TaxTMI Updates e-Newsletter
Feb 03,2012

Penalty under Section 271(1)(c) - Explanation 1 to Section 271(1)(c) - Section 40(a)(i) - disallowance for sums payable outside India where tax has not been paid or deducted - Allowance of deduction in subsequent year upon payment or deduction of tax - Capital expenditure versus revenue expenditure - Genuine belief based on legal advice as a defence to penalty

Capital expenditure versus revenue expenditure - Penalty under Section 271(1)(c) - Genuine belief based on legal advice as a defence to penalty - Deletion of penalty under Section 271(1)(c) in respect of the ROC payment claimed as revenue expenditure - HELD THAT: - The Tribunal accepted the assessee's explanation that one-third of the payment to the Registrar of Companies was treated as revenue expenditure pursuant to legal advice and that an identical claim had earlier been allowed for the assessment year. The court noted that the question whether an expenditure is capital or revenue is debatable and admits two views. Having regard to the small amount involved relative to total income, the assessee's bona fide belief and the Tribunal's findings, the High Court found no basis to admit the Revenue's appeal against deletion of penalty and declined to interfere. [Paras 5]

Penalty deleted in respect of the ROC-related disallowance; Revenue's appeal on this point dismissed.

Section 40(a)(i) - disallowance for sums payable outside India where tax has not been paid or deducted - Allowance of deduction in subsequent year upon payment or deduction of tax - Penalty under Section 271(1)(c) - Genuine belief based on legal advice as a defence to penalty - Deletion of penalty under Section 271(1)(c) in respect of disallowance under Section 40(a)(i) for payment to AT&T Singapore - HELD THAT: - The Tribunal in quantum upheld the disallowance under Section 40(a)(i) because TDS was deposited only in November 2001 and, therefore, deduction for the expenditure would be allowable in a subsequent year. In the penalty proceedings the Tribunal considered whether the assessee discharged the onus under Explanation 1 to Section 271(1)(c) by showing that its interpretation and conduct were plausible. Although the quantum view rejecting the assessee's contention as to timing of payment/deduction of tax was adverse, the Tribunal accepted that the assessee had a tenable explanation (including the contention that deduction had been 'deducted' on 31st March but paid later) and therefore penalty could not be sustained. The High Court found no substantial question of law and dismissed the Revenue's challenge to the deletion of penalty. [Paras 7, 8, 9, 11, 12]

Penalty deleted in respect of the disallowance under Section 40(a)(i); Revenue's appeal on this point dismissed.

Remand for fresh adjudication - Third addition (amount received from Birla AT&T) not pursued in the present appeal and left for fresh adjudication - HELD THAT: - The third addition noted by the Assessing Officer was set aside for fresh adjudication by the Tribunal in the quantum appeal and the Revenue did not raise that issue before the High Court. Consequently the present proceedings do not decide that addition on merits. [Paras 2, 3]

Third addition remanded to the Tribunal for fresh adjudication in the quantum appeal and not adjudicated in this appeal.

Final Conclusion: The High Court dismissed the Revenue's appeal and refused to interfere with the Tribunal's deletion of penalty under Section 271(1)(c) in respect of the disallowances relating to the ROC payment and the payment to AT&T Singapore; the third addition was remanded to the Tribunal for fresh adjudication in the quantum proceedings and no substantial question of law was found.

Re-computation of sale consideration - apportionment of sale consideration between land and building - finality of sale consideration accepted under Chapter XXC/permission under Section 269UL(3) - valuation report of Departmental Valuation Officer - computation of long term capital gains

Re-computation of sale consideration - finality of sale consideration accepted under Chapter XXC/permission under Section 269UL(3) - Whether the Assessing Officer could re-examine and re-compute the total sale consideration received for the composite transfer after the appropriate authority under Chapter XXC had granted permission accepting the sale consideration. - HELD THAT: - The Tribunal had remitted the matter to the Assessing Officer only to resolve the allocation of the agreed sale consideration between land and building. The court examined the operative direction in the Tribunal's order and found that the question referred back was limited to bifurcation/apportionment. The sale consideration as a whole had been accepted by the appropriate authority under Chapter XXC (permission under Section 269UL(3)) and was not placed in doubt by that order. Accordingly, the Assessing Officer was not entitled to enhance the total sale consideration beyond the amount already accepted; his subsequent adoption of the Departmental Valuation Officer's report to increase the total consideration from the certified amount was held to be legally impermissible. The court noted that the Departmental Valuation Officer's report, in any event, accepted the assessee's allocation between land and building, reinforcing that only apportionment was open for determination and not the quantum of total consideration. [Paras 13, 14, 15]

Assessing Officer could not re-compute or enhance the total sale consideration; only bifurcation between land and building was permissible.

Apportionment of sale consideration between land and building - valuation report of Departmental Valuation Officer - computation of long term capital gains - Whether, after remand for valuation, the Assessing Officer could determine allocation between land and depreciable building and re-compute capital gains accordingly. - HELD THAT: - The Tribunal's remand for obtaining a valuer's opinion was directed to resolve the technical question of allocation in a composite sale. Proceeding on that limited remit, the Assessing Officer could obtain and act upon a valuation report to apportion the agreed sale consideration between land and building and then apply the correct provisions (including treatment of depreciable assets) to compute long term capital gains. However, such exercise had to respect the ceiling of the total sale consideration accepted under Chapter XXC; allocation alone was open for fresh determination. The court observed that the Departmental Valuation Officer's report accepted the assessee's bifurcation, and thus nothing justified enhancement of the total consideration. [Paras 10, 11, 14]

Apportionment between land and building could be determined by valuation and used for recomputing capital gains, but within the total sale consideration accepted under Chapter XXC; re-determination of the total quantum was not permissible.

Final Conclusion: Appeal allowed to the extent that the enhancement of the total sale consideration by the Revenue was set aside; only apportionment between land and building could be revisited on valuation, and the Assessing Officer was not entitled to increase the total consideration accepted under Chapter XXC/permission under Section 269UL(3). No costs.

Continental shelf - exclusive economic zone - sovereign rights limited to exploration and exploitation - deeming fiction under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 - export out of the territory of India - crossing the customs frontiers - Article 286(1)(b) - export/import pairing - Section 5(1) of the Central Sales Tax Act, 1956 - sale in course of export - Section 3 and Section 6 of the Central Sales Tax Act, 1956 - interstate trade and movement of goods

Continental shelf - exclusive economic zone - sovereign rights limited to exploration and exploitation - deeming fiction under the Territorial Waters, Continental Shelf, Exclusive Economic Zone and Other Maritime Zones Act, 1976 - Whether Mumbai High (located in the continental shelf / exclusive economic zone) is to be treated as a foreign destination or as part of the territory of India for the purposes of sales tax law. - HELD THAT: - The Court held that the sovereignty exercised by the Union in respect of the continental shelf and the exclusive economic zone is limited and purpose specific (exploration, exploitation and related activities) and does not equate to full territorial sovereignty. Sections 6(6) and 7(7) of the Maritime Zones Act, 1976 create a statutory deeming fiction by which a specified enactment, when extended by notification, is to have effect as if the designated area is part of the territory of India for the purposes of that enactment; but that fiction is statutory and confined to the enactments so extended. Consequently, the continental shelf and exclusive economic zone do not, by virtue of constitutional or general law, form part of any State or the domestic territory of India except insofar as a particular statute is expressly extended thereto by notification, which operates by legal fiction for the purposes of that statute. [Paras 13, 14, 15]

Mumbai High (continental shelf / exclusive economic zone) is not a foreign destination only by being part of the domestic territory; the area is subject to limited sovereign rights and becomes 'part of the territory of India' for the purposes of a particular enactment only by the statutory deeming/extension under the Maritime Zones Act and the consequent notification.

Export out of the territory of India - crossing the customs frontiers - Section 5(1) of the Central Sales Tax Act, 1956 - sale in course of export - Article 286(1)(b) - export/import pairing - Section 3 of the Central Sales Tax Act, 1956 - interstate movement - Whether sales of Helium gas by the assessee to ONGC at Mumbai High were sales in the course of export out of India under Section 5(1) CST Act (and/or sales in the course of interstate trade under Section 3 CST Act). - HELD THAT: - The Court explained that for a sale to qualify as in the course of export under Section 5(1) CST Act the sale must either occasion an export beyond the customs frontiers or involve transfer of documents of title after goods have crossed the customs frontiers. Once the Customs Act has been extended by notification to a designated area, the customs frontier is correspondingly extended and supplies to that area cannot be treated as exports for customs or CST purposes. Even prior to the 15 January 1987 notification, the Constitution Bench decision in Burmah Shell establishes that 'export' for the purposes of Article 286(1)(b) and related tax provisions means sending goods to a foreign destination where they would be received as imports; mere removal from the mainland or delivery for use outside territorial waters without a foreign destination does not amount to export. Applying these principles, the movement of Helium from Maharashtra to Mumbai High does not amount to export beyond India, and therefore Section 5(1) is not attracted. Further, Mumbai High does not form part of any State in India; therefore a movement to Mumbai High is not a movement from one State to another for the purposes of Section 3, and the sale cannot be sustained as an interstate sale under the CST Act. [Paras 16, 18, 21, 23]

The sales to Mumbai High were neither sales in the course of export out of the territory of India nor sales occasioning movement from one State to another; accordingly, Section 5(1) and Section 3 of the CST Act do not apply to treat those supplies as exports or interstate sales.

Final Conclusion: The reference is answered by holding that Mumbai High (continental shelf / exclusive economic zone) is not a foreign destination for the purposes relied upon by the Tribunal and that the supplies of Helium to Mumbai High did not constitute sales in the course of export out of India nor did they occasion movement from one State to another; the Tribunal's conclusion to the contrary was not justified. No order as to costs.