sale are business income/loss.

Interpretation and reasoning: Tribunal found properties acquired in foreclosure/settlement of loans, accounted as investments but arising from lending operations; properties were not fixed assets nor used in the business; sale proceeds set off against outstanding loans-hence character is converted form of stock-in-trade/business asset. Distinguished the argument that mere absence of depreciation or classification in books dictates capital nature. Noted factual questions not examined by lower authorities.

Ratio vs. Obiter: Ratio - when an immovable property is acquired in satisfaction of debt by a banker and subsequently sold, resultant gain/loss is business income/loss; factual determination required as to nature of acquisition, so remitted for enquiry.

Conclusion: Held in favour of assessee in principle; remitted to AO for limited factual examination to ascertain acquisition in satisfaction of debt and to allow business loss if established.

Issue 4 - Allowability of provisions for standard assets under section 36(1)(viia)

Legal framework: Section 36(1)(viia) allows deduction for "any provision made for bad and doubtful debts" subject to ceilings; banks follow RBI provisioning norms which include standard, sub-standard, doubtful, loss categories.

Precedent treatment: Followed coordinate-bench decisions (Kotak Mahindra and prior ITAT rulings) holding that provisions for standard assets are made pursuant to RBI guidelines and are legitimately "provision for bad and doubtful debts" and therefore can be considered for allowance under s.36(1)(viia) subject to verification.

Interpretation and reasoning: Tribunal accepted the view that section uses the phrase "provision made for bad and doubtful debts" and does not limit to specified categories; a provision for standard assets addresses inherent risk and thus falls within the statutory language. Emphasised that AO must examine reasonableness and evidence for provisioning.

Ratio vs. Obiter: Ratio - deduction under s.36(1)(viia) may include provisions made for standard assets where justified; remitted to AO to examine merits.

Conclusion: Directs AO to examine and allow deduction including provisions for standard assets, subject to verification.

Issue 5 - ESOP additional adjustment at exercise (market value at exercise v. market value at grant)

Legal framework: Deductibility principles under mercantile accounting; taxation of ESOP benefit as perquisites in employee hands; SEBI guidelines on accounting treatment; section 37 general deduction.

Precedent treatment: Followed Special Bench decision (Biocon Ltd. SB) which held (i) discount on ESOP is an ascertainable liability deductible over vesting, (ii) amounts relating to unvested/lapsed options must be reversed, and (iii) adjustment at exercise is required to reconcile provisional deductions with actual discount measured by market price at exercise - i.e., north/south adjustments on exercise.

Interpretation and reasoning: Tribunal rejected submission that accounting guidance alone determines tax outcome; adopted Special Bench reasoning that the company's deductible employee cost must ultimately match the actual discount that accrues to employees at exercise; provisional deductions over vesting must be adjusted at exercise for difference between grant-based estimate and exercise-based actual; remitted for AO verification.

Ratio vs. Obiter: Ratio - additional adjustment at exercise is required; the Special Bench holding is followed as binding for the issue remitted to AO for verification and appropriate allowance/reversal.

Conclusion: Allowed in principle; remitted to AO to verify additional claim and permit reasonable opportunity to assessee in accordance with Special Bench decision.

Issue 6 - Allowability of ESOP expenditure (revenue v. capital / wholly and exclusively)

Legal framework: Section 37 for general business deductions; principles for mercantile accounting and timing of deduction; SEBI accounting guidance.

Precedent treatment: Followed coordinate-bench decisions in assessee's own case and other Tribunal rulings restoring matter to AO for verification and allowing deduction where liability is ascertained and quantified (subject to verification of terms/conditions).

Interpretation and reasoning: Tribunal observed issue had been considered by coordinate bench and lower appellate authority; factual verification required regarding terms and quantification of ESOP; in absence of contrary findings, no interference with CIT(A) allowance.

Ratio vs. Obiter: Ratio - ESOP expenditure can be revenue deduction where it represents employee compensation recognized as an ascertained liability and appropriately quantified; factual verification required.

Conclusion: Revenue's disallowance dismissed; CIT(A) order sustaining allowance upheld following coordinate bench precedents.

Issue 7 - Section 14A/Rule 8D disallowance for bank's exempt income / stock-in-trade investments

Legal framework: Section 14A disallows expenditure in relation to exempt income; Rule 8D prescribes computation mechanism; interplay with banking business and classification of investments.

Precedent treatment: Followed coordinate bench and higher court jurisprudence (including Maxopp, CBDT Circular No.18/2015, and Tribunal decisions in assessee's own case) which recognize that for banks investments and related income may form part of business and that Rule 8D application requires nuanced treatment; in this matter prior coordinate bench decisions led to deletion of Rule 8D(2)(ii) disallowance and complete deletion ultimately.

Interpretation and reasoning: Tribunal accepted that where investments form part of banking business/stock-in-trade, the mechanical application of Rule 8D may not yield correct result; reliance on CBDT Circular and Supreme Court guidance supports that incomes from banking investments are business income; followed coordinate bench holdings which deleted the disallowance.

Ratio vs. Obiter: Ratio - in the factual matrix of the assessee-bank, disallowance under Rule 8D deleted; AO directed to delete disallowance.

Conclusion: CIT(A) order deleting Rule 8D disallowance sustained.

Issue 8 - QIP subscription expenses and section 35D(2)(c)(iv)

Legal framework: Section 35D allows amortisation of preliminary expenses incurred in connection with issue for "public subscription". Question whether QIP (issue to QIBs) constitutes "public subscription".

Precedent treatment: Followed coordinate bench precedent (Deccan Chronicle, Yes Bank, and tribunal decisions) holding that QIBs/QIP fall within the ambit of "public" for the purpose of section 35D where statutory instruments/regulations and listing rules classify QIBs as part of public shareholding and regulatory scheme treats IPP/QIP as modes to raise public shareholding.

Interpretation and reasoning: Tribunal relied on SCRR, listing agreement, SEBI regulations and prior Tribunal decisions holding QIBs to be part of public; concluded expenses of QIP may qualify for amortisation under s.35D; noted factual similarity with prior allowed years and remitted as required for factual examination in some precedents but here followed coordinate bench allowing 1/5th amortisation.

Ratio vs. Obiter: Ratio - QIP/QIB issue can be treated as public subscription for s.35D allowing amortisation of preliminary expenses; followed coordinate bench precedent in assessee's own case.

Conclusion: CIT(A) order allowing amortisation upheld; no interference.

Issue 9 - Bad debts pertaining to credit card business

Legal framework: Section 36(1)(vii) deduction for bad debts; characterisation of credit card business as part of banking business.

Precedent treatment: Followed coordinate bench decisions (assesssee's own case) and RBI master circular recognising credit card activity as banking business.

Interpretation and reasoning: Tribunal held credit card business is part of banking operations (per RBI circular), income from it was offered as business income by the assessee; bad debts arising in that business are deductible as business bad debts even if not routed through provision accounts, subject to proper book entries and verification of write-offs.

Ratio vs. Obiter: Ratio - bad debts from credit card business are allowable as business deductions under s.36(1)(vii) where income from that business has been offered and facts support write-off; remitted/allowed as per facts.

Conclusion: CIT(A) order allowing bad-debt deduction sustained.

Issue 10 - Allowability of interest on perpetual bonds

Legal framework: Section 36(1)(iii) deduction for interest on capital borrowed; characterization of perpetual instruments (debt v. quasi-equity) and practical features (fixed rate, investor rights, redemption/call, treatment in accounts).

Precedent treatment: Followed coordinate bench decisions (ICICI Bank decision) which considered terms, RBI recognition, treatment in books (shown as borrowings), tax deducted at source on interest and practical redemption history; held interest allowable under s.36/alternatively under s.37.

Interpretation and reasoning: Tribunal distinguished authorities treating government-provided capital and statutory features; observed that where instruments carry fixed interest, holders have no management rights, interest was paid and TDS deducted and instruments were shown as borrowings and actually redeemed in practice, they operate as long-term borrowings - interest is deductible. Also held that if not falling under s.36, interest may be allowable under s.37 as business expenditure.

Ratio vs. Obiter: Ratio - interest on perpetual instruments having debt-like features, used for business purposes, and shown/treated as borrowings is allowable as deduction; factual elements determine characterization.

Conclusion: CIT(A) order deleting disallowance upheld; revenue appeal dismissed.

Issue 11 - Amortisation of premium on HTM securities

Legal framework: RBI classification of investments (HTM/AFS/HFT) and accounting treatment; question whether amortisation/diminution on HTM is allowable in computing taxable income.

Precedent treatment: Followed coordinate bench precedent (Bank of Rajasthan, HDFC Bank decisions) holding amortisation of HTM premium allowable.

Interpretation and reasoning: Tribunal noted settled coordinate bench position in favour of allowing amortisation where investments are classified HTM in accordance with RBI norms and prior Tribunal authority supports allowance.

Ratio vs. Obiter: Ratio - amortisation of premium on HTM securities allowed; AO directed to accept claim following coordinate bench jurisprudence.

Conclusion: CIT(A) allowance sustained.

Issue 12 - Broken period interest

Legal framework: Treatment of broken period interest paid on acquisition of securities - whether capital element of acquisition cost or revenue expenditure deductible in P&L.

Precedent treatment: Followed jurisdictional High Court decisions in assessee's own case (HDFC Bank line of authority) holding broken period interest allowable as deduction.

Interpretation and reasoning: Tribunal relied on High Court precedent that accepted broken period interest as allowable and noted that Supreme Court had not overturned the High Court outcome in relevant appeals; fact and law thus support treating broken period interest as revenue deduction in the assessee-bank context.

Ratio vs. Obiter: Ratio - broken period interest is deductible in the facts of banking investments as revenue expenditure; AO cannot disallow following binding High Court authority.

Conclusion: Revenue ground on broken period interest dismissed; CIT(A) order sustained.

DTAA benefit denied; s.36(1)(viia) allows deduction for amalgamated NBFC rural advances with 8.5% benchmark; other deductions remitted
ITAT MUMBAI (AT) dismissed the DTAA beneficial-rate challenge following Special Bench precedent. Rural advances of an amalgamated NBFC are includible for deduction under s.36(1)(viia) with an 8.5% benchmark; quantum remitted to AO for verification. Loss/gain on sale of property acquired in satisfaction of debt is business loss/gain; factual inquiry remitted. Deduction under s.36(1)(viia) for provisions on standard assets, additional ESOP cost, and amortization of HTM premium are to be examined/allowed as indicated and remitted where factual verification needed. s.14A disallowance under Rule 8D deleted. QIP issue expenses qualify under s.35D. Credit-card bad debts allowed under s.36(1)(vii). Interest on perpetual bonds allowed as deductible borrowing cost. Broken-period interest allowed per HC position.

Beneficial rate of DTAA on tax paid on dividend - HELD THAT:- AR during the course of hearing fairly conceded that the issue is covered against the assessee in terms of the decision of Total Oil India (P) Ltd [2023 (4) TMI 988 - ITAT MUMBAI (SB)] Accordingly respectfully following the decision of the Special Bench, we dismiss the ground raised by the assessee in this regard. Claim u/s 36(1)(viia) for Rural Advances - BFIL amalgamated with the assessee from the appointed date 01.01.2018 vide the scheme of amalgamation as approved by NCLT vide order dated 10.06.2019 with effective date 04.07.2019 - The assessee submitted before the CIT(A) that while claiming the deduction under section 36(1)(viia) the assessee missed to include the rural advances given by BFIL from the appointed date till effective date - revenue's contention is that BFIL is an NBFC and not a Bank and hence the advances extended by BFIL cannot be considered for the purpose of deduction under section 36(1)(viia) - HELD THAT:- When the scheme is approved without any date being specified then the date as contained in the scheme would become the effective date of amalgamation. This fact is similar to the assessee's case and therefore the effective date of amalgamation in the present case is 01.01.2018 and from the said date the business carried on by BFIL would be that of the assessee. Therefore including the rural advances extended by BFIL should be included for the purpose of deduction u/s 36(1)(viia) of the Act. Further the same logic would be applicable for the purpose computing the percentage of income and accordingly we hold that 8.5% would be the percentage applicable for the purpose of deduction under section 36(1)(viia) of the Act. The claim towards including the rural advances given by BFIL for deduction under section 36(1)(viia) is a fresh claim before the CIT(A) and the said claim needs factual examination to check the correctness of the quantum of the claim. Hence for the limited purpose of examining amount of claim made by the assessee we are remitting the issue back to the AO with a direction to verify and allow in accordance with the provisions of section 36(1)(viia) r.w.s. 36(2)(v). Sale of Immovable Property acquired through loan to be treated as Business Income / Loss - HELD THAT:-When a property which is acquired in satisfaction of the loan is subsequently sold the loss or gain should be treated as business loss/ gain. We unable to appreciate the contention of the ld DR that the above decision to be interpreted narrowly to the effect that it is applicable only when the assets acquired is kept as stock-in-trade. Ratio to be applied is that the assets are acquired in satisfaction of a debt which is same as in assessee's case and therefore the loss arising there from should be allowed as a business loss. However we notice that the facts pertaining to the acquisition of the property has not been factually examined by the lower authorities. Hence we are remitting this issue back to the AO for the limited purpose of examining the nature of acquisition i.e. it is in satisfaction of the debt and allow the claim of the assessee as business loss accordingly. Deduction u/s 36(1)(viia) against the provision made on standard assets - As relying on case of Kotak Mahindra Bank [2023 (2) TMI 1005 - ITAT MUMBAI] we direct the AO to examine the claim of the assets on merits ad allow deduction under section 36(1)(viia) including provision made towards standard assets. Allowability of additional ESOP cost - additional claim before us seeking deduction towards difference between market value on the date of exercise and market price at the grant of option to be allowed as a deduction - claim now made by the assessee before us is an incremental claim towards the ESOP cost which was not claimed while filing the return of income - HELD THAT:- As decided in Special Bench in the Biocon Ltd. [2013 (8) TMI 629 - ITAT BANGALORE] held that discount under ESOP is in the nature of employees cost and is hence deductible during the vesting period w.r.t the market price of shares at the time of grant of options to the employees. The amount of discount claimed as deduction during the vesting period is required to be reversed in relation to the unvesting/lapsing options at the appropriate time. However, an adjustment to the income is called for at the time of exercise of option by the amount of difference in the amount of discount calculated with reference the market price at the time of grant of option and the market price at the time of exercise of option. No accounting principle can be determinative in the matter of computation of total income under the Act. The question before the special bench is thus answered in affirmative by holding that discount on issue of Employee Stock Options is allowable as deduction in computing the income under the head Profits and gains of business or profession. Considering the binding precedents of the decision of the Special Bench, we are remitting the impugned issue to the AO for verification of the additional claim now made by the assessee. Disallowance u/s 14A r.w.r. 8D - assessee has made a suo-motu disallowance towards exempt income earned - HELD THAT:- We direct the ld. AO to completely delete the disallowance made u/s 14A of the Act in respect of both second and third limbs of Rule 8D(2) of the Rules. Disallowance of expenses claimed u/s 35D - AO disallowed the said claim on the ground that QIP is not a public subscription and therefore the expenses fall outside the scope of section 35D(2)(c)(iv) - HELD THAT:- The assessee during the year under consideration has claimed 1/5th of expenses incurred towards issue of shares to QIP. The contention of the revenue is that QIPs do not fall within the purview of public subscription and the expenses incurred towards public subscription only are eligible for deduction under section 35D(2)(c)(iv). As decided in Yes Bank Ltd [2020 (8) TMI 86 - ITAT MUMBAI] QIBs are to be treated a public and hence any expenditure incurred towards issue of shares under QIP would qualify for deduction under section 35D. Therefore, we hold that there is no infirmity in the findings of the Tribunal. Disallowance of Bad-debts pertaining to credit card expenses - HELD THAT:- We notice that the Co-ordinate Bench has considered an identical issue for AY 2014-15 in assessee's own case [2019 (4) TMI 1488 - BOMBAY HIGH COURT] wherein verified the computation of income. We have also gone through the workings for bad debts written off enclosed in page 43 of the paper book. Hence, it is observed that the bad debts arising from credit card business is part and parcel of total bad debts reflected by the assessee. Hence, we have no hesitation to hold that bad debts arising from credit card business would be part and parcel of loss arising in the course of banking business and hence liable as deduction u/s.36(1)(vii) of the Act. Allowability of interest on perpetual bonds - AO held that the interest on IPDI cannot be allowed as a deduction u/s 36(1)(iii) which allows deduction in respect of capital "borrowed" - CIT(A) deleted the disallowance - HELD THAT:- As decided in ICICI Bank Ltd. [2022 (8) TMI 1346 - ITAT MUMBAI] perused the decision of Kerala Road Transport Corporation [1988 (4) TMI 102 - ITAT COCHIN] wherein held that payment of interest was not made to the corporation but it was the payment made to the third parties. In the light of the above facts and circumstances merely that RBI recognizes to treat the said debt instruments as additional Tier/Capital would not change the nature of Innovative Perpetual Debt Instruments which were of the nature of long term borrowings and the interest paid was debited to the profit and loss account. These debt instruments were also redeemed on different dates as discussed supra in this order, therefore, we don’t find any reason to interfere in the decision of ld. CIT(A), accordingly, this ground of appeal of the revenue is dismissed. Amortization of premium on HTM securities - HELD THAT:- We hold that there is no infirmity in the decision of the CIT(A) in allowing the claim of the assessee towards amortization of premium on Securities Held to Maturity (HTM). Disallowance of Broken Period Interest - HELD THAT:- We notice that the Hon'ble Jurisdictional High Court in assessee's own case in [2019 (4) TMI 1488 - BOMBAY HIGH COURT] wherein ruled issue in favour of the assessee.

2025 (6) TMI 2113 - ITAT BANGALORE Income Tax

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Issues: (i) whether interest earned from deposits maintained under statutory requirements was attributable to the assessee's business and eligible for deduction under section 80P(2)(a)(i); (ii) whether interest earned from investments with co-operative societies and co-operative banks was eligible for deduction under section 80P(2)(d) and, if not, whether only net interest after related was taxable under section 56 with corresponding deduction under section 57.

Issue (i): whether interest earned from deposits maintained under statutory requirements was attributable to the assessee's business and eligible for deduction under section 80P(2)(a)(i).

Analysis: The assessee, a credit co-operative society, was required under the Karnataka co-operative law regime to maintain reserve fund and fluid resources in prescribed investments. Interest arising from such compulsory deposits was treated as linked to the carrying on of the business and not as a voluntary surplus investment. The expression "attributable to" was applied in its wider sense, and the statutory compulsion to park funds in specified institutions was held relevant to the business character of the income.

Conclusion: The issue was decided in favour of the assessee, with the matter remitted to the Assessing Officer to verify the statutory deposit quantum and allow deduction on the corresponding interest income under section 80P(2)(a)(i).

Issue (ii): whether interest earned from investments with co-operative societies and co-operative banks was eligible for deduction under section 80P(2)(d) and, if not, whether only net interest after related expenditure was taxable under section 56 with corresponding deduction under section 57.

Analysis: Interest earned from investments with other co-operative societies was held eligible for deduction under section 80P(2)(d). For investments with co-operative banks, the Tribunal distinguished between statutory deposits and surplus funds. Interest on surplus funds placed beyond the statutory requirement was held not to be attributable to business and not deductible under section 80P(2)(a)(i), while the assessee was entitled to claim the corresponding cost of funds and administrative expenses if such interest was assessed under the head "income from other sources". The issue was accordingly directed to be re-examined by the Assessing Officer.

Conclusion: The issue was decided partly in favour of the assessee and partly in favour of the Revenue, with remand for segregation of statutory deposits, surplus investments, and eligible deductions.

Issue (iii): whether the appeals and cross-objections required final disposition by way of remand and statistical allowance.

Analysis: As the core controversies required factual segregation and recomputation, the Tribunal did not finally quantify the allowable deduction itself but sent the matters back for verification and fresh determination in accordance with the stated principles.

Conclusion: The appeals and cross-objections were partly allowed for statistical purposes.

Final Conclusion: The decision affirms deduction for income traceable to statutory co-operative deposits and to interest from investments with other co-operative societies, rejects blanket treatment of all surplus-fund interest as business income, and leaves recomputation of eligible relief and related expenditure to the Assessing Officer.

Ratio Decidendi: Interest on deposits mandated by co-operative law for reserve fund or fluid-resource compliance retains a business nexus and can qualify under section 80P(2)(a)(i), whereas interest on surplus funds beyond the statutory requirement is not automatically attributable to business and must be tested separately, including for deduction of related expenditure if taxed as other sources.

Statutory co-operative deposits can retain business nexus for deduction, while surplus-fund interest needs separate tax treatment.
Interest from deposits maintained under statutory co-operative requirements was treated as attributable to the society's business and eligible for deduction under section 80P(2)(a)(i), subject to verification of the statutory deposit quantum. Interest from investments with other co-operative societies was held deductible under section 80P(2)(d). Interest on surplus funds placed beyond the statutory requirement was not treated as business income and had to be re-examined separately, including the availability of related expenditure under sections 56 and 57 if assessed as income from other sources. The matters were remitted for segregation of statutory deposits, surplus investments, and corresponding deductions.

Deduction u/s 80P(2)(a)(i) - Statutory reserve and fluid resource deposits - Deduction u/s 80P(2)(d) - Interest assessable as income from other sources - Deduction of proportionate expenditure u/s 57 Deduction u/s 80P(2)(a)(i) - Attributable to business - Statutory deposits - Interest earned by the co-operative society from deposits - distinction between statutory deposits and surplus funds invested - HELD THAT: - The Tribunal held that interest on funds which were merely idle or surplus and not required either for maintaining fluid resources or for compliance with the Karnataka Co-operative Societies law could not be regarded as attributable to the business of providing credit facilities to members. Such interest was neither operational income nor business income merely because the assessee was a co-operative credit society. At the same time, where deposits were made under statutory compulsion, including reserve fund and fluid resource requirements, the placement of funds was integral to carrying on the society's business, and the resulting interest was attributable to business and qualified for deduction under section 80P(2)(a)(i). Since the necessary details of the quantum required to be maintained under the governing statute had not been placed before the Assessing Officer, the matter was remitted for verification and computation of the eligible interest. [Paras 14] Deduction u/s 80P(2)(a)(i) was held allowable only in respect of interest from statutory reserve and fluid resource deposits, and the issue was remanded to the AO to determine the required statutory quantum and grant corresponding relief. Deduction u/s 80P(2)(d) - Investments with co-operative societies - Co-operative banks as banking companies - HELD THAT: - The Tribunal distinguished the claim u/s 80P(2)(d) from the principle governing business income under section 80P(2)(a)(i). It held that if, upon verification, the assessee had earned interest or dividend from investments made with another co-operative society, the whole of such income would qualify for deduction u/s 80P(2)(d). However, interest earned on investments made over and above the mandatory statutory limits with scheduled or co-operative banks that answer the description of a banking company could not be treated as deductible u/s 80P(2)(d), and such receipts were to be assessed under the head income from other sources. The issue was accordingly restored for factual verification of the nature of the investee entity and the character of the receipts. [Paras 14] Interest or dividend from investments with other co-operative societies was held eligible for deduction under section 80P(2)(d), but interest from non-statutory surplus investments with scheduled or co-operative banks treated as banking companies was held not so eligible and was directed to be examined accordingly on remand. Income from other sources - Netting of interest income - Deduction u/s 57 - HELD THAT: - The Tribunal accepted the alternative plea that, if any interest from investments over and above statutory requirements was assessed under the head income from other sources, the corresponding cost of funds and related administrative expenditure had to be considered. It observed that the Act taxes only net income and that expenditure directly relatable to earning such interest cannot be ignored merely because the claim had not been raised before the lower authorities. The matter was therefore restored to the AO to examine the assessee's claim for proportionate deduction u/s 57 on the basis of the supporting material to be furnished. [Paras 14] The assessee was held entitled in principle to deduction of proportionate expenditure under section 57 against any interest assessed as income from other sources, and the claim was remanded for examination and quantification. Final Conclusion: The Tribunal held that interest from statutory reserve and fluid resource deposits was eligible for deduction under section 80P(2)(a)(i), while interest from surplus investments beyond statutory requirements with banks falling within the banking law definition was not deductible under section 80P(2)(d) and was liable to be examined under the head income from other sources with consequential deduction under section 57. The entire matter for both assessment years was remitted to the Assessing Officer for verification and recomputation in accordance with these principles, and both the revenue appeals and the assessee's cross-objections were partly allowed for statistical purposes.

2025 (6) TMI 1156 - GUJARAT HIGH COURT GST

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this group of petitions are:

(i) Whether Notification No. 20/2024 dated 8th October, 2024, which omits Rule 96(10) of the Central Goods and Services Tax Rules, 2017 (CGST Rules), applies retrospectively or prospectivelyRs.

(ii) If the omission is prospective, whether it applies to all pending litigation and proceedings that challenge or involve Rule 96(10)Rs.

(iii) Whether Rule 96(10), as it existed prior to omission, is ultra vires Articles 14 and 19(1)(g) of the Constitution of India, violating fundamental rights to equality and freedom of trade and commerceRs.

(iv) Whether the doctrine of proportionality and reasonableness is applicable in assessing the validity of Rule 96(10), including the consideration of legislative motiveRs.

(v) Whether the rationale for Rule 96(10) is arbitrary and discriminatory, particularly in creating a "class within class" of exporters-those who import goods under the Advance Authorisation Scheme (AAS) and those who do notRs.

(vi) Whether exporters can be prevented from claiming refund of IGST paid on exports on grounds of alleged "double benefit" arising from duty-free imports under AAS combined with refund claimsRs.

(vii) Whether Rule 96(10) is ultra vires Section 164 of the CGST Act as it purportedly goes beyond the rule-making power granted to the GovernmentRs.

(viii) Whether Rule 96(10) contravenes Section 16(3)(b) of the Integrated Goods and Services Tax Act, 2017 (IGST Act), by imposing restrictions on the right to claim refund of IGST paid on exportsRs.

(ix) Whether the phrase "conditions, safeguards and procedure" in Section 16(3)(b) of the IGST Act permits the rule-making authority to impose restrictions on classes of persons claiming refund, especially when such restrictions deny refund on exports made without availing benefits on corresponding inputsRs.

2. ISSUE-WISE DETAILED ANALYSIS

Issue (i) and (ii): Applicability and Retrospectivity of Notification No. 20/2024 Omitting Rule 96(10)

Legal Framework and Precedents: Rule 96(10) was inserted and amended retrospectively from 23.10.2017 and further amended in 2018 and 2020. Notification No. 20/2024 omits Rule 96(10) with effect from 8.10.2024. Sections 6, 6A, and 24 of the General Clauses Act, 1897 govern the effect of repeal or omission of statutes and rules. Apex Court precedents establish that repeal or omission without a saving clause obliterates the provision as if it never existed, affecting pending proceedings unless otherwise stated.

Court's Reasoning and Findings: The Court examined the legislative history and the text of Notification No. 20/2024. Unlike other amendments in the same notification, no specific retrospective effective date was provided for the omission of Rule 96(10). The default rule under Rule 1(2) of the Notification is that it comes into force on the date of publication, i.e., 8.10.2024.

The Court held that omission of Rule 96(10) amounts to repeal of that provision without any saving clause, thereby terminating any proceedings pending under it, except those already finalized. The Court relied on authoritative decisions holding that omission is a form of repeal and that repeal without saving clause affects pending proceedings.

The Court rejected petitioners' submissions that omission should be construed as curative or retrospective, noting that the GST Council expressly recommended prospective omission. The absence of express retrospective language and the Council's recommendation bind the Government. Therefore, the omission applies prospectively from 8.10.2024 but also applies to all pending proceedings not yet finalized, including these petitions.

Issue (iii), (iv), (v), (vi): Constitutionality and Reasonableness of Rule 96(10)

Legal Framework and Precedents: Articles 14 and 19(1)(g) of the Constitution guarantee equality before law and freedom of trade, respectively. The doctrine of proportionality, as elaborated in landmark judgments including K.S. Puttaswamy, requires that restrictions on rights must have legitimate goals, be suitable, necessary, and balanced. Legislative classification must have a rational basis and not be arbitrary or discriminatory. The rule-making power under Section 164 of the CGST Act must be exercised within the scope of the parent Act.

Court's Reasoning and Findings: The petitioners contended that Rule 96(10) creates an arbitrary classification by denying refund of IGST paid on exports if even a small portion of inputs were imported duty-free under schemes such as Advance Authorisation, EPCG, or EOU, while allowing other exporters to claim full refund. This "class within class" denies equality and freedom of trade.

Petitioners argued that the rule is ultra vires Section 16(3)(b) of the IGST Act, which permits refund on payment of IGST subject only to "conditions, safeguards and procedure," not blanket restrictions on classes of persons. They submitted that the rule goes beyond procedural regulation and imposes substantive restrictions, thus exceeding rule-making powers.

Respondents defended Rule 96(10) as a necessary safeguard to prevent "double benefit" or "encashment" of input tax credit (ITC) where inputs are imported duty-free but exporters claim refund of IGST paid on exports by utilizing ITC on other inputs, which is contrary to the principle that taxes should not be exported.

The Court noted that refund is not an unfettered right; it is subject to statutory conditions and safeguards. The GST Council and CBIC issued Rule 96(10) to ensure that refund claims are legitimate and to prevent misuse. The rule was framed under Section 164 with retrospective effect, approved by the GST Council, a constitutional body.

However, the Court observed that the petitioners' grievance relates to the denial of refund on the entire export transaction even if only a small portion of inputs were imported duty-free. The rule's application results in denial of refund on inputs and services on which tax was paid, causing hardship and arguably disproportionate impact.

While the Court recognized the legitimate objective of preventing misuse, it also acknowledged that the rule's blanket bar may be disproportionate and arbitrary in some cases, as it denies refund even when the exporter has paid IGST on exports and on majority of inputs. The Court also noted the absence of an alternative or proportionate mechanism for such exporters under Rule 89.

The Court further considered the principle that rule-making authority cannot impose restrictions that defeat statutory rights granted by Parliament. The expression "conditions, safeguards and procedure" in Section 16(3)(b) does not empower the Government to impose absolute prohibitions on classes of persons, especially when such restrictions are not explicitly provided in the statute.

Nevertheless, given the subsequent omission of Rule 96(10), the Court refrained from adjudicating the constitutional validity of the rule at this stage.

Issue (vii) and (viii): Validity of Rule 96(10) under Section 164 and Section 16(3)(b) of the IGST Act

Legal Framework and Precedents: Section 164 of the CGST Act empowers the Government to make rules for carrying out the provisions of the Act, including retrospective rules. Section 16(3)(b) of the IGST Act allows registered persons to pay IGST on exports and claim refunds subject to conditions, safeguards, and procedure prescribed.

Judicial precedents emphasize that rules must conform to the parent statute and cannot supplant or override substantive provisions. The rule-making power is ancillary and cannot create substantive rights or disabilities beyond the statute.

Court's Reasoning and Findings: The Court noted that Rule 96(10) was framed under Section 164 and approved by the GST Council. The rule imposes conditions restricting refund claims to prevent misuse of exemptions on inputs imported duty-free.

Petitioners argued that the rule exceeds the scope of Section 164 as it restricts substantive rights under Section 16(3)(b) and is therefore ultra vires. Respondents contended that the rule is a valid procedural safeguard consistent with the statute.

The Court acknowledged that while rules can prescribe procedure and safeguards, they cannot impose restrictions that effectively deny statutory rights. The distinction between conditions and restrictions was discussed, with emphasis that "restrictions" on persons' rights are not contemplated under Section 16(3)(b).

However, the Court deferred detailed examination of ultra vires challenge in light of the omission of Rule 96(10).

Issue (ix): Whether Rule 96(10) Imposes Unauthorized Restrictions on Classes of Persons

Legal Framework and Precedents: The phrase "conditions, safeguards and procedure" in Section 16(3)(b) has been interpreted to permit regulation of the manner of claiming refunds but not to impose blanket prohibitions on classes of persons. The Supreme Court's decision in Sankar Ram and Co. v. Kasi Naicker emphasizes that every word in a statute must have meaning and legislative intent must be given effect.

Court's Reasoning and Findings: The Court observed that Rule 96(10) prohibits refund claims by persons who have availed benefits under specified notifications, regardless of whether the exported goods were manufactured without availing such benefits on corresponding inputs. This creates a broad prohibition on a class of persons rather than regulating the manner of refund claims.

The Court noted that such blanket prohibitions are not authorized by the statute and contradict the purpose of Section 16(3)(b), which aims to facilitate exports by allowing refund of IGST paid. The rule thus imposes a restriction beyond the scope of "conditions, safeguards and procedure."

Again, the Court refrained from final adjudication due to the omission of Rule 96(10).

3. SIGNIFICANT HOLDINGS

"The omission of Rule 96(10) of the CGST Rules by Notification No. 20/2024 dated 8th October, 2024, amounts to repeal without any saving clause, and accordingly, the said omission applies prospectively from the date of publication and also to all pending proceedings which have not attained finality as on that date."

"Refund of IGST paid on export of goods is a statutory right conferred under Section 16(3)(b) of the IGST Act, subject only to conditions, safeguards and procedure prescribed. Rule 96(10) of the CGST Rules, by imposing blanket prohibitions on classes of persons who have availed benefits under certain exemption notifications, goes beyond procedural regulation and imposes substantive restrictions, which may be ultra vires the parent statute."

"The principle of proportionality and reasonableness applies in assessing the validity of fiscal laws and subordinate legislation. Restrictions on fundamental rights, including the right to equality under Article 14 and freedom of trade under Article 19(1)(g), must have legitimate aims, be suitable, necessary, and balanced. Rule 96(10)'s creation of a 'class within class' of exporters and denial of refund on the entire export transaction for partial duty-free imports may be disproportionate and arbitrary."

"Refund is not an unfettered right but is subject to statutory conditions and safeguards. The GST Council, a constitutional body, has the authority to recommend rules under Section 164 of the CGST Act, including retrospective rules, to prevent misuse of refund provisions. However, such rules cannot defeat statutory rights or impose unauthorized restrictions."

"The omission of Rule 96(10) by Notification No. 20/2024 will govern all pending proceedings and petitions where final adjudication has not taken place, entitling petitioners to maintain refund claims of IGST paid on exports in accordance with law."

"The impugned show cause notices and orders-in-original issued under Rule 96(10) are quashed and set aside in view of the omission of the said rule."

Rule 96(10) CGST Rules omission applies prospectively but covers pending proceedings, quashing show cause notices for IGST refund claims
Gujarat HC ruled that omission of Rule 96(10) of CGST Rules, 2017 through Notification 20/2024 dated October 8, 2024 applies prospectively but covers pending proceedings. The court held that petitioners challenging the rule's validity regarding IGST refund denial on exports using duty-free inputs under advance authorization licenses were entitled to relief. Following GST Council's recommendation to remove export refund restrictions, the omission operates without saving clause under General Clauses Act, affecting all pending cases where final adjudication hasn't occurred. Show cause notices and orders-in-original were quashed, allowing petitioners to claim IGST refunds on exported goods.

Validity of of Rule 96 (10) of the Central/State Goods and Services Tax Rules, 2017 as substituted by the Central Goods and Services Tax (12th Amendment) Rules, 2018 with effect from 9.10.2018 - refund of actual amount of excise duty so paid on the goods exported under Rule 18 of the Central Excise Rules, 2002 - breach of fundamental rights under Articles 14, 19 (1) (g) of the Constitution of India - Effect of a change in the law between a decision at first instance and the hearing of an appeal from that decision - Principles of statutory interpretation - retrospective Or Prospective operation of the statute - Effect of repeal - Provisions of the General Clauses Act vis-a-vis the repeal or omission or implied repeal. Whether Notification No. 20/2024 dated 8th October, 2024 whereby Rule 96 (10) has been omitted with effect from the date of notification would be applicable retrospectively or not? - HELD THAT:- On coming into force of the Rule 96 (10), the refund claims of the petitioners for IGST paid on export of goods or services were denied even if the petitioners had utilised only a small portion of the inputs imported without payment of custom duty under Advance Authorisation License. Being aggrieved, the petitioners have challenged vires of Rule 96 (10) in this group of petitions - The GST Council in its 54th meeting recommended to omit Rule 96 (10), Rule 89 (4A) and Rule 89 (4B) of the CGST Rules, 2017 prospectively to simplify and expedite the procedure for refund in respect of exports considering the difficulties being faced by the exporters due to the restrictions in respect of refund on exports in cases where benefits of specified concessional/exemption notification is availed on the inputs. On perusal of the Central Goods and Services Tax (Second Amendment) Rules, 2024, it appears that whenever amendment in various rules prescribed therein is to come into effect from a particular date, such date is mentioned in rules - Similarly, in Rules 3, 4, 6, 7, 8, 11 and 12 of the said Rules,2024, it is stipulated that the said rules shall be inserted with effect from 1st day of November, 2024. Therefore, except Rules 2, 9 and 10, effective date of applicability of amendment in various Rules of CGST Rules is provided whereas amendment in Rule 36(3), Rule 89 and Rule 96 (10), no such effective date is provided. Therefore, as per Rule 1(2) of the Rules, 2024, such Rules comes into force on the date of publication in the Official Gazette i.e. 8th October, 2024 meaning thereby Rules 2, 9 and 10 of the Rules, 2024 would come into effect from 8th October, 2024. The fact remains that Rule 96 (10) of the CGST Rules has been recommended to be omitted by GST Council prospectively to remove the difficulties of the exporters in claiming refund of the IGST paid on export of goods on account of four exemption notifications from payment of duty for importation of the inputs utilised for manufacture of goods to be exported - Sub-rule(2) of Rule 1 of the Rules, 2024 clearly stipulates that the rules save as otherwise provided in the said rules, shall come into effect on the date of the publication in the Official Gazette i.e 8th October, 2024. Reliance placed on behalf of the petitioners in case of CIT, Kolkatta v. Calcutta Export Company [2018 (5) TMI 356 - SUPREME COURT] as to whether omission of Rule 96 (10) by Rules, 2024 is curative in nature and therefore, should be applied retrospectively i.e. from the date of insertion of the said rule from 9th October, 2018 is also required to be applied to the facts of the case because the Rules, 2024 clearly stipulates for applicability from the date of publication in Official Gazette in consonance with the recommendation of the GST Council to omit Rule 96 (10) of the CGST Rules, 2017 prospectively. It cannot be said that omission of Rule 96 (10) is curative or remedial because, by omission it affects substantive rights of the assessee to claim refund of IGST paid on export of goods when duty free inputs are utilised. If the omission of Rule 96 (10) is to be applied with retrospective effect, the Rules,2024 would have stipulated but even the GST Council has recommended omission of Rule 96 (10) with prospective effect. Such recommendation is binding upon the Government. Whether Notification No. 20/2024 whereby Rule 96 (10) of the CGST Rules has been omitted with effect from 8th October, 2024 would be applicable to the proceedings including this group of petitions which are pending before the Court or any other proceedings which are pending before the respondents or not? - HELD THAT:- The Hon’ble Apex Court in case of Fibre Boards Private Limited, Bangalore v. Commissioner of Income Tax, Bangalore [2015 (8) TMI 482 - SUPREME COURT] while considering the applicability of the aforesaid provisions of the General Clauses Act vis-a-vis the repeal or omission or implied repeal regarding conditions laid down in section 54G of the Income Tax Act, 1961 has held that 'At this stage, it is important to note that a temporary statute does not attract the provision of Section 6 of the General Clauses Act only for the reason that the said statute expires by itself after the period for which it has been promulgated ends. In such cases, there is no repeal for the reason that the legislature has not applied its mind to a live statute and obliterated it. In all cases where a temporary statute expires, the statute expires of its own force without being obliterated by a subsequent legislative enactment. But even in this area, if a temporary statute is in fact repealed at a point of time earlier than its expiry, it has been held that Section 6 of the General Clauses Act would apply.' In view of the above decision rendered by the Apex Court, “omission” would be included in the interpretation of word “repeal” and hence omission of Rule 96 (10) with effect from 8th October, 2024, would amount to repeal without any saving clause. General Clauses Act, 1897 is largely based on the English Interpretation Act, 1889 and according to such law, the effect of repealing a statute was to obliterate it completely from the records of Parliament as if it had never been passed, except for the purpose of those actions, which were commenced, prosecuted and concluded while it was an existing law. Therefore, repeal without any saving clause would destroy any proceeding whether or not yet begun or whether pending at the time of enactment of the repealing Act and not already prosecuted to a final judgment so as to create a vested right. The recommendations of the GST Council to omit Rule 96 (10) prospectively would apply to all the pending proceedings and cases - By N/N. 20/2024 Rules, 2024 have been notified and as per Rule 10 of the said Rules, Rule 96 (10) of the CGST Rules has been omitted with prospective effect. This would give rise to three situations, firstly, whether the same would be applicable retrospectively, or secondly, prospectively or thirdly, same would be applicable prospectively but also to “pending proceedings”. As discussed here-in-above, Rule 10 of Rules, 2024 is applicable prospectively and the same also would be applicable to pending proceedings. N/N. 20/2024 dated 8th October, 2024 would be applicable to all the pending proceedings/cases meaning thereby that Rule 96 (10) would stand omitted prospectively but applicable to pending proceedings/cases where final adjudication has not taken place - the omission of Rule 96 (10) would apply to all the proceedings/cases/ petitions which are pending for adjudication either before this Court or before the respondent adjudicating authority and no further proceedings are required to be carried forward and petitioners would be entitled to maintain refund claims of IGST paid on export of goods. Conclusion - The omission of Rule 96 (10) would apply to all the proceedings/cases/ petitions which are pending for adjudication either before this Court or before the respondent adjudicating authority and no further proceedings are required to be carried forward and petitioners would be entitled to maintain refund claims of IGST paid on export of goods. The petitions therefore succeed in view of applicability of N/N. 20/2024 whereby Rule 96 (10) is omitted and the said Notification would be applicable to all the pending proceedings/cases as on 8th October, 2024. The impugned show cause notices and the orders-in-original are therefore, quashed and set aside - Petition allowed.

2025 (3) TMI 1989 - ITAT JAIPUR Income Tax

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Limited-scrutiny scope bars unrelated expenditure disallowance without authorised conversion to complete scrutiny after contract-receipt verification.
Limited-scrutiny assessments confined to verifying contract-receipt reporting cannot support disallowance of unrelated expenditure unless the prescribed conversion to complete scrutiny occurs. Reconciliation of Form 26AS receipts with the return resolved the selected issue without adverse findings. Expenditure was not integral to verifying gross contract receipts merely because it affected taxable income. CBDT instructions permit examination of additional issues only upon a reasonable view, written approval from the competent authority, and conversion to complete scrutiny. As no such conversion occurred, the expenditure disallowance exceeded the Assessing Officer's jurisdiction and could not be sustained.

2025 (3) TMI 1457 - ITAT MUMBAI Income Tax

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1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

Whether the Transfer Pricing Officer (TPO) correctly included or excluded certain companies as comparables for benchmarking the international transaction of "Provision of Software Development Services" and "Provision of ITeS".
Whether the assessee is entitled to deductions under section 10A of the Income Tax Act for various units, including UB Plaza Unit, Titanium STPI Unit, and the unit acquired from Reuters India Pvt. Ltd.
Whether the assessee's claim for depreciation on goodwill is allowable under section 32 of the Income Tax Act.
Whether the Dispute Resolution Panel (DRP) correctly directed the exclusion of communication and travel expenses from both export turnover and total turnover for computing deductions under section 10A.
Whether the deletion of disallowance on software items under section 40(a)(ia) was justified.

2. ISSUE-WISE DETAILED ANALYSIS

Transfer Pricing Related Issues

The TPO included several companies as comparables for benchmarking the international transaction of "Provision of Software Development Services". The assessee challenged the inclusion of Infosys Ltd., Persistent Systems Ltd., Tata Elexi Ltd. (Segmental), and Bodhtree Consulting Ltd. The Tribunal found these companies to be functionally dissimilar to the assessee, which provides contract software development services, and directed their exclusion based on precedents and the functional profile of the assessee.

Similarly, for "Provision of ITeS", the assessee contested the inclusion of Eclerx Services Ltd., Cosmic Global Ltd., Accentia Technologies Ltd., and Infosys BPO Ltd. The Tribunal found these companies to be functionally different, with some engaged in Knowledge Process Outsourcing (KPO) and others having high brand value and profitability, and thus directed their exclusion.

Deductions under Section 10A

The Tribunal addressed the denial of deductions under section 10A for the UB Plaza Unit, Titanium STPI Unit, and the unit acquired from Reuters India Pvt. Ltd. The Tribunal found that the deduction under section 10A is undertaking-specific and should not be denied merely due to a change in ownership. The Tribunal relied on previous decisions and CBDT Circular No. 1/2013, which clarified that a slump sale does not result in the splitting or reconstruction of an existing business.

Depreciation on Goodwill

The Tribunal considered the assessee's claim for depreciation on goodwill arising from the acquisition of business units. The Tribunal noted that the assessee's claim was based on the Supreme Court's decision in Smifs Securities Ltd., which held that goodwill is an asset under section 32 eligible for depreciation. The Tribunal directed the AO to re-examine the claim in light of the valuation reports and other details provided by the assessee.

Exclusion of Expenses from Turnover

The Tribunal upheld the DRP's direction to exclude communication and travel expenses from both export turnover and total turnover while computing deductions under section 10A. This decision was based on the Supreme Court ruling in HCL Technologies Ltd., which supports such exclusion.

Disallowance on Software Items

The Tribunal upheld the deletion of disallowance on software items under section 40(a)(ia), following the Karnataka High Court's decision in Tally Solutions Pvt. Ltd., which held that depreciation is not an outgoing expenditure and thus not subject to disallowance under section 40(a)(ia).

3. SIGNIFICANT HOLDINGS

The Tribunal established several core principles:

Transfer pricing comparables must be functionally similar to the tested party, and significant differences in business models, risk profiles, and intangibles justify exclusion.
Deductions under section 10A are undertaking-specific, and a change in ownership does not negate eligibility if the unit otherwise qualifies.
Goodwill arising on amalgamation or acquisition can be considered an intangible asset eligible for depreciation under section 32, provided it is properly valued and recorded.
Expenses excluded from export turnover must also be excluded from total turnover for consistency in computing deductions under section 10A.
Depreciation is an allowance and not an expenditure subject to disallowance under section 40(a)(ia).

The Tribunal's final determinations included the exclusion of certain companies from the set of comparables for transfer pricing, the allowance of section 10A deductions for specific units, the remand of the depreciation on goodwill issue for further examination, and the upholding of the DRP's directions on turnover exclusions and software disallowance.

Companies excluded from transfer pricing benchmarking due to functional incomparability and lack of segmental data
ITAT Mumbai held that several companies including Infosys Ltd, Persistent Systems Ltd, Tata Elexi Ltd, and Bodhtree Consulting Ltd should be excluded from transfer pricing benchmarking for software development services due to functional incomparability or lack of segmental data. The tribunal allowed Section 10A deductions for multiple units including UB Plaza and Titanium STPI units, following coordinate bench decisions. The depreciation on goodwill claim was remanded to AO for fresh consideration. Communication and travel expenses exclusion from turnover computation was upheld following SC precedent in HCL Technologies. Software disallowance under Section 40(a)(ia) deletion was sustained following Karnataka HC decision in Tally Solutions.

TP Adjustment - Comparable selection - whether the assessee is a software product company or provides contract software development services? - HELD THAT:- Infosys Ltd. - As having considered the functions performed, assets employed and risks assumed by both entities, we are of the considered view that being a contract software development service provider, the assessee cannot be compared with the company as giant in its operations as Infosys Ltd. Accordingly, we direct the TPO/AO to exclude Infosys Ltd while benchmarking the international transaction pertaining to “Provision of Software Development Services”. Persistent Systems Ltd be excluded while benchmarking the international transaction pertaining to “Provision of Software Development Services” in the absence of relevant segment information of Persistent System Ltd, which is comparable to the assessee's international transaction under consideration. Tata Elexi Ltd. (Segmental) is not functionally comparable to the assessee. Hence, we direct the TPO/AO to exclude Tata Elexi Ltd.(segmental) while benchmarking the international transaction pertaining to “Provision of Software Development Services” Bodhtree Consulting Ltd. company is earning revenue from various streams, therefore, in the absence of relevant segmental information, this company cannot be said to be functionally comparable to the assessee. Further, as regards the submission of the learned DR that the assessee is seeking exclusion of its own comparable, as noted in the foregoing paragraphs, there is no estoppel on the taxpayer from pointing out that a particular company has been wrongly taken as a comparable. Accordingly, we direct the TPO/AO to exclude Bodhtree Consulting Ltd. while benchmarking the international transaction pertaining to “Provision of Software Development Services”. TP Adjustment in relation to the international transaction of “Provision of ITeS” - Eclerx Services Ltd be excluded as not functionally comparable. Cosmic Global Ltd. be excluded while benchmarking the international transaction pertaining to “Provision of ITeS”. Accentia Technologies Ltd. develops its own software and renders medical transcription services, while the assessee, as noted in the foregoing paragraph, compiles data from various publicly available sources, which is used as an input by the associated enterprises in its various products and databases, which are created, maintained and owned by the associated enterprises. Thus, we direct the TPO/AO to exclude Accentia Technologies Ltd. while benchmarking the international transaction pertaining to “Provision of ITeS”. Infosys BPO Ltd be excluded as a comparable on the basis of its high brand value and consequent higher profitability. Denial of deduction claimed u/s 10A in respect of the UB Plaza Unit - Since the year under consideration is the 3rd year of claim of deduction u/s 10A of the Act by the assessee in respect of the UB Plaza Unit, which has been allowed by the coordinate bench in the first year of claim, in absence of any change in facts and law AO is directed to allow the deduction claimed u/s 10A of the Act in respect of the UB Plaza Unit in the year under consideration. As a result, Ground No.9, raised in the assessee appeal, is allowed. Denial of deduction claimed u/s 10A in respect of the Titanium STPI Unit - Since the year under consideration is the second year of the claim of deduction u/s 10A in respect of the Titanuim Unit, Bangalore, therefore respectfully following the decision of the coordinate bench cited supra, AO is directed to allow the deduction claimed by the assessee u/s 10A with respect to the Titanium Unit, Bangalore. Accordingly, Ground raised in assessee’s appeal, is allowed. Denial of deduction claimed u/s 10A with respect to the unit acquired from Reuters India Pvt. Ltd.- HELD THAT:- The issue arising in the present appeal is recurring in nature and has been decided in favour of the assessee by the decision of the coordinate bench of the Tribunal. Accordingly, we direct the AO to allow the deduction claimed under section 10A of the Act with respect to the unit acquired from RIPL. Denial of the claim of depreciation on goodwill - whether the assessee is entitled to claim depreciation on goodwill which arose on account of merger/amalgamation, being the excess amount of consideration over the value of net assets of the entity acquired, came up for consideration before various Courts/Tribunals? - HELD THAT:- As in the present case, it is evident that neither the AO nor the learned DRP considered the details filed by the assessee, as one of the reasons for rejecting the assessee’s claim was that the same was made by way of a letter instead of filing the revised return of income by placing reliance on the decision in Goetze India Limited [2006 (3) TMI 75 - SUPREME COURT] We further find that vide letter dated 25/06/2021, the Revenue requested for verification of factual details with respect to the claim of depreciation on goodwill. Therefore, we are of the considered view that this issue be restored to the file of the jurisdictional AO for de novo adjudication, in light of the decisions cited supra, after examining the details filed by the assessee. Since this issue is restored to the AO for consideration afresh, it is needless to mention that the AO can seek any other information from the assessee for complete adjudication of this issue and the assessee can also furnish any other documents in support of its claim. Exclusion of communication expenses and travel expenses from both export turnover as well as the total turnover while computing deduction u/s 10A - HELD THAT:- We find that this issue is now decided in favour of the taxpayer in CIT v/s HCL Technologies Ltd, [2018 (5) TMI 357 - SUPREME COURT] Accordingly, respectfully following the aforesaid decision, we do not find any infirmity in the directions of the learned DRP in excluding the communication expenditure and travel expenditure from the total turnover also to the extent it was excluded from the export turnover. As a result, the impugned final assessment order on this issue is upheld and Grounds No. 2 and 3, raised in Revenue’s appeal, are dismissed. Disallowance on software items u/s 40(a)(ia) - HELD THAT:- We find that the learned DRP while issuing the directions to the AO to delete the disallowance of depreciation on computer software made under section 40(a)(ia) of the Act, followed the aforesaid decision of the Hon’ble Karnataka High Court in Tally Solutions Pvt. Ltd. [2020 (12) TMI 1160 - KARNATAKA HIGH COURT] Thus, in the absence of any contradictory decision on this issue being placed on record, we do not find any infirmity in the directions issued by the learned DRP. As a result, the impugned final assessment order on this issue is upheld.

2024 (12) TMI 1383 - ITAT DELHI Income Tax

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ITAT allows depreciation on transferred assets, deductions for abandoned projects, and provisions for restoration obligations
ITAT Delhi ruled in favor of the assessee on multiple issues. The tribunal held that court-sanctioned demerger and merger schemes are binding on tax authorities, allowing depreciation claims on passive infrastructure assets transferred through the scheme. The tribunal permitted deduction of capital work-in-progress written off as business loss when projects were abandoned. Provisions for site restoration obligations, service level adjustments, and other expenses were deemed ascertained liabilities eligible for deduction under normal provisions and section 115JB. Interest disallowance under section 36(1)(iii) was deleted, and enhanced depreciation at 80% was granted for energy-saving devices. Revenue's appeals on salary capitalization and various expense disallowances were dismissed.

Treatment of courtsanctioned scheme of arrangement as binding on tax authorities - characterisation of transfer as a 'gift' and consequence for cost determination - allowability of tax depreciation on assets received pursuant to courtapproved transfer and subsequent amalgamation - recognition of assets at fair value on amalgamation and effect on book profit under 115JB - allowability of writeoff of abandoned Capital WorkinProgress as revenue loss - allowability of provision for Site/Asset Restoration Obligation (SRO/ARO) as ascertainable liability - allowability of accrualbased provisions for operating expenses and power/fuel as deductible - allowability of provision for Service Level Agreement (SLA) credits as ascertainable liability - application of proviso to section 36(1)(iii) - interest capitalization vs. revenue deduction - enhanced depreciation for energysaving devices (80% rate) vs standard rate - provisional capitalization practice and eligibility for depreciation - date of 'put to use' for depreciation - RFAI notice generation date vs billing/RFAI date - treatment of salary expenses of SCM/site acquisition/infra quality teams - capital or revenue - verifiability of expenses and admissibility despite TDS/PAN discrepancies when documentary support furnishedCharacterisation of transfer as a 'gift' and consequence for cost determination - treatment of courtsanctioned scheme of arrangement as binding on tax authorities - allowability of tax depreciation on assets received pursuant to courtapproved transfer and subsequent amalgamation - Whether PIAs transferred under a twostep courtapproved scheme qualified as gift and whether the tax WDV in the hands of transferors could be treated as actual cost for claiming depreciation in the hands of the assessee. - HELD THAT: - The Tribunal examined the two separate, courtapproved steps (transfer of PIAs to TowerCos and subsequent merger of TowerCos into the assessee), observed that the High Courts had sanctioned the transfer schemes and accepted the element of gift in the first step, and held that the revenue could not, at implementation stage, rewrite the character of the sanctioned scheme. Reliance was placed on binding High Court/Supreme Court outcomes and prior tribunal decisions addressing identical transactions. Given the court sanction, the tax written down value in the hands of the transferor companies became the actual cost in the hands of the TowerCos and, following amalgamation, in the hands of the assessee for AY 201011, entitling the assessee to claim tax depreciation. [Paras 3]Depreciation disallowance on the PIAs was deleted and the assessee is entitled to tax depreciation on the WDV flowing from the transferors.Recognition of assets at fair value on amalgamation and effect on book profit under 115JB - allowability of tax/book depreciation where assets acquired under amalgamation are recorded at fair value - Whether book depreciation claimed on PIAs recorded at fair value pursuant to the amalgamation is to be allowed for computation of book profit under section 115JB, or should be treated as revaluation and disallowed. - HELD THAT: - The Tribunal held that assets brought into the assessee's books pursuant to sanctioned amalgamation are to be recognised at fair value as mandated by the court order and that such recognition does not amount to a revaluation by the assessee. The Tribunal followed precedent that acquisition valuation on amalgamation is not revaluation and that accounts prepared in compliance with company law and accounting standards are sacrosanct for computing book profit under section 115JB. Accordingly, the upward adjustment made by the AO/CIT(A) was not sustainable. [Paras 3, 10]Book depreciation on PIAs recorded at fair value pursuant to the amalgamation is allowable in computing book profit under section 115JB; the upward adjustment is deleted.Allowability of writeoff of abandoned Capital WorkinProgress as revenue loss - Whether amounts written off as provision for obsolescence of CWIP (abandoned/aborted tower projects) are deductible as revenue expenditure. - HELD THAT: - The Tribunal accepted that the CWIP related to projects aborting before completion and that expenditure incurred was linked to the assessee's primary business. It applied authoritative high court and tribunal precedents holding that expenditure on abandoned additions to an existing business can be revenue in nature and deductible under section 37(1). Given the genuineness and business connection of the debited writeoff, the disallowance was reversed. [Paras 4]The CWIP writeoff is allowable as a business deduction; the disallowance is deleted.Allowability of provision for Site/Asset Restoration Obligation (SRO/ARO) as ascertainable liability - application of AS29 and mercantile system in determining allowable provision - Whether provision for SRO/ARO, created on a scientific basis and as per contractual obligations, is an ascertainable liability deductible under normal provisions and in computing book profit under section 115JB. - HELD THAT: - The Tribunal found the lease agreements created a definite obligation to restore sites, that the assessee had prepared the SRO/ARO estimate on a reasoned basis using vendor quotations, inflation and discounting, and that such provisions represent ascertained liabilities under accepted accounting principles. Relying on Supreme Court and high court precedents, the Tribunal held the provision is deductible, subject to reversal of any excess on actualisation under section 41. [Paras 5]Provision for SRO/ARO is an ascertainable, allowable business expense for normal tax and for book profit computation under section 115JB.Allowability of accrualbased provisions for operating expenses and power/fuel as deductible - application of AS29 to provisions for expenses accrued but invoiced subsequently - Whether provisions made on accrual basis for operating expenses (including power and fuel) that crystallised subsequently are deductible or whether they are unascertained liabilities subject to disallowance. - HELD THAT: - The Tribunal reviewed the assessee's accrual accounting practice and detailed workings showing that significant portions of the provisions were actualised or reversed in subsequent years. It accepted that provisions were made on a scientific and rational basis under mercantile principles and AS29, and therefore constituted ascertainable liabilities deductible both under ordinary provisions and for computing book profits under section 115JB. [Paras 6]Provisions for operating expenses and power/fuel made on accrual basis are allowable deductions; related disallowances are deleted.Allowability of provision for Service Level Agreement (SLA) credits as ascertainable liability - Whether SLA credit provisions, determined from automated downtime reports and settled by issuance of credit notes, are ascertainable liabilities deductible under normal provisions and for section 115JB purposes. - HELD THAT: - The Tribunal accepted the assessee's technical procedures (automated downtime reports), sample credit notes, customer signoffs and monthwise workings demonstrating that SLA credits represent definite liabilities arising from contractual deficiencies. Applying the Rotork Controls principle on ascertainable liabilities, the Tribunal treated SLA provisions as deductible. [Paras 7]SLA credit provisions are ascertainable liabilities and allowable deductions for normal tax and book profit computation.Application of proviso to section 36(1)(iii) - interest capitalization vs. revenue deduction - Whether a portion of interest expense attributable to construction/acquisition of tower sites is to be capitalised under proviso to section 36(1)(iii) or is allowable as revenue deduction. - HELD THAT: - The Tribunal found there was no extension of business; towers extended the existing business. It applied precedent that borrowed funds used for business purpose permit interest deduction under section 36(1)(iii), and noted absence of reliable basis for AO's computation (arbitrary average construction period). It followed earlier tribunal decision in the assessee's own case and Supreme Court authority to allow the interest. [Paras 8]Interest disallowance under proviso to section 36(1)(iii) is not sustainable; the interest is allowable as deduction.Enhanced depreciation for energysaving devices (80% rate) vs standard rate - Whether the specified energysaving devices installed at tower sites qualify for enhanced depreciation at 80% instead of 15%. - HELD THAT: - The Tribunal reviewed the technical report and the nature/functionality of the listed devices, found they are installed to ensure uninterrupted power supply and to save energy, and concluded they fall within the category of energysaving devices eligible for higher depreciation. The AO's reliance on Goetze (India) Ltd was held inapplicable at the appellate level and the Tribunal decided the issue on merits. [Paras 9]Assessee is entitled to claim enhanced depreciation at 80% on the specified energysaving devices; AO/cit(A) to recompute depreciation accordingly.Provisional capitalization practice and eligibility for depreciation - Whether yearend provisional capitalization recorded for sites 'ready to use' but pending final invoices is valid for claiming depreciation. - HELD THAT: - The Tribunal examined the assessee's operational process, mapping of invoices to sites, reversal/regularisation practice, and special auditor's acceptance of the accounting policy. It concluded provisional capitalization related to assets already put to use and therefore formed part of asset cost on which depreciation could be claimed. [Paras 13]Depreciation on provisional capitalization is allowable; the revenue's challenge is dismissed.Date of 'put to use' for depreciation - RFAI notice generation date vs billing/RFAI date - Whether depreciation on tower sites is allowable from the RFAI notice generation date (site ready for active installation) or only from the RFAI/billing date when customer acceptance/invoicing occurs. - HELD THAT: - The Tribunal held that 'put to use' must be determined from the assessee's perspective - when the asset is ready for use and offered for testing (RFAI notice generation date). It relied on High Court and Supreme Court precedents recognising 'ready for use' or 'passive use' as includible within 'use' for Section 32. The Tribunal observed that any timing difference is revenue neutral and therefore accepted RFAI notice generation date as the date of capitalization for depreciation. [Paras 14]Depreciation on tower sites is allowable from the RFAI notice generation date; revenue's disallowance is deleted.Treatment of salary expenses of SCM/site acquisition/infra quality teams - capital or revenue - Whether salary expenses of employees in Supply Chain Management, Site Acquisition and Infra Quality teams are capital in nature or deductible revenue expenses. - HELD THAT: - The Tribunal analysed job profiles and functions, noting substantial postcapitalisation and ongoing operational duties (maintenance, vendor interaction, landlord relations) that are integral to daytoday business. As these expenses were incurred in the ordinary course of business and not solely for asset creation, the Tribunal agreed with the CIT(A) that they are revenue in nature and deductible. [Paras 15]Salary expenditures are revenue expenses and allowable; AO's capitalization/disallowance is dismissed.Verifiability of expenses and admissibility despite TDS/PAN discrepancies when documentary support furnished - Whether expenses identified by the special auditor as unverifiable (including cases with PAN/name discrepancies) can be disallowed where the assessee furnishes invoices, agreements, Form 16A and other documentary evidence. - HELD THAT: - The Tribunal noted the special audit's sample queries, reviewed the additional evidence admitted by the CIT(A) under Rule 46A (invoices, agreements, TDS documents, CA certificates), and found that the assessee had discharged its onus of proving genuineness. Clerical errors in TDS/PAN entries do not by themselves render expenses unverifiable when robust documentary support exists. The CIT(A)'s deletion of disallowances was affirmed. [Paras 20, 21]Disallowances for unverifiable expenses and PAN/TDS discrepancies are deleted where the assessee produced supporting documentary evidence; revenue's challenge is dismissed.Final Conclusion: The Tribunal allowed the assessee's appeals for AY 201011 and dismissed the revenue's appeal. Key outcomes: (i) PIAs transferred under the twostep courtapproved schemes were held to be gift in the first step and, after amalgamation, the WDV in the hands of transferors formed the basis for allowable tax depreciation in the assessee's hands; (ii) book depreciation on assets recognised at fair value pursuant to amalgamation is admissible for computing book profit under section 115JB; (iii) various provisions and accruals (CWIP writeoff, SRO/ARO, operating provisions, SLA credits) made on a scientific/accrual basis were held to be ascertainable and deductible; (iv) provisional capitalization and RFAI notice generation date were accepted for depreciation; (v) enhanced depreciation at 80% was allowed for specified energysaving devices; and (vi) salary capitalization and unverifiableexpense additions were disallowed where the assessee demonstrated business nexus and produced documentary evidence.

2024 (10) TMI 1586 - DELHI HIGH COURT Income Tax

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Issues Involved:
1. Validity of reassessment action under Section 148 of the Income Tax Act, 1961.
2. Compliance of reassessment notices with the Faceless Scheme of Assessment.
3. Jurisdiction of the Jurisdictional Assessing Officer (JAO) under the Faceless Reassessment Scheme.

Comprehensive, Issue-Wise Detailed Analysis:

1. Validity of Reassessment Action Under Section 148:
The judgment addresses the validity of reassessment notices issued under Section 148 of the Income Tax Act, 1961, particularly after the introduction of the Faceless Scheme of Assessment. The petitioners challenged the notices on the grounds of jurisdiction and compliance with the faceless assessment procedures. The Court examined whether the notices issued by the JAO were valid under the new faceless regime, emphasizing that the JAO retains jurisdiction under certain circumstances as per the statutory framework.

2. Compliance of Reassessment Notices with the Faceless Scheme:
The Court analyzed the statutory provisions related to the faceless assessment, particularly Sections 144B and 151A, which govern the faceless assessment and reassessment processes. It was noted that the Faceless Reassessment Scheme, 2022, mandates that notices under Section 148 should be issued through automated allocation and in a faceless manner, but this does not entirely exclude the JAO's role. The Court highlighted that the Faceless Scheme is designed to enhance transparency and reduce human interface, but it does not completely eliminate the JAO's authority to issue notices.

3. Jurisdiction of the JAO Under the Faceless Reassessment Scheme:
The judgment extensively discusses the concurrent jurisdiction of the JAO and the Faceless Assessment Units. The Court clarified that the JAO retains jurisdiction to initiate reassessment proceedings based on information available through the Risk Management Strategy (RMS) and other sources. The Court emphasized that the faceless assessment framework does not entirely replace the JAO's role but operates alongside it to ensure comprehensive and balanced assessments. The judgment also referenced previous decisions, including Sanjay Gandhi Memorial Trust, which supported the view of concurrent jurisdiction.

Disposition:
The Court dismissed the writ petitions, upholding the validity of the reassessment notices issued by the JAO. It concluded that the notices were not invalid merely because they were issued by the JAO, as the statutory framework allows for concurrent jurisdiction and the initial stages of reassessment may involve the JAO. The Court allowed the petitioners to raise any other objections to the reassessment proceedings in separate, independent proceedings.

Validity of Section 148 reassessment notices upheld; JAO may form opinion using RMS, search, audit, and orders
HC upheld validity of reassessment notices under Section 148, holding that a JAO may form the requisite opinion based on RMS data and other specified inputs (including search/survey information, audit objections and tribunal/court orders) and thereafter transmit records to NFAC for faceless assessment. The court construed the Faceless Reassessment Scheme as a two-stage process-JAO's preliminary scrutiny and opinion followed by faceless allocation and assessment-rejecting the contention that notices issued by the JAO are per se invalid. Writ petitions challenging the notices were dismissed.

Faceless assessment - faceless reassessment scheme - automated allocation - risk management strategy - concurrent jurisdiction - jurisdictional Assessing Officer - formation of opinion under Section 148A - faceless assessment procedure under Section 144B - information for reassessment (Explanations 1 and 2 to Section 148) Jurisdictional Assessing Officer - faceless reassessment scheme - concurrent jurisdiction - Validity of notices under Section 148 issued by the jurisdictional Assessing Officer after promulgation of the Faceless Reassessment Scheme 2022 - HELD THAT: - The Court held that notices under Section 148 issued by the JAO are not invalid merely because a faceless reassessment scheme exists. The statutory scheme and notifications confer concurrent powers on faceless assessing authorities and the JAO rather than effecting a complete ouster of the JAO's jurisdiction. The faceless framework contemplates situations where cases may be processed centrally, transferred back, or otherwise handled by the JAO; the legislative design preserves the JAO's role, particularly where information is placed in the JAO's hands and requires local consideration. Consequently, the writ petitions challenging Section 148 notices solely on the ground that they were issued by the JAO were dismissed. [Paras 82, 86, 104, 105] Challenge to Section 148 notices solely because they were issued by the JAO is rejected; the JAO is not completely denuded of jurisdiction. Automated allocation - risk management strategy - formation of opinion under Section 148A - Construction of Clause 3 of the Faceless Reassessment Scheme, 2022 and the sequencing of pre-issuance enquiry and faceless assessment - HELD THAT: - The Court construed Clause 3 as reflecting a two-stage process: (i) the RMS/Insight process places information before the JAO and the JAO conducts pre-issuance consideration (including Section 148A procedure and formation of opinion); and (ii) if reassessment proceeds, the records are transmitted to the NFAC and the actual assessment is conducted by automated allocation/faceless units. Punctuation and scheme structure were read to separate the stage of initiation/formation of opinion from the subsequent faceless assessment, producing a harmonious construction that preserves the JAO's role in preliminary evaluation while implementing faceless assessment for final determination. [Paras 56, 99, 101, 102] Clause 3 contemplates initial evaluation by the JAO on information furnished through RMS, followed by faceless randomized allocation for the assessment stage. Faceless assessment procedure under Section 144B - information for reassessment (Explanations 1 and 2 to Section 148) - Whether Section 144B operates as a substantive ouster of other reassessment modes or is primarily procedural - HELD THAT: - The Court held that Section 144B is principally procedural, prescribing how faceless assessments are to be conducted (randomized allocation, units, electronic communications, review, etc.) and does not itself supply the substantive basis for reassessment. Explanations 1 and 2 to Section 148 identify multiple independent sources of 'information' (including RMS, audit objections, search/survey material and information under schemes) that may justify reassessment and which often come to the JAO. Reading Section 144B as the exclusive route would render these provisions and the JAO's statutory functions otiose; a harmonious construction treats 144B as a procedural mechanism complementing, not supplanting, other statutory reassessment triggers. [Paras 72, 73, 76, 77] Section 144B is procedural; it does not extinguish other statutory modes of initiation of reassessment nor the role of the JAO in acting on information described in Explanations 1 and 2 to Section 148. Final Conclusion: Writ petitions challenging reassessment notices solely because they were issued by the jurisdictional Assessing Officer are dismissed; the Faceless Reassessment Scheme and Section 144B prescribe procedural modes for faceless assessment but do not ipso facto oust the JAO's concurrent jurisdiction or preclude the JAO from initiating proceedings where information (including RMS, audit objections, search/survey material or information under Section 135A schemes) supports formation of opinion under the statutory reassessment provisions.

2024 (10) TMI 1135 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL AT DELHI Companies Law

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Club management supersession upheld due to misuse of funds with only 3% spent on sports activities
The NCLAT upheld the NCLT's order superseding the management of a club incorporated under Section 26 of the Companies Act, 1913. The court found that sufficient materials existed for the Central Government to form an opinion that the club's affairs were conducted prejudicially to public interest, as only 3% of expenditure was devoted to sports despite its sports promotion objectives. The conditions precedent under Section 241(2) of the Companies Act, 2013 were satisfied. However, the NCLAT directed the nominated 15-member committee to complete remedial actions by 31.03.2025 and conduct elections within three months thereafter, rejecting the appellant's argument that indefinite supersession was inappropriate.

Formation of opinion under Section 241(2) - affairs of the company conducted in a manner prejudicial to the public interest - inspection under Section 206 - powers under Sections 241 and 242 - interim order under Section 242(4) - final order under Section 242 - judicial review of existence of circumstances for governmental satisfaction - status and obligations of a non-profit / Section 8 companyFormation of opinion under Section 241(2) - judicial review of existence of circumstances for governmental satisfaction - Whether the Central Government formed the requisite opinion to file a petition under Section 241(2) and the standard for review of that opinion - HELD THAT: - The Tribunal held that the Government had formed the subjective opinion required by Section 241(2) and that formation of opinion need not follow any prescribed form, but must be based on material. The Court examined the statutory inspection report dated 31.07.2019, the supplementary inspection report dated 03.03.2020, the recommendations of the Regional Director and related material, and concluded that the Ministry's order dated 18.03.2020 (issued with approval of the competent authority) evidenced formation of opinion. Applying settled precedents, the Court reiterated that while the Government's opinion is subjective, the existence of circumstances on which that opinion is founded is open to judicial review; the record here supplied sufficient material to demonstrate those circumstances. The Court therefore rejected appellants' contention that no opinion was formed or that it lacked application of mind. [Paras 33, 41]Central Government formed the requisite opinion under Section 241(2) on the basis of statutory inspection and supplementary reports; existence of supporting circumstances is amenable to review and were present here.Affairs of the company conducted in a manner prejudicial to the public interest - status and obligations of a non-profit / Section 8 company - Whether the affairs of Delhi Gymkhana Club were being conducted in a manner prejudicial to the public interest - HELD THAT: - The Tribunal analysed the object clause of the Memorandum (promotion of sports and related activities), the company's status under earlier law corresponding to Section 8, and the financial and membership material in the inspection and supplementary inspection reports. The reports showed minimal expenditure on sports (c. 2.7-3%), divergent accounting treatment of registration fees, creation of membership categories and practices (green cards, UCPs, special categories) not authorised by the Articles, and other irregularities. The NCLT's findings, reproduced by the Appellate Tribunal, concluded that these facts amounted to mismanagement and conduct prejudicial to the company's objects and public interest. The Court rejected submissions that the Club's affairs affected only private interests, holding that companies formed for objects listed in Section 8/26 engage public-purpose considerations and their impairment can prejudice public interest. [Paras 65, 72, 85]The affairs of the Company were being conducted in a manner prejudicial to public interest, thereby justifying the Union's petition under Section 241(2).Powers under Sections 241 and 242 - interim order under Section 242(4) - final order under Section 242 - Whether the NCLT's order dated 01.04.2022 is an interim order or a final order under Sections 241/242 and whether it recorded findings sufficient to exercise jurisdiction - HELD THAT: - The Tribunal examined the history of interim reliefs (including the NCLT order of 26.06.2020 and this Tribunal's modification of interim relief), the Supreme Court directions for expeditious disposal, the petition and the voluminous inspection material. It concluded that the NCLT's decision of 01.04.2022 was a final order disposing of the petition (given compliance with the Supreme Court timelines and the NCLT's considered findings), not merely an interim order under Section 242(4). The Appellate Tribunal found that the NCLT had identified and recorded the matters complained of, set out findings on violations of the Memorandum and Articles and financial irregularities, and therefore had sufficiently recorded the basis for exercising jurisdiction under Section 242. [Paras 81, 82, 84]Order dated 01.04.2022 is a final order under Sections 241/242 and contains sufficient findings to exercise jurisdiction.Powers under Sections 241 and 242 - judicial review of existence of circumstances for governmental satisfaction - Whether the NCLT unlawfully delegated or abdicated its jurisdiction to the Government nominated committee by appointing 15 government nominees to the General Committee - HELD THAT: - The Tribunal construed the operative directions permitting the Central Government to nominate persons as directors and requiring those directors to report periodically and take corrective/restructuring measures in terms of the Memorandum and Articles. The Court held that entrusting implementation of remedial measures to the committee did not amount to unlawful delegation of the NCLT's adjudicatory power: the committee was to act under the NCLT's order and report to the Tribunal, which retained supervisory authority. The Court rejected the contention that the NCLT had abdicated jurisdiction, noting the requirement of periodic reporting and the NCLT's continued superintendence. [Paras 96]Appointment of Government nominated committee to implement remedial measures did not amount to impermissible delegation; NCLT retained supervisory jurisdiction.Powers under Sections 241 and 242 - interim order under Section 242(4) - Whether the Government nominated committee may continue indefinitely and what timetable, if any, should be imposed to bring the matters complained of to an end - HELD THAT: - Recognising that the statutory scheme and precedents require orders under Sections 241/242 to be directed to bringing to an end the matters complained of, the Tribunal observed that an indefinite supersession of the elected management is not permissible. Having reviewed the remediations already undertaken and the elapsed time since 01.04.2022, the Court found it appropriate to fix a concrete timetable to secure completion of remedial measures and restoration of an elected General Committee. The Tribunal directed the committee to complete remedial actions by 31.03.2025 and to conduct elections in accordance with Clause 20 of the Articles within three months after 31.03.2025, thereby ensuring the remedial purpose of Sections 241/242 is achieved within specified timelines. [Paras 101, 102, 112]Committee must complete remedial measures by 31.03.2025 and hold elections under Article 20 within three months thereafter; indefinite continuation is not permitted.Final Conclusion: The NCLT order of 01.04.2022 appointing Government nominated directors to the General Committee is upheld: the Central Government formed the requisite opinion on the basis of inspection and supplementary reports, sufficient materials existed showing affairs prejudicial to public interest, and the NCLT's order was a final order under Sections 241/242. The Government nominated committee may implement corrective measures subject to the Tribunal's supervision, but must complete remedial actions by 31.03.2025 and hold elections under Clause 20 of the Articles within three months thereafter; parties to bear their own costs.

2024 (10) TMI 740 - ITAT CHENNAI Income Tax

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Issues Involved:
1. Classification of Government incentives as capital or revenue receipts.
2. Treatment of construction expenses on leasehold land as capital or revenue expenditure.

Issue-wise Detailed Analysis:

1. Classification of Government Incentives:
The primary issue was whether the incentives received under the Market Linked Focus Products Scheme (MLFPS) should be treated as capital receipts or revenue receipts. The Revenue argued that these incentives are revenue in nature and chargeable to tax under section 28(iiib) of the Income Tax Act, as they are akin to cash assistance for exports. The assessee contended that these incentives are capital receipts, intended to expand market areas and not for running the business profitably.

The tribunal examined the purpose of the incentives, citing the Supreme Court's decision in CIT v. Ponni Sugars & Chemicals Ltd., which emphasizes the "purpose test" to determine the nature of a subsidy. The tribunal concluded that the incentives were for expanding market areas, thus constituting capital receipts, not chargeable to tax under section 2(24) or section 28 of the Act. The tribunal also discussed the amendment to section 2(24) by the Finance Act, 2015, which includes various subsidies and incentives as income but found that the incentives in question did not fall under the definitions provided in section 2(24)(xviii).

2. Treatment of Construction Expenses on Leasehold Land:
The second issue was whether the expenses incurred on constructing a building on leasehold land should be treated as capital or revenue expenditure. The assessee claimed these expenses as revenue expenditure, arguing that the construction did not result in acquiring a capital asset since the land was not owned by them.

The tribunal referred to previous decisions, including the Madras High Court's ruling in TVS Lean Logistics Ltd., which held that construction on leased land for business purposes constitutes revenue expenditure. The tribunal noted that the assessee's situation was similar, as the building was constructed on leased land, and upon lease termination, the land would be returned to the lessor. Therefore, the tribunal upheld the CIT(A)'s decision to treat the construction expenses as revenue expenditure, allowing the assessee's claim.

Conclusion:
The tribunal dismissed the Revenue's appeals, affirming that the incentives under MLFPS are capital receipts and the construction expenses on leasehold land are revenue expenditures. The tribunal's decision was consistent with previous rulings and legal principles regarding the classification of government incentives and treatment of construction expenses.

MEIS scrips are rewards under section 2(24)(xviii) and capital receipts, not taxable; leasehold construction costs allowed as revenue deduction
ITAT CHENNAI - AT held that export incentive MEIS scrips are rewards, not subsidies or assistance under section 2(24)(xviii), and thus constitute capital receipts not chargeable as income; ICDS-VII and section 28(iiib) do not apply, and book treatment alone cannot determine taxability. The Revenue's appeals on this issue were dismissed. The tribunal also upheld the appellate authority in allowing deduction of construction cost on leasehold land as revenue expenditure for the year under consideration.

Capital receipt versus revenue receipt - purpose test for characterisation of government incentives - definition of "income" under section 2(24)(xviii) - scope of the phrase "by whatever name called" and ejusdem generis - Merchandise Exports from India Scheme (MEIS) / Market Linked Focus Product Scheme (MLFPS) as rewards - applicability of ICDS VII (treatment of Government grants) - cash assistance under section 28(iiib) - revenue v. capital characterisation of expenditure on construction on leasehold landCapital receipt versus revenue receipt - purpose test for characterisation of government incentives - Merchandise Exports from India Scheme (MEIS) / Market Linked Focus Product Scheme (MLFPS) as rewards - Characterisation of proceeds from sale of MEIS/MLFPS scrips as capital or revenue receipt - HELD THAT: - Applying the purpose test derived from Ponni Sugars and related authorities, the Tribunal held that the MEIS/MLFPS scrips are rewards granted to offset infrastructural inefficiencies and to provide exporters a level playing field and are not given for running the business more profitably. The reward therefore expands or facilitates market creation rather than serving as recurrent business income. The Tribunal followed its prior coordinate-bench decisions in the assessee's own cases and concluded that sale proceeds of MEIS/MLFPS scrips are capital receipts and not taxable as business income. [Paras 32, 38, 41, 42, 43]Proceeds from sale of MEIS/MLFPS scrips are capital receipts and not chargeable to tax as business income.Definition of "income" under section 2(24)(xviii) - scope of the phrase "by whatever name called" and ejusdem generis - Whether the amendment by insertion of section 2(24)(xviii) brings MEIS/MLFPS rewards within the definition of "income" - HELD THAT: - The Tribunal examined the language of sub clause (xviii) and the surrounding statutory and policy material. Applying the principle of ejusdem generis, it held that the phrase "by whatever name called" qualifies the listed items (subsidy, grant, cash incentive, duty drawback, waiver, concession, reimbursement) and does not broaden the independent word "assistance" to include distinct concepts such as a "reward" under the Foreign Trade Policy. The Tribunal found no factual element of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement in the MEIS/MLFPS benefits; they are rewards and thus do not fall within section 2(24)(xviii). The Tribunal also observed that the Bombay High Court's dismissal of constitutional challenge to sub clause (xviii) did not decide its applicability to MEIS/MLFPS facts. [Paras 31, 32, 33, 42, 43]Section 2(24)(xviii) does not apply to MEIS/MLFPS rewards; such rewards are not captured within the amended definition of "income."Applicability of ICDS VII (treatment of Government grants) - Government grants versus rewards - Whether ICDS VII or the ICDS treatment of government grants renders MEIS/MLFPS scrips taxable - HELD THAT: - The Tribunal noted ICDS VII deals with government grants and prescribes recognition patterns for grants. It held that duty credit scrips under MEIS are rewards (not government grants) and thus do not fall within ICDS VII. Consequently, ICDS VII does not govern the tax treatment of MEIS/MLFPS scrips and cannot be used to characterise them as taxable income. [Paras 33, 34, 35, 43]ICDS VII is not applicable to MEIS/MLFPS duty credit scrips; they are not government grants for ICDS purposes.Cash assistance under section 28(iiib) - chargeability of export incentives under section 28 - Whether MEIS/MLFPS rewards constitute "cash assistance" under section 28(iiib) and are chargeable as business income - HELD THAT: - Examination of section 28 sub clauses showed that sub clause (iiib) applies to cash assistance received or receivable against exports. The Tribunal found no cash component or reimbursement in MEIS/MLFPS scrips; they are transferable duty credit rewards, not cash assistance. Therefore section 28(iiib) is not attracted to the facts and cannot be used to tax the MEIS/MLFPS receipts. [Paras 24, 28, 43]MEIS/MLFPS receipts do not fall within cash assistance under section 28(iiib) and are not chargeable as business income under that provision.Revenue v. capital characterisation of expenditure on construction on leasehold land - Explanation 1 to section 32 - Characterisation of expenditure incurred in construction of building on leasehold land as revenue or capital expenditure - HELD THAT: - The Tribunal followed earlier coordinate bench and High Court authority distinguishing cases where only land is leased and the lessee constructs and bears the cost. Where the lessee does not own the land and the superstructure may have to be handed over or removed at lease termination, the expenditure confers a business advantage rather than a capital asset to the lessee. Applying established tests and precedents, the Tribunal held such construction costs to be revenue expenditure and upheld the CIT(A)'s allowance. [Paras 45, 46, 47, 48]Expenditure on construction of building on leased land (where land not owned by assessee) is revenue expenditure and allowable as such.Appellate authority's power to remit for verification - Remand to Assessing Officer for verification of a claim not made in original return - HELD THAT: - Relying on Goetze (India) Ltd., the Tribunal exercised its appellate power to remit the question of exclusion of MEIS proceeds (raised belatedly by an assessee in one appeal) to the Assessing Officer for verification and consideration in the light of the Tribunal's view on the main question. The direction is procedural and limited to verification and allowance consistent with the Tribunal's holdings. [Paras 65]Matter remitted to the Assessing Officer for verification and decision in terms of the Tribunal's view; remand ordered.Final Conclusion: The appeals on the primary question hold that MEIS/MLFPS duty credit scrips are rewards aimed at creating market advantages and, applying the purpose test, constitute capital receipts not taxable as business income; section 2(24)(xviii), ICDS VII and section 28(iiib) do not bring such rewards within taxable income. Expenditure on construction on leasehold land (where land is not owned) is revenue in nature and allowable. One matter (additional claim in ITA No. 358/Chny/2022) is remanded to the Assessing Officer for verification consistent with these conclusions.

2024 (9) TMI 1120 - ITAT DELHI Income Tax

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TPO cannot separately benchmark AMP expenses when distribution business already benchmarked using TNM method within ALP
The ITAT Delhi ruled on multiple transfer pricing and depreciation issues. Regarding AMP expenses, the tribunal held that separate AMP adjustment is unnecessary when distribution business is already benchmarked using TNM method and found within ALP. Following HC precedent in Maruti Suzuki case, the tribunal rejected TPO's approach of benchmarking AMP expenses separately using BLT method. For reimbursement of marketing expenses, considering time elapsed and to resolve the long-pending issue, the tribunal directed 20% addition to reimbursement expenses as ALP adjustment rather than remitting back to AO/TPO. The appeal was partly allowed with directions for completing benchmarking of international transactions.

Advertisement, Marketing and Promotion expenses as separate international transaction - Bright Line Test - Combined/aggregated transaction benchmarking - Comparability and exclusion of comparable companies for transfer pricing - Block of assets concept for depreciation - Allocation of common expenses for section 10AA benefit - Dividend Distribution Tax and applicability of DTAA - Classification of software licences as tangible computer assets or intangible assets for depreciationAdvertisement, Marketing and Promotion expenses as separate international transaction - Bright Line Test - Combined/aggregated transaction benchmarking - Transfer-pricing adjustment in respect of AMP expenses and benchmarking of reimbursement received from associated enterprises - HELD THAT: - The Tribunal considered earlier orders in the assessee's cases and the Delhi High Court authority. It concluded that where the distributor's combined international transaction (import and distribution) has been benchmarked under TNMM and accepted as at arm's length, a separate full-scale AMP adjustment by applying the Bright Line Test is not warranted on identical facts. The TPO had benchmarked AMP by applying BLT and disallowed AMP expenditure; the Tribunal held that the TPO should have confined benchmarking to the declared international transaction of reimbursement. To finalise the long-pending year, the Tribunal did not remit the matter but directed a pragmatic resolution: add 20% of the reimbursement of marketing expenses as the ALP adjustment and direct the AO/TPO to complete benchmarking accordingly. The Tribunal thus partly allowed the assessee's grounds on AMP while directing a fixed upward adjustment to resolve the dispute. [Paras 21, 22, 23]Partly allow - decline to sustain the BLT-based full AMP disallowance; direct AO/TPO to treat only the declared reimbursement transaction for benchmarking and make an addition equal to 20% of the reimbursement amount as ALP adjustment, and complete benchmarking.Comparability and exclusion of comparable companies for transfer pricing - Comparability of software development service providers - Selection/exclusion of specified comparable companies for benchmarking the software services (SISC/SARD) divisions - HELD THAT: - The Tribunal examined the functional profile and earlier coordinate-bench decisions involving identical facts (including the assessee's group-related decisions) and accordingly directed the AO/TPO to exclude five specified comparables (E-Infochips Bangalore Ltd., Infinite Data Systems Pvt. Ltd., Infosys Ltd., Persistent Systems Ltd., Thirdware Solutions Ltd.) from the final comparable set for the software services benchmarking for AY 2010-11. The Tribunal relied on the coordinate-bench reasoning reproduced in the order and directed the AO/TPO to follow that approach when finalising comparables and ALP for the software divisions. [Paras 24, 26]Allow in part - direct AO/TPO to exclude the five named comparables and to proceed in accordance with the coordinate-bench findings in selecting the final comparable set for software services.Block of assets concept for depreciation - Allowability of depreciation on residuary WDV of assets of the Daruhera unit (closed/ transferred unit) under block-of-assets concept - HELD THAT: - Both parties agreed and the Tribunal followed the precedent of the Delhi High Court: once assets form part of a block of assets they lose individual identity and depreciation is to be allowed on the block's WDV as adjusted for additions/deletions. The Tribunal directed the AO to allow the depreciation claimed on the residuary WDV of the block, following the High Court reasoning reproduced in the order. [Paras 27]Allow - direct AO to permit depreciation on the residuary WDV under the block-of-assets concept.Allocation of common expenses for section 10AA benefit - Disallowance/allocation of common expenses to the SEZ unit for computation of deduction under section 10AA - HELD THAT: - The Tribunal found that the quantification and verifications relating to allocation of additional/common expenses to the SEZ unit required factual verification. The parties accepted that similar issues in a subsequent year were verified and rectified on review; accordingly, the Tribunal remitted the matter to the file of the AO for verification of calculations and recomputation in accordance with law. [Paras 28]Remanded - issue sent back to AO for verification and recomputation of the allocation and section 10AA deduction.Dividend Distribution Tax and applicability of DTAA - Claim to restrict levy of dividend distribution tax (DDT) in accordance with beneficial rates under DTAA for dividends paid to non-resident shareholders - HELD THAT: - The Tribunal considered the Special Bench precedent in Total Oil and related authorities. It followed the Special Bench holding that where a domestic company pays DDT under section 115-O, the tax payable by the domestic company is at the rate specified in section 115-O and not at the beneficial DTAA rate applicable to the non-resident shareholder unless the contracting states have expressly extended treaty protection to the domestic company paying DDT. Applying that precedent, the Tribunal rejected the assessee's claim for DDT relief under the DTAA. [Paras 31, 32]Dismiss - additional grounds on DDT dismissed; DTAA rates held not to reduce the DDT payable by the domestic company in the facts of this case.Classification of software licences as tangible computer assets or intangible assets for depreciation - Revenue's appeal challenging DRP direction to recompute depreciation on software licences as per specific entry in Appendix I of the Income-tax Rules - HELD THAT: - The Tribunal examined submissions and earlier assessment-year decisions in the assessee's case (AYs 2006-07 to 2008-09) and concluded that the matter is covered by the assessee's earlier favourable decisions. The Tribunal dismissed the Revenue's appeal and confirmed that the DRP's direction to recompute depreciation as per the relevant rule entry should stand. [Paras 34, 35, 36]Dismiss revenue appeal - DRP direction upheld; revenue's grounds dismissed.Final Conclusion: For Assessment Year 2010-11 the Tribunal partly allows the assessee's appeal: the BLT-based full AMP disallowance is set aside and the Tribunal directs an ALP addition equal to 20% of the reimbursement of marketing expenses with AO/TPO to complete benchmarking; the Tribunal directs exclusion of five specified comparables for software services benchmarking and allows depreciation on the Daruhera unit under the block-of-assets principle; the allocation issue under section 10AA is remitted to the AO for verification; claims to reduce DDT by DTAA rates are dismissed. The Revenue's appeal on software-license depreciation is dismissed.

2024 (9) TMI 1119 - ITAT DELHI Income Tax

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Nokia subsidiary wins transfer pricing case on foreign exchange treatment and comparable selection
ITAT Delhi ruled on transfer pricing adjustments for a Nokia subsidiary engaged in mobile phone manufacturing and software development services. The tribunal upheld treating foreign exchange gains/losses as non-operative for the assessee since all currency risks were transferred to the parent company, distinguishing it from comparables bearing such risks. The tribunal excluded certain comparables including Whirlpool and Penguin Electronics due to functional dissimilarity (home appliances vs mobile phones), and rejected several IT companies for the software development segment due to lack of segmental data or functional differences. Regarding dividend distribution tax, the tribunal held that domestic companies can only claim DTAA benefits if contracting states specifically extend treaty protection for such tax. The appeal was partly allowed.

Treatment of foreign exchange gain/loss as operating or non operating item for transfer pricing - application of Safe Harbour Rules as an optional election and its inapplicability where not opted for - comparability analysis and filters in transfer pricing benchmarking including persistent loss filter, functional comparability and segmental data - adjustment of arm's length price by excluding non operating items and applying uniform treatment to tested party and comparables - exclusion of comparables on account of extraordinary events - refund claim of excess Dividend Distribution Tax and non applicability of DTAA to domestic dividend distribution taxTreatment of foreign exchange gain/loss as operating or non operating item for transfer pricing - application of Safe Harbour Rules as an optional election and its inapplicability where not opted for - adjustment of arm's length price by excluding non operating items and applying uniform treatment to tested party and comparables - Whether foreign exchange gain/loss is to be treated as part of operating revenue for determination of arm's length price of international transactions in the MPA segment - HELD THAT: - The Tribunal examined the assessee's contention that foreign exchange gain/loss arising from sale/purchase transactions should be included in operating revenue because such gains/losses flow from the trading activity. The Tribunal accepted the factual finding recorded in the transfer pricing documentation that the assessee is a limited risk/captive entity and that foreign exchange risk in respect of its international transactions with associated enterprises is borne by the parent/AEs. On that factual matrix the Tribunal held that exchange fluctuation entries are merely an accounting mechanism to monitor settlement with the AE and do not impact the operating revenue or operating costs of the assessee, because the contract price is effectively assured and any currency movement is adjusted by the AE. The Tribunal further observed that the DRP/TPO applied a consistent benchmarking approach by treating forex gains/losses as non operating for both the tested party and the comparables and that reliance on the Safe Harbour Rules was explanatory of the definition of operating revenue rather than an invocation of SHR as an election. Decisions cited by the assessee where forex was treated as operating were held distinguishable on facts where the tested parties bore forex risk. Consequently, the Tribunal rejected the assessee's challenge to the treatment of forex gain/loss and sustained the adjustment made by TPO/DRP in respect of the MPA segment. [Paras 33, 34, 35]Foreign exchange gain/loss treated as non operating item for transfer pricing benchmarking in the facts of this case; challenge dismissed.Comparability analysis and filters in transfer pricing benchmarking including persistent loss filter, functional comparability and segmental data - exclusion of comparables on account of extraordinary events - Whether specific companies relied on by the assessee or selected by the TPO are to be included or excluded as comparables for determination of ALP for the MPA and CSD segments - HELD THAT: - The Tribunal examined the comparables dispute company wise. For the MPA segment it found that Zenith Computers Ltd. failed the persistent loss filter (losses in the relevant three years including the year under consideration) and the assessee's plea for inclusion was rejected. The Tribunal found Whirlpool India Ltd. and Penguin Electronics Ltd. to be functionally dissimilar to the assessee (different product lines) and directed the AO/TPO to delete them from the final comparable set. For the CSD segment the Tribunal analysed the objections to Infobeans Technologies Ltd., Persistent Systems Ltd., Larsen & Toubro Infotech Ltd. and Mindtree Ltd. The Tribunal concluded that Persistent Systems Ltd. was functionally comparable and admissible as a comparable (turnover, intangibles and R&D not determinative on the facts and FAR matching acceptable). Conversely, the Tribunal directed deletion of Infobeans Technologies Ltd., L&T Infotech Ltd. and Mindtree Ltd. from the final set of comparables for reasons including lack of appropriate segmental data, functional dissimilarity and presence of extraordinary events or different business models that impair comparability. The Tribunal emphasised that comparability must be tested on functional similarity and reliable financial information, and that extraordinary events require demonstration of financial impact before exclusion can be based solely on occurrence. [Paras 32, 36, 38, 39]Zenith excluded; Whirlpool and Penguin deleted from comparables for MPA; Persistent Systems accepted as comparable for CSD; Infobeans, L&T Infotech and Mindtree directed to be deleted from final comparables for CSD.Adjustment of arm's length price by excluding non operating items and applying uniform treatment to tested party and comparables - comparability analysis and filters in transfer pricing benchmarking including persistent loss filter, functional comparability and segmental data - Whether TPO/DRP's transfer pricing adjustments (TP adjustments to income) in respect of NMP/MPA and CSD segments are sustainable - HELD THAT: - Having upheld the treatment of forex as non operating on the factual matrix and having resolved the comparables disputes (excluding certain comparables and accepting others), the Tribunal found that the TPO/DRP's approach to benchmarking and resultant adjustments were in substantial part sustainable. The Tribunal deleted certain comparables as noted above which will require recalculation/adjustment by the AO/TPO where applicable, but otherwise dismissed the assessee's primary challenges to the substantive TP adjustments arising from the DRP directions. [Paras 33, 36, 38, 39]Part of the TP adjustments sustained; some comparables deleted and remitted to AO/TPO for recomputation in accordance with directions.Refund claim of excess Dividend Distribution Tax and non applicability of DTAA to domestic dividend distribution tax - Whether the assessee is entitled to refund of excess Dividend Distribution Tax paid by reference to India Finland DTAA rates - HELD THAT: - The Tribunal considered the assessee's late raised claim for refund of DDT paid on dividends to a Finland resident shareholder and examined the legal principle that a domestic company's liability under Section 115 O (DDT) is not curtailed by DTAA unless the relevant treaty expressly extends treaty protection to the domestic levy (for example, by protocol). Relying on the reasoning of the cited Special Bench authority, the Tribunal held that DTAA protection does not operate to reduce the domestic DDT charged on a resident domestic company, and that treaty provisions do not alter the rate of Section 115 O unless the treaty expressly provides for such extension. Consequently, the assessee's additional ground seeking refund under DTAA was dismissed. [Paras 40, 83]Claim for refund of excess DDT under India Finland DTAA dismissed; DTAA does not alter domestic DDT liability in absence of specific treaty provision.Final Conclusion: The appeal is partly allowed. The Tribunal sustained the TPO/DRP treatment of foreign exchange gain/loss as non operating on the facts that the AE bore forex risk and upheld the benchmarking approach subject to deletion of certain comparables (Whirlpool, Penguin, Infobeans, L&T Infotech and Mindtree) and acceptance of others (including Persistent Systems). Zenith was excluded for persistent loss. The TP adjustments are therefore largely sustained, with directions to the AO/TPO to revise benchmarking where comparables have been deleted. The assessee's claim for refund of DDT under the India Finland DTAA was dismissed.

2024 (8) TMI 1111 - NATIONAL FINANCIAL REPORTING AUTHORITY - LB Companies Law

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Issues: (i) Whether the auditors failed to detect and report fraudulent diversion of funds, understatement of related party balances, and evergreening in the audit of the consolidated financial statements. (ii) Whether the auditors failed to verify end use of loans and guarantees and to report non-compliance with section 185 in the standalone financial statements. (iii) Whether the audit firm and engagement partner violated audit documentation and quality control requirements under SQC 1 and SA 230. (iv) Whether the proved failures constituted professional misconduct warranting penalty and debarment.

Issue (i): Whether the auditors failed to detect and report fraudulent diversion of funds, understatement of related party balances, and evergreening in the audit of the consolidated financial statements.

Analysis: The audit involved substantial related party exposures, unusually large advances, circular movement of funds, and book-entry based reductions in outstanding balances. The auditors relied heavily on component auditors and management explanations, but did not perform adequate additional procedures, independent verification, or meaningful assessment of business rationale, recoverability, and fraud risk. The findings also recorded that bank statements and related party balances revealed structured circulation of funds and repeated same-day round-tripping that understated the true exposure.

Conclusion: The failure to apply professional skepticism, assess fraud risk, and obtain sufficient appropriate audit evidence was established against the auditors.

Issue (ii): Whether the auditors failed to verify end use of loans and guarantees and to report non-compliance with section 185 in the standalone financial statements.

Analysis: The standalone audit record did not show adequate verification of the end use of large loans and guarantees granted to subsidiaries, nor did it show proper testing of whether the borrowing entities used the funds for their principal business activities. The audit also did not evidence the required scrutiny of related party lending, guarantees, or the factual basis for treating the transactions as compliant. Reliance on management representations and partial repayment did not satisfy the reporting obligations under the audit framework and CARO.

Conclusion: The auditors were held to have failed to report the section 185 non-compliance and the related audit lapse was proved.

Issue (iii): Whether the audit firm and engagement partner violated audit documentation and quality control requirements under SQC 1 and SA 230.

Analysis: The electronic audit system permitted post-signoff alterations, creation of new work papers, and modification of existing work papers without adequately preserving the identity of the modifier, the date of modification, or a reliable audit trail. The record showed work papers created or altered after the audit report date and other documents modified without proper sign-off. These defects meant the engagement file did not reliably evidence when procedures were performed, who performed or reviewed them, or whether the documentation was complete and tamper-proof.

Conclusion: The firm and the engagement partner were found in violation of the documentation and quality control standards.

Issue (iv): Whether the proved failures constituted professional misconduct warranting penalty and debarment.

Analysis: The established lapses amounted to failure to disclose material facts, failure to report material misstatements, gross negligence, failure to obtain sufficient information for an opinion, and failure to invite attention to material departures from accepted audit procedure. The authority treated the firm as primarily responsible for the audit report issued in its name and held the firm, engagement partner, and engagement quality control reviewer accountable in the respective roles found proved on the record.

Conclusion: Professional misconduct was proved and monetary penalties and debarment were justified.

Final Conclusion: The auditors were found guilty of serious audit failures in relation to fraud detection, related party exposures, statutory compliance, and audit documentation, and sanctions were imposed accordingly.

Ratio Decidendi: An auditor, including the principal auditor of a listed company, must independently assess fraud risk, business rationale, recoverability, and related party transactions with professional skepticism and sufficient appropriate evidence, and may not discharge that duty by blind reliance on component auditors or management representations; audit documentation must also preserve a reliable and tamper-evident record of the work performed.

Professional skepticism in audit, related party scrutiny and tamper-evident documentation requirements reinforced in NFRA action.
An auditor must exercise professional skepticism, independently assess fraud risk, related party exposures, business rationale and recoverability, and obtain sufficient appropriate audit evidence; reliance on component auditors or management explanations is not enough where circular fund movements, round-tripping and understated balances are indicated. The audit must also verify end use of loans and guarantees, test related party lending and report statutory non-compliance under section 185 where established. Audit documentation and quality control records must preserve a reliable, tamper-evident trail showing when work was done, by whom, and on what basis. Failures of this kind may amount to professional misconduct, supporting penalty and debarment.

Professional misconduct - Fraud risk and evergreening of loans - Related party transactions - SA 600 - reliance on component auditors - Failure to report fraud under section 143(12) - Section 185 compliance and CARO reporting - SQC 1 and SA 230 - audit documentation controls - Firm liability for audit quality and supervision - Monetary penalty and debarmentProfessional misconduct - Fraud risk and evergreening of loans - Related party transactions - SA 600 - reliance on component auditors - Whether the Firm, the Engagement Partner and the EQCR committed professional misconduct by failing to detect, investigate and report diversion of funds to a promoter-controlled entity (MACEL), understatement of receivables and evergreening of loans in the Consolidated Financial Statements. - HELD THAT: - NFRA found that the principal auditors identified the group's exposure to MACEL as a significant audit area but did not perform sufficient additional procedures or exercise professional skepticism required by the Standards. The principal auditor's reliance on the work of component auditors under SA 600 was misplaced given (a) the materiality of component balances to the CFS, (b) apparent red flags (unusual advances, disproportionate advances for purchases, circular fund movements visible in bank statements), and (c) the statutory right of access to subsidiary records under section 143(1). The audit file shows recoverability testing based on the promoter's net worth certificate without appropriate evaluation of the expert, absence of item wise recoverability analysis, discrepancies in related party amounts across work papers, and bank evidence of structured circulation of funds (evergreening) which the auditors failed to identify or report. These failures amounted to gross negligence and a breach of duties under SA 200, SA 240, SA 315, SA 330 and SA 550 and constituted professional misconduct. [Paras 31, 34, 37, 48, 50]Proved that the Firm, the Engagement Partner and the EQCR committed professional misconduct by failing to detect, investigate and report the diversion, understatement and evergreening in the Consolidated Financial Statements.Failure to report fraud under section 143(12) - Professional misconduct - Whether the auditors failed to report to the Central Government an offence of fraud in terms of section 143(12) of the Act. - HELD THAT: - NFRA concluded that despite evidence indicating diversion of funds to promoter controlled entities and other indicia of fraud, the auditors represented in their report that no material fraud had been noticed. The factual findings (bank statements showing circular transactions, abnormal related party transactions, improper recoverability analyses) established that the auditors were aware of circumstances warranting reporting under section 143(12) but did not report to the Central Government. This omission forms part of the proven professional misconduct under the Companies Act and the Standards. [Paras 50]Proved that the auditors failed to report the suspected offence of fraud to the Central Government in breach of section 143(12).Section 185 compliance - CARO - Related party transactions - Whether the Firm, the EP and the EQCR failed to comply with CARO and applicable auditing requirements in auditing the standalone financial statements, specifically for verification of compliance with section 185 (loans/guarantees/end use) of the Act. - HELD THAT: - NFRA found that CDEL had advanced substantial loans and given guarantees to subsidiaries whose proceeds were not shown to be used for principal business activities. The auditors did not verify whether special resolutions (where required) were passed, nor did they adequately test the end use of funds or substantiate management representations. Work papers lacked transaction wise verification and the EQCR's review did not cure these deficiencies. These lapses violated CARO reporting obligations and the auditors' duties under SA 315, SA 330 and related Standards. [Paras 61, 63, 65, 67, 69]Proved that the Firm, the Engagement Partner and the EQCR failed to report and verify compliance with section 185 of the Act and thus violated CARO and relevant auditing Standards.SQC 1 and SA 230 - audit documentation controls - Audit documentation - Whether the Firm and the Engagement Partner violated SQC 1 and SA 230 by permitting creation and modification of audit work papers after signing the auditor's report without proper records of who modified them and when. - HELD THAT: - The e audit application used by the Firm allowed creation and modification of AWPs post sign off and post audit report without mandating that the modifier record identity and date, and without preventing post sign off insertion or replacement of evidence. NFRA's review identified multiple AWPs created or modified after the auditor's report date and AWPs lacking modifier sign offs. The Firm's contention that iterative electronic workflows justify such changes was rejected because SA 230 and SQC 1 require documentation of the nature, timing and authorship of audit procedures and controls to prevent unauthorized changes. The absence of mandatory re signing and traceability undermined the integrity and reliability of the audit documentation. [Paras 71, 73, 76, 78, 79]Proved that the Firm and the Engagement Partner violated SQC 1 and SA 230 by permitting inadequate controls over audit documentation creation and modification.Firm liability for audit quality - Monetary penalty and debarment - Whether the Firm is accountable for the audit failures and what sanctions should be imposed on the Firm, the Engagement Partner and the EQCR. - HELD THAT: - NFRA held that the legal responsibility for the audit rests with the appointed audit firm and that firm level systems, supervision and quality control are integral to compliance with the Act and Standards. Given systemic documentation weaknesses and the demonstrated failures of supervision, the Firm was held jointly and severally responsible with the EP and EQCR for the professional misconduct. Applying the statutory sanctioning powers in section 132(4)(c) and principles of proportionality and deterrence, NFRA imposed monetary penalties and debarments: a monetary penalty on the firm and individual penalties and periods of debarment on the EP and the EQCR, with the order effective after 30 days. [Paras 87, 100, 104, 105, 106]Firm held responsible for failures of audit quality; monetary penalties and debarments imposed on the Firm, the Engagement Partner and the EQCR as ordered.Final Conclusion: NFRA concluded that M/s BSR & Associates LLP, CA Aravind Maiya (EP) and CA Amit Somani (EQCR) committed professional misconduct by failing to exercise due diligence and professional skepticism, by inadequately relying on component auditors, by not reporting suspected fraud, by failing to verify compliance with section 185 and CARO requirements, and by maintaining deficient audit documentation systems; monetary penalties and periods of debarment were therefore imposed as set out in the Order.

2024 (8) TMI 43 - ITAT DELHI Income Tax

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Issues: (i) whether the alleged arm's length price adjustment on advertisement, marketing and promotion expenses as an international transaction was sustainable; (ii) whether the comparables and method applied for the trading segment were sustainable; (iii) whether the comparables and method applied for the networking segment were sustainable; (iv) whether the comparables and method applied for the manufacturing segment were sustainable; (v) whether the royalty payment could be separately benchmarked and adjusted; and (vi) whether the salary paid to expatriate employees on secondment was disallowable.

Issue (i): whether the alleged arm's length price adjustment on advertisement, marketing and promotion expenses as an international transaction was sustainable

Analysis: The assessee had disclosed only the reimbursed marketing expenses as an international transaction. The Tribunal found that the Revenue had no evidence of any understanding, arrangement, or action in concert to incur AMP expenditure for the foreign parent's brand promotion. It held that the scope of the disclosed transaction could not be expanded to the full AMP spend merely by invoking the bright line approach or an intensity-based variant of TNMM, and that ALP determination could not proceed unless the existence of the international transaction itself was first established.

Conclusion: The AMP adjustment was deleted and the issue was decided in favour of the assessee.

Issue (ii): whether the comparables and method applied for the trading segment were sustainable

Analysis: The assessee's trading segment was benchmarked under RPM, while the Revenue substituted TNMM and altered the comparable set. The Tribunal found OTS E-Solutions Pvt. Ltd. and Virtual Netcom Pvt. Ltd. functionally dissimilar and directed their exclusion. It also held that Sataytej Commercial Co. Ltd. was wrongly retained despite clear product-profile differences and directed its exclusion. On the other hand, it upheld inclusion of the trading segment of Nu Tech India Ltd. and declined inclusion of HCL Comnet for want of reliable audited quarterly data.

Conclusion: The trading segment adjustment was not sustained in the form made by the Revenue, and the issue was decided substantially in favour of the assessee.

Issue (iii): whether the comparables and method applied for the networking segment were sustainable

Analysis: In the networking segment, the Tribunal held that the comparables selected by the Revenue were service providers or otherwise functionally dissimilar to the assessee's predominantly trading model for telecom equipment. It found that the Revenue's comparables did not match the assessee's buy-sell profile, and that the excluded/included entities did not satisfy functional similarity on the record.

Conclusion: The networking segment adjustment was not sustained as made, and the issue was decided in favour of the assessee.

Issue (iv): whether the comparables and method applied for the manufacturing segment were sustainable

Analysis: The Tribunal held that Frog Cellsat Ltd. was functionally dissimilar because of its different product profile, B2B model, and independent R&D function, while Glen Appliances Ltd. was a distributor and not a true manufacturer. It further held that Value Industries Ltd. and Trend Electronics Ltd. could not be included without reliable quarterly data, but Penguin Electronics Ltd. was a suitable comparable because its consumer-electronics profile matched the assessee's broader manufacturing segment.

Conclusion: The manufacturing segment adjustment was not sustained in the form made by the Revenue, and the issue was decided substantially in favour of the assessee.

Issue (v): whether the royalty payment could be separately benchmarked and adjusted

Analysis: The Tribunal held that royalty was intrinsically linked with the licensed manufacturing segment and could not be cherry-picked for separate benchmarking when the segment as a whole had already been tested under TNMM. It also found the CUP comparables relied upon by the Revenue to be wholly incomparable, involving disparate agricultural biotechnology arrangements lacking transactional similarity, contractual congruence, and currency for the relevant year.

Conclusion: The royalty adjustment was deleted and the issue was decided in favour of the assessee.

Issue (vi): whether the salary paid to expatriate employees on secondment was disallowable

Analysis: The Tribunal found that the seconded employees were on the assessee's payroll and under its control during secondment, and that the Revenue had not produced material showing that they were rendering services for the foreign parent. It followed the consistent view taken in earlier years that such salary expenditure was incurred wholly for the assessee's business and was not liable to disallowance under the stated rationale.

Conclusion: The disallowance of expatriate salary was deleted and the issue was decided in favour of the assessee.

Final Conclusion: The appeal succeeded on the principal transfer-pricing and expatriate-salary disputes, while the Revenue's adjustments were substantially set aside and only limited comparative findings were retained or modified as indicated.

Ratio Decidendi: An alleged international transaction cannot be presumed for AMP spend without evidence of an arrangement with the associated enterprise, closely linked transactions may be aggregated for TNMM, and CUP can be applied only with truly comparable uncontrolled transactions.

Transfer pricing comparability and AMP adjustments fail where no international transaction is proved and comparables are functionally dissimilar.
ITAT Delhi held that an alleged AMP adjustment could not stand where the Revenue failed to establish any international transaction beyond reimbursed marketing es, and a bright line or intensity-based approach could not enlarge the disclosed transaction; the adjustment was deleted. It also rejected Revenue's comparable sets across the trading, networking and manufacturing segments where entities were functionally dissimilar or lacked reliable data, while permitting suitable segmental comparables where record support existed. Royalty could not be separately benchmarked when intrinsically linked to the tested manufacturing segment under TNMM, and CUP adjustments based on dissimilar arrangements were rejected. Expatriate salary paid during secondment was held to be business expenditure and not disallowable.

International transaction - bright line test - transactional net margin method (TNMM) - intensity-based adjustment - aggregation of closely linked transactions - comparable selection and functional comparability - comparable uncontrolled price (CUP) method and transactional comparability - working capital adjustment under Rule 10B(1)(e) - proportionate adjustment / apportionment of AE transactions - disallowance of expenditure under section 37(1) - remand for computation and verification International transaction - bright line test - transactional net margin method (TNMM) - Adjustment treating AMP expenditure as an international transaction and related substantive and protective transfer pricing adjustments - HELD THAT: - The Tribunal held that AMP expenditure cannot be treated as an international transaction beyond the limited reimbursements expressly disclosed and agreed with the associated enterprise. Coordinate Benches had consistently decided the assessee's prior years on the same principle that, absent evidence of an understanding, arrangement or action in concert with the AE, expenditure incurred autonomously by the Indian entity is not an international transaction. Consequently, both the Bright Line Test and the TNMM intensity-based adjustment which sought to expand the scope of international transaction to cover alleged "excessive" AMP expenditure are untenable. The Tribunal rejected the Revenue's reliance on Sony Ericsson [2015 (3) TMI 580 - DELHI HIGH COURT] to justify expansion of the transaction where existence of the international transaction itself was disputed, and held that the TPO/AO/DRP failed to place evidence to rebut the assessee's position that reimbursements were limited and incurred on the assessee's own volition. The substantive and protective AMP adjustments were therefore deleted. [Paras 13, 14, 15, 16, 17] Transfer pricing adjustments (substantive and protective) treating AMP expenditure as an international transaction are deleted; Grounds 4 to 20 allowed. Comparable selection and functional comparability - transactional net margin method (TNMM) - Validity of comparables and TNMM benchmarking in the Trading segment (inclusion/exclusion of specific comparables) - HELD THAT: - The Tribunal reviewed the comparables relied upon by the TPO and DRP and found that certain companies were functionally dissimilar to the assessee's trading operations. On factual examination it directed exclusion of OTS E-Solutions Pvt. Ltd. and Sataytej Commercial Co. Ltd. as not functionally comparable; it allowed inclusion of certain other comparables where functional similarity was established and rejected inclusion where data or functional comparability was deficient. The Tribunal emphasised that comparability requires scrutiny of functions, assets and risks, and allowed the assessee's challenge to the inclusion of unsuitable comparables. The primary comparability findings and consequential directions dispose of Ground 21. [Paras 25, 26, 27, 28, 29] Specific comparables (including OTS E-Solutions and Sataytej Commercial) excluded from Trading segment comparables; Ground 21 disposed accordingly and TNMM-related computation to be revisited as directed. Comparable selection and functional comparability - transactional net margin method (TNMM) - Validity of comparables and TNMM benchmarking in the Networking segment - HELD THAT: - The Tribunal found that a number of comparables introduced by the TPO were service providers and not traders, whereas the assessee's networking segment predominantly involved buy-sell of telecom equipment (B2B), with services being a minor portion. For lack of functional similarity, the Tribunal directed exclusion of the seven service companies introduced by the TPO. It accepted Nu Tech India Limited as a comparable after examining net worth and sales trends, and rejected HCL Comnet due to absence of audited quarterly data necessary to reconstruct annual results. The Tribunal thus emphasised functional comparability and required the comparables set to be revised accordingly. [Paras 38, 39, 40, 41, 42] Service-provider comparables excluded; Nu Tech included; HCL Comnet excluded for lack of audited data; networking comparables to be recomputed consistent with directions. Comparable selection and functional comparability - transactional net margin method (TNMM) - Validity of comparables and TNMM benchmarking in the Manufacturing segment - HELD THAT: - On review of functional profiles and product similarity the Tribunal directed exclusion of Frog Cellsat Ltd. and Glen Appliances Limited as functionally dissimilar to the assessee's manufacturing of consumer electronics and home appliances. It accepted Penguin Electronics Limited as a suitable comparable given similarity of product profile and prior treatment. Value Industries Limited and Trend Electronics could not be included because the appellant had not furnished audited quarterly data necessary to reconstruct annual results for comparability. The Tribunal emphasised that TNMM allows flexibility but does not permit comparables with stark functional or product-profile dissimilarity to remain. [Paras 45, 46, 47, 48, 49] Frog Cellsat and Glen Appliances excluded; Penguin included; Value and Trend not included for lack of requisite data; manufacturing comparables to be revised accordingly. Working capital adjustment under Rule 10B(1)(e) - proportionate adjustment / apportionment of AE transactions - remand for computation and verification - Working capital adjustment, computation of margins, and proportionate adjustment for Trading, Networking and Manufacturing segments - HELD THAT: - The Tribunal found merit in the assessee's contentions that working capital adjustments and certain income/expenditure classifications were not properly taken into account. The DRP had directed grant of working capital adjustment; the TPO omitted it. The CIT(DR) did not oppose remand for factual verification. Accordingly, the Tribunal directed the TPO to grant working capital adjustment while computing mean/median margins, to verify and correct treatment of operating/non operating items, and to determine proportionate adjustment (apportionment of AE transactions) appropriately after considering the assessee's computations. These matters were remanded to the TPO for recomputation and factual verification. [Paras 50, 51] Working capital adjustment and proportionate adjustment remanded to the TPO for computation and factual verification in accordance with DRP directions; Grounds 25, 27 and 28 disposed accordingly. Comparable uncontrolled price (CUP) method and transactional comparability - aggregation of closely linked transactions - Validity of disaggregation and CUP benchmarking of royalty payments to the parent - HELD THAT: - The Tribunal held that the TPO's CUP benchmarking of royalty using selected third party agreements was unsustainable because the chosen agreements were ex facie disparate (agriculture/biotech transactions) and lacked the necessary transactional similarity required by CUP. The Tribunal also accepted the assessee's submission that the royalty is inextricably linked to the manufacturing segment and that an aggregated TNMM analysis for the segment had been accepted by the TPO in the TP order. Cherry picking the royalty for separate CUP benchmarking, particularly with wholly inappropriate comparables, would amount to double adjustment and was impermissible. Consequently the royalty adjustment was deleted on merits; the Tribunal did not find it necessary to adjudicate procedural/144C objections after deciding on merits. [Paras 57, 61, 63, 64, 65] Royalty adjustment under CUP set aside and deleted; aggregation under TNMM for the manufacturing segment upheld for the royalty transaction. Disallowance of expenditure under section 37(1) - Disallowance of salary paid to expatriate employees on secondment - HELD THAT: - The Tribunal found no evidence that the secondee expatriates were furthering the business objectives of the foreign parent or that they were not under the control of the appellant during secondment. Prior Coordinate Bench decisions (including the Tribunal's decision in the parent's case negating a PE finding) supported deletion of the addition. The AO's reliance on assessment conclusions in the parent entity's file and conjecture was insufficient. On facts and precedent, the Tribunal directed deletion of the disallowance of salaries paid to expatriate secondees. [Paras 66, 67, 68, 69] Disallowance of salary expenditure for secondee expatriates deleted; Grounds 33-35 allowed. Final Conclusion: The Tribunal partly allowed the appeal for AY 2015-16: AMP-related transfer pricing adjustments (substantive and protective) deleted; several comparables excluded or included as directed for trading, networking and manufacturing segments with remand to the TPO for working capital, margin computations and proportionate adjustment; royalty adjustment under CUP deleted and aggregation under TNMM upheld; disallowance of expatriate salaries deleted. Appeal disposed in the terms indicated.

2024 (7) TMI 1340 - DELHI HIGH COURT Income Tax

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Issues: (i) Whether the receipts from Indian customers for bandwidth and connectivity services rendered outside India were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore DTAA. (ii) Whether the amendments introduced in section 9(1)(vi), including the expanded meaning of "process", could be read into Article 12 of the DTAA through Article 3(2). (iii) Whether the OSS/GBSA arrangements conferred any use or right to use process or equipment on the customers or the Indian telecom operators.

Issue (i): Whether the receipts from Indian customers for bandwidth and connectivity services rendered outside India were taxable as royalty under section 9(1)(vi) of the Income-tax Act, 1961 and Article 12 of the India-Singapore DTAA.

Analysis: The decisive enquiry was whether the customers obtained a right over any patent, process, equipment, or other protected subject matter, or merely derived the benefit of a telecommunications service. The Court held that the agreements showed provision of standard bandwidth and connectivity services through the service provider's own infrastructure, which remained under its control. Mere use of a facility, without conferral of dominion, possession, or effective control over equipment or process, does not amount to use or right to use for royalty purposes.

Conclusion: The receipts were not taxable as royalty and the issue was answered in favour of the assessee.

Issue (ii): Whether the amendments introduced in section 9(1)(vi), including the expanded meaning of "process", could be read into Article 12 of the DTAA through Article 3(2).

Analysis: Article 3(2) applies only to terms not defined in the treaty. Since Article 12 already defines royalty, domestic-law amendments cannot enlarge or alter the treaty definition. The Court further held that unilateral amendments to the Income-tax Act cannot modify the negotiated bargain embodied in the DTAA, and that the retrospective domestic explanations do not control treaty interpretation.

Conclusion: The amended domestic definition could not be imported into the DTAA, and the issue was decided against the Revenue.

Issue (iii): Whether the OSS/GBSA arrangements conferred any use or right to use process or equipment on the customers or the Indian telecom operators.

Analysis: The OSS and GBSA arrangements were held to be reciprocal service agreements facilitating seamless international connectivity and single billing. The customers and counterpart operators did not receive possession, control, or an exclusive right to exploit the underlying infrastructure, process, or equipment. The Court treated the arrangements as service contracts, not as leases or licences of equipment or process. The expressions "process" and "equipment" could not be stretched to cover the mere use of a telecom network in the course of service provision.

Conclusion: No use or right to use process or equipment was conferred, and the issue was answered in favour of the assessee.

Final Conclusion: The appeals failed because the consideration received for overseas bandwidth and connectivity services was held to be outside the royalty charge under the DTAA, and the domestic statutory expansions could not alter that treaty position.

Ratio Decidendi: Where a DTAA expressly defines royalty, the domestic law cannot unilaterally expand that treaty meaning by retrospective amendment, and a telecom service transaction does not become royalty unless the payer is granted effective control or a right to use the underlying process or equipment.

Royalty treatment excludes telecom connectivity services where customers lack effective control or rights to use underlying network equipment.
Bandwidth and connectivity receipts for services provided through the provider's own overseas infrastructure fall outside royalty treatment where customers receive only telecommunications services, not possession, dominion, effective control, or a right to use equipment or process. Article 12 of the India-Singapore DTAA contains its own royalty definition, so domestic amendments expanding the meaning of "process" under the Income-tax Act cannot be imported through Article 3(2) or alter the treaty bargain. OSS and GBSA arrangements providing reciprocal connectivity and single billing remain service contracts where operators and customers lack exclusive rights over the network infrastructure.

Royalty - use or right to use - process - equipment royalty - Article 12 of the DTAA - Section 9(1)(vi) of the Income Tax Act - Article 3(2) of the DTAA (ambulatory reference to domestic law) - treaty override / Section 90(2) - One Stop Shopping Service Agreement (OSS) / Global Business Services Agreement (GBSA)Royalty - Article 12 of the DTAA - Section 9(1)(vi) of the Income Tax Act - treaty override / Section 90(2) - Whether receipts from Indian customers for bandwidth/data transmission services provided outside India are taxable as royalty under Section 9(1)(vi) of the Act read with Article 12 of the India-Singapore DTAA. - HELD THAT: - The Court held that the payments in issue are not taxable as royalty under Article 12 of the DTAA. It reaffirmed the prevailing principle that where a DTAA applies the treaty definition governs and, under Section 90(2), treaty provisions prevail to the extent they are more beneficial to the assessee. Unilateral amendments to domestic law (the Explanations to Section 9(1)(vi)) cannot be read into or used to alter the meaning of defined terms in the DTAA; Parliament cannot, by domestic amendment, unilaterally change treaty definitions. Applying the tests developed in Asia Satellite and New Skies Satellite (and the Supreme Court in Engineering Analysis), the Court found no effective conferral of a right to use or exclusive control over any process or equipment on Indian customers such as would bring the receipts within Article 12. The Court therefore answered the question in the negative and dismissed the appeals on this score. [Paras 71, 72, 73, 96, 107]Receipts are not taxable as royalty under Article 12 of the DTAA; Section 9(1)(vi) explanations do not override the treaty.Article 3(2) of the DTAA (ambulatory reference to domestic law) - process - Explanation 6 to Section 9(1)(vi) - Whether Article 3(2) of the DTAA permits importing Explanation 6 (and other clarificatory explanations) from domestic law into the treaty definition of 'process' so as to tax the receipts as royalty. - HELD THAT: - The Court rejected the appellant's Article 3(2) contention. Article 3(2) applies only where a term in the treaty is undefined; here 'royalty' (and its elements) is defined in Article 12 and hence Article 3(2) is not engaged. Even where ambulatory reference is permitted for undefined terms, it does not empower a Contracting State to unilaterally amend the core bargain of the treaty by importing domestic amendments that expand treaty scope. The Court followed the reasoning in New Skies Satellite that unilateral domestic amendments cannot be read to alter treaty definitions and emphasized the limits of the ambulatory approach. [Paras 45, 46, 90, 91, 96]Article 3(2) does not permit importing Explanation 6 or the Section 9 amendments into Article 12 to expand the treaty definition.Use or right to use - process - equipment royalty - One Stop Shopping Service Agreement (OSS) / Global Business Services Agreement (GBSA) - Whether the OSS/GBSA arrangements or the commercial facts here effected a grant of 'use' or 'right to use' (i.e. effective and general control) of any process or equipment to customers or Indian operators such that Article 12 would be attracted. - HELD THAT: - Applying the established test (effective and general control/dominion), the Court found the OSS/GBSA merely provided coordinated reciprocal services and single billing/settlement mechanisms; the infrastructure and technology remained under the control of the foreign operator and no exclusive right or control was transferred to the customer or Indian operator. Relying on precedents (Asia Satellite, Dell AAR, Cable & Wireless, OECD/UN commentary and BSNL), the Court emphasised that mere enjoyment of a service or benefit from equipment/process used by a service provider does not amount to 'use' or 'right to use' within Article 12. Hence neither process-royalty nor equipment-royalty applied to the transactions. [Paras 14, 78, 79, 88, 89]The OSS/GBSA and related arrangements do not confer 'use' or 'right to use' of process or equipment; the receipts are for services, not royalty.Final Conclusion: The appeals are dismissed. The Court held that the payments received by Telstra Singapore from Indian customers for bandwidth/data transmission provided outside India do not constitute process or equipment royalty under Article 12 of the India-Singapore DTAA; domestic amendments to Section 9(1)(vi) (including Explanation 6) cannot be read so as to alter the DTAA definition or to bring these transactions within Article 12, and the OSS/GBSA arrangements did not transfer effective control or a right to use the process or equipment.

2024 (5) TMI 1344 - DELHI HIGH COURT Money Laundering

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Issues: (i) Whether the applicant was entitled to regular bail solely on the ground of delay in trial; (ii) whether the delay in commencement of trial was attributable to the applicant; (iii) whether the applicant was entitled to regular bail in the CBI and ED cases on merits.

Issue (i): Whether the applicant was entitled to regular bail solely on the ground of delay in trial.

Analysis: The order read the earlier Supreme Court liberty as permitting a fresh bail application where trial delay was one relevant consideration, but not as creating an automatic entitlement to bail merely because trial had not commenced or had progressed slowly. The Court held that the bail plea still had to be tested on merits, with speedy trial being an additional factor and not the sole ground, especially in serious corruption and money-laundering matters.

Conclusion: The applicant was not entitled to bail solely on the ground of delay in trial.

Issue (ii): Whether the delay in commencement of trial was attributable to the applicant.

Analysis: The Court examined the pre-charge proceedings and noted repeated applications concerning supply and inspection of documents, alongside the practical complexity of a multi-accused case with voluminous records. It held that several applications were related to the accused's procedural rights and could not automatically be branded as delay tactics, yet the overall pre-trial process had not moved at a snail's pace in a manner attributable solely to the prosecution or the trial court. The Court found that the applicant had nonetheless contributed to the delay in the pre-charge stage through repeated document-related applications.

Conclusion: The delay in commencement of trial was not wholly attributable to the applicant, though his applications contributed to the delay in the pre-charge proceedings.

Issue (iii): Whether the applicant was entitled to regular bail in the CBI and ED cases on merits.

Analysis: On a prima facie assessment, the Court found material indicating the applicant's role in the alleged conspiracy, the creation of a fabricated public-feedback process, the increase in wholesale profit margin without justification, the alleged facilitation of licences and kickbacks, and the alleged destruction of electronic evidence. Applying the ordinary bail parameters and, in the ED case, the stringent twin conditions under the PMLA, the Court held that the applicant failed the triple test and that a prima facie case of money laundering was made out. The Court also held that economic offences of this nature warranted a stricter approach and that delay alone could not override the statutory safeguards.

Conclusion: The applicant was not entitled to regular bail in either case on merits.

Final Conclusion: The bail applications were rejected, with the Court declining release on both the delay ground and on merits, while granting only a limited custodial visitation relief concerning the applicant's wife.

Ratio Decidendi: In serious economic offences, delay in trial is only one factor in bail adjudication and does not by itself justify release where the accused fails the ordinary bail tests and, in PMLA matters, cannot satisfy the twin statutory conditions.

Delay in trial is only one bail factor; serious economic offence allegations defeated release on merits.
Delay in trial is only one factor in bail adjudication and does not create an automatic right to release in serious economic offences. The Court held that the applicant could not obtain regular bail solely because trial had progressed slowly, and that the pre-charge delay was not wholly attributable to the applicant, though his repeated document-related applications contributed to it. On merits, the Court found a prima facie case involving alleged conspiracy, fabricated processes, kickbacks and destruction of electronic evidence, and in the PMLA case the applicant failed the twin statutory conditions. Bail was rejected in both cases, with only limited custodial visitation relief granted.

Right to speedy trial - grant of bail on ground of delay - Sections 207/208 Cr. P.C. - supply and inspection of relied/un-relied documents - triple test for grant of bail - Section 45 PMLA - mandatory twin conditions for bail - prima facie satisfaction on PMLA material at bail stage - custody parole - manufacturing public opinion as an element of corrupt design Right to speedy trial - grant of bail on ground of delay - Scope and effect of the Supreme Court's liberty to file a fresh bail application where trial is protracted - HELD THAT: - The Court construed paragraphs 28-30 of the Supreme Court judgment dated 30.10.2023 as having granted only a liberty to move a fresh bail application either on change of circumstances or if the trial proceeds at a snail's pace within the specified period, but emphasised that any such fresh application must be decided on merits by the trial court without being influenced by earlier rejections. The appellate courts retain full power to consider the fresh application on its factual and legal merits while taking the Supreme Court's observations on speedy trial into account; the order did not entitle the applicant to bail as of right solely on the ground that trial has not commenced. The Supreme Court's observations were held to be guidance, not a substitution of the merit-based adjudicatory process. [Paras 49, 50, 51, 52, 53] The Supreme Court's liberty permits filing a fresh bail application where trial is protracted, but the same must be decided on merits by the trial court (and appellate courts) with consideration of the right to speedy trial; delay alone does not automatically entitle the applicant to bail. Sections 207/208 Cr. P.C. - supply and inspection of relied/un-relied documents - grant of bail on ground of delay - Whether the delay in commencement of trial is attributable to the applicant - HELD THAT: - The Court examined the applications moved by the applicant after 30.10.2023 and the trial court record. It recognised the statutory right under Sections 207/208 Cr.P.C. to receive copies or inspect documents and observed that multiple accused in a multi accused conspiracy case legitimately require separate inspection and copies. The Court found that while there were delays in concluding pre charge procedures (notably inspection of un relied documents between October 2023 and January 2024), such delay arose from a combination of factors - complexity of the case, voluminous record, multiple accused and their individual applications, logistical constraints in supplying material, and some late or repeated applications by defence. The trial court's finding that some applications were repetitive and contributed to delay was accepted in part, but the Court held that the overall pre trial delay could not be characterised as solely due to prosecution or the trial court; it was not shown that proceedings were moving at a snail's pace attributable exclusively to the applicant. The Court also noted instances where many applications of the applicant were allowed by the trial court and that certain requests by prosecution (e.g. filing of relied documents later) also contributed to the timeline. [Paras 71, 75, 76, 82, 83] Delay in pre-trial proceedings arose from multiple causes including legitimate defence applications under Sections 207/208 Cr.P.C., volume and complexity of material and actions by several parties; delay is not attributable solely to the applicant. Triple test for grant of bail - Section 45 PMLA - mandatory twin conditions for bail - prima facie satisfaction on PMLA material at bail stage - Whether the applicant is entitled to regular bail on merits under Section 439 Cr.P.C. and/or Section 45 PMLA - HELD THAT: - Applying established principles for regular bail and the special rigours of PMLA, the Court considered the nature and gravity of allegations, material collected by investigating agencies, and the statutory tests. The Court observed prima facie material indicating the applicant's central role in formulation and implementation of the Excise Policy, orchestration of pre decided public feedback, directives resulting in change of profit margins, alleged facilitation of L 1 license to M/s Indo Spirits, and destruction of electronic evidence (non availability of earlier mobile phones). On the triple test, the Court held that the applicant posed a real risk of tampering with evidence and influencing witnesses given his position, alleged conduct and destruction of devices; while flight risk was not shown, two limbs of the triple test were not satisfied. Under Section 45 PMLA the Court found a prima facie case of money laundering on the material and concluded that the mandatory twin conditions (reasonable grounds for believing the accused is not guilty; accused not likely to commit an offence while on bail) were not met on available material. The Court emphasised that at bail stage it need only form prima facie views based on material, not conduct a mini trial. Taking all factors together, the applicant failed to establish entitlement to bail. [Paras 146, 147, 149, 151, 152] Bail on merits is refused: the applicant fails the triple test and does not satisfy the twin conditions of Section 45 PMLA on prima facie material; therefore regular bail is not warranted. Custody parole - Application for permission to meet his wife physically once weekly - HELD THAT: - The Court considered the medical condition of the applicant's wife and the humane grounds for physical meetings. Noting that similar reliefs had earlier been granted by the trial court and that such parole is a necessary, non frivolous relief for an undertrial whose family member is seriously ill, the Court directed that the applicant be permitted to visit his residence to meet his wife in custody once every week at State expense subject to the earlier terms and conditions imposed by the trial court. [Paras 181, 184] Permission granted for weekly custody parole to meet his wife (at State expense), subject to the previously imposed terms. Final Conclusion: The High Court held that the Supreme Court's liberty to move a fresh bail application for delay must be adjudicated on merits and not as an automatic entitlement; pre trial delay arose from multiple factors and was not solely attributable to the applicant; on prima facie assessment the applicant fails the triple test and the twin conditions of Section 45 PMLA and regular bail is refused. Separately, weekly custody parole to meet his ailing wife was allowed.

2024 (5) TMI 480 - DELHI HIGH COURT Customs

AI TextQuick Glance (AI)Headnote

Issues: (i) Whether the Board's instruction directing review of existing warehousing permissions and further action under the solar-power warehousing scheme was valid under section 151A of the Customs Act, 1962; (ii) Whether solar power generation using imported capital goods in a bonded warehouse fell within sections 61 and 65 of the Customs Act, 1962 and the MOOWR Regulations; (iii) Whether the consequential cancellation of licence and show cause notices based on the impugned instruction could stand.

Issue (i): Whether the Board's instruction directing review of existing warehousing permissions and further action under section 151A of the Customs Act, 1962 was valid.

Analysis: Section 151A permits instructions for uniformity and implementation, but its proviso forbids directions that require a particular assessment or interfere with statutory discretion. The impugned instruction did not remain at the level of a general clarification; it declared that permissions already granted to solar power projects were contrary to law and required immediate review and follow-up action. That direction effectively bound licensing authorities and left no room for independent consideration under the statutory scheme. The power to cancel a licence under section 58B lies with the proper officer, who must decide after applying the statute and hearing the licensee.

Conclusion: The impugned instruction, to the extent it mandated review of existing licences and follow-up action, was invalid and could not be sustained.

Issue (ii): Whether solar power generation using imported capital goods in a bonded warehouse fell within sections 61 and 65 of the Customs Act, 1962 and the MOOWR Regulations.

Analysis: Sections 61 and 65, read with the MOOWR Regulations and the contemporaneous circulars and FAQs, show a duty-deferment regime for warehoused capital goods and other goods used in manufacturing or other operations. The statute does not create an express exclusion for solar power generation. The expression "in relation to" is of wide import and does not require the capital goods themselves to undergo transformation or to be consumed in the resultant product. The absence of an input-output ratio for electricity did not justify reading an exclusion into the scheme. The contemporaneous material also supported the availability of the benefit to capital goods used in such operations.

Conclusion: Solar power generation using imported capital goods in a bonded warehouse was held to fall within the scope of sections 61 and 65 and the MOOWR Regulations.

Issue (iii): Whether the consequential cancellation of licence and show cause notices based on the impugned instruction could stand.

Analysis: The cancellation order and the notices were founded on the same invalid instruction and proceeded on the assumption that the activity itself was outside the statutory scheme. Since the foundational instruction was unsustainable and the authorities were required to exercise their own statutory discretion, the consequential actions could not survive.

Conclusion: The cancellation order and the impugned show cause notices were quashed.

Final Conclusion: The writ petitions succeeded, the Board's restrictive instruction was struck down to the extent it required review of existing permissions, and the impugned consequential actions against the petitioners were set aside while the statutory authorities were left free to proceed in accordance with law.

Ratio Decidendi: An administrative instruction under section 151A cannot compel a quasi-judicial customs authority to reach a predetermined result or foreclose independent statutory discretion, and a customs warehousing scheme framed for duty deferment must be construed according to its text, which does not permit reading in an exclusion that the legislature did not express.

Customs warehousing discretion and solar power generation using imported capital goods fall within the duty-deferment scheme, with no implied exclusion.
A Delhi HC ruling on the customs warehousing scheme held that an instruction under section 151A could not direct authorities to review existing solar-power warehousing permissions or predetermine cancellation, because statutory discretion must remain with the proper officer. The court also read sections 61 and 65 with the MOOWR Regulations as a duty-deferment regime that covers solar power generation using imported capital goods in a bonded warehouse, with no express exclusion for such activity. Consequential licence cancellation and show cause notices founded on the impugned instruction were set aside.

Instructions under Section 151A of the Customs Act, 1962 - Proviso to Section 151A - protection of quasi judicial discretion - Manufacture and other operations in relation to goods in a warehouse (Section 65) - Period for which goods may remain warehoused (Section 61) - Validity and scope of MOOWR Regulations (Manufacture and other Operations in Warehouse Regulations, 2019) - Cancellation of warehouse licence - Section 58B - Meaning of 'in relation to' in statutory provisions - Doctrine against acting under dictation / surrender of statutory discretionInstructions under Section 151A of the Customs Act, 1962 - Proviso to Section 151A - protection of quasi judicial discretion - Doctrine against acting under dictation / surrender of statutory discretion - Validity of the Board's Instruction dated 09 July 2022 insofar as it directed review and follow up action on licences granted under the MOOWR Regulations - HELD THAT: - The Board issued Instruction No.13/2022 (09.07.2022) concluding that permissions for warehousing solar power generation units under MOOWR 2019 were not in accordance with law and directing immediate review and follow up action. Section 151A empowers the Board to issue instructions for uniformity but the proviso forbids issuing directions that require an officer to make a particular assessment or dispose a particular case in a particular manner or interfere with quasi judicial discretion. The Instruction went beyond general guidance by mandating review and essentially compelling licensing authorities to cancel or re examine licences on the basis of the Board's definitive conclusion that solar generation falls outside MOOWR. That amounted to directing subordinate quasi judicial officers and thereby risked abdicating their independent decision making role. Established authorities and authorities under pari materia provisions prohibit circulars or instructions that control a quasi judicial determination. For these reasons the Court held the impugned part of the Instruction (the mandate to review and take follow up action) to be ultra vires Section 151A and quashed it. [Paras 110, 113, 116, 117, 120]Impugned Instruction quashed insofar as it mandates review of existing licences and follow up action; Board cannot direct licensing authorities to dispose particular cases in a particular manner.Manufacture and other operations in relation to goods in a warehouse (Section 65) - Period for which goods may remain warehoused (Section 61) - Meaning of 'in relation to' in statutory provisions - Validity and scope of MOOWR Regulations (Manufacture and other Operations in Warehouse Regulations, 2019) - Whether generation of electricity by solar power projects undertaken using imported capital goods housed in a licensed warehouse can fall within Section 65 and the MOOWR Regulations - HELD THAT: - Sections 61 and 65 read together permit warehousing of capital and non capital goods and the carrying on of 'any manufacturing process or other operations in the warehouse in relation to such goods.' Post 2016 amendments Section 61 allows capital goods to remain in warehouse until clearance for home consumption. The phrase 'in relation to' is broadly inclusive and denotes association/connection with the warehoused goods; it does not require that the imported capital goods themselves be transformed or subsumed into the resultant product. Contemporaneous material (MOOWR regs, Circular, FAQs, Invest India material) consistently treated capital goods and inputs as eligible for duty deferment without a time limit and contemplated removal/assessment mechanics on ex bonding. The fact that electricity is intangible or that input output norms may be inapplicable does not, by itself, exclude an activity from Section 65. Construing Sections 61 and 65 to exclude generation of electricity would impose a restrictive gloss not supported by statutory text or contemporaneous materials, and would frustrate the statutory scheme of duty deferment for capital goods used in manufacturing or other operations. Accordingly, the Court held that solar electricity generation using imported capital goods housed in a licensed warehouse can fall within Section 65 / MOOWR where the activity is 'in relation to' the warehoused goods. [Paras 126, 129, 136, 140, 141]Section 65 and MOOWR Regulations are not, on their text or contemporaneous materials, inapplicable to solar power generation carried out with imported capital goods housed in a licensed warehouse; such activity can qualify as manufacture/other operations 'in relation to' warehoused goods.Cancellation of warehouse licence - Section 58B - Instructions under Section 151A of the Customs Act, 1962 - Doctrine against acting under dictation / surrender of statutory discretion - Validity of Show Cause Notices and the cancellation order(s) issued pursuant to the impugned Instruction (including W.P.(C) 10838/2022) - HELD THAT: - Section 58B empowers the Principal Commissioner/Commissioner to cancel a warehouse licence for contravention of the Act, rules or licence conditions but requires reasonable opportunity of hearing. The impugned SCNs and the cancellation dated 19.07.2022 proceeded on the basis of the Board's Instruction that solar generation fell outside MOOWR; licensing authorities treated the Instruction as binding and initiated cancellation without independent adjudication of contravention by the licensees. The Court found no material that the petitioners had breached licence conditions or concealed material facts; moreover the Board could not lawfully direct licensors to cancel licences. Consequently, SCNs dated 13.07.2022 (as listed) and the cancellation order of 19.07.2022 were quashed for being founded on the ultra vires Instruction and for impermissibly fettering the quasi judicial exercise of cancellation power. [Paras 110, 111, 112, 120, 179]SCNs (13.07.2022 and specified others) and the licence cancellation order dated 19.07.2022 quashed; petition in which licence was cancelled (W.P.(C)10838/2022) allowed.Purposive interpretation and limits thereof - Policy considerations (level playing field, domestic manufacturing incentives) - Validity and scope of MOOWR Regulations (Manufacture and other Operations in Warehouse Regulations, 2019) - Whether the Court should construe Sections 61/65 and MOOWR purposively to exclude solar generation because of policy concerns (distortion of level playing field / encouragement of domestic manufacture) - HELD THAT: - Respondents urged that permitting MOOWR for solar generation would frustrate government policy to incentivize domestic PV manufacturing and distort competition. The Court acknowledged the policy objectives (PLI, tariff changes, Project Imports amendments) but reiterated the limited judicial role: statutory text is primary, purposive interpretation is available only where language is ambiguous or literal construction leads to absurdity or repugnancy. Sections 61/65 and contemporaneous material were clear and unambiguous and did not show legislative intent to exclude solar generation. Policy considerations, however weighty, do not permit the Court to read into the statute disqualifying conditions absent in the text; remediable measures rest with the executive/legislature. Thus the Court declined to construe the statute to exclude solar projects on policy grounds. [Paras 52, 162, 166, 175, 176]Court will not rewrite or narrow Sections 61/65/MOOWR on policy grounds; remedies for perceived policy distortion lie with the executive/legislature, not by judicial construction.Final Conclusion: Writ petitions allowed. The Board's Instruction dated 09.07.2022 is quashed to the extent it mandates review and follow up action compelling licensing authorities to treat previously granted MOOWR permissions for solar generation as invalid. Specified SCNs and the cancellation order dated 19.07.2022 are quashed; the Court holds that Sections 61 and 65 and the MOOWR Regulations can encompass solar power generation undertaken with imported capital goods housed in licensed warehouses, and declines to narrow those provisions on policy grounds; parties remain free to act further in accordance with law.

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