TaxTMI Updates e-Newsletter
Feb 16,2012

Tax deduction at source under section 195 - Disallowance under section 40(a)(i) - Taxability of income of foreign shipping companies in India - Applicability of CBDT Circular No.723 regarding ships and section 172 - Reference application under section 195(2)

Tax deduction at source under section 195 - Disallowance under section 40(a)(i) - Reference application under section 195(2) - Whether provisions of section 195 and consequent disallowance under section 40(a)(i) apply to payments made to agents of foreign shipping companies where those payments are not taxable in India and no application under section 195(2) was made - HELD THAT: - The Tribunal noted that the assessee claimed the payments to agents of foreign shipping companies were not taxable in India and that the Assessing Officer did not dispute that claim. Reliance placed by the AO on a High Court decision holding section 195 applicable even where payments were not taxable was held to be overtaken by the Supreme Court decision in G. E. India Technology Centre (P) Ltd., which limits the operation of section 195 to cases where there is no doubt that the payment is chargeable to tax; section 195(2) is confined to situations where taxability is not in doubt but the taxable portion is uncertain. As the record contained no material to controvert the assessee's claim of non-taxability and the AO himself had not disputed it, there was no basis to invoke section 195 or to sustain a disallowance under section 40(a)(i). [Paras 4]

Section 195 is not attracted and section 40(a)(i) cannot be invoked where payments are not chargeable to tax in India; the addition was rightly deleted.

Applicability of CBDT Circular No.723 regarding ships and section 172 - Taxability of income of foreign shipping companies in India - Whether levy and recovery of tax relating to ships belonging to or chartered by a non-resident (and related payments) are governed by section 172 and excluded from the operation of section 195 and section 194C by CBDT Circular No.723 - HELD THAT: - The Tribunal accepted the assessee's submission and the view of the Commissioner (Appeals) that CBDT Circular No.723 clarifies the special scheme for levy and recovery of tax in respect of ships of non-residents under section 172, and that in such cases provisions like section 194C and section 195 do not apply. Given the claim that the payments were not chargeable to tax in India and the Circular's clarification, the Tribunal held that section 195/40(a)(i) were not applicable to the payments in question. [Paras 4]

Payments connected with ships of non-residents fall under the special regime described in CBDT Circular No.723 and are not subject to section 195/section 40(a)(i) in the circumstances shown; deletion of the addition is sustained.

Final Conclusion: The order of the Commissioner (Appeals) deleting the disallowance under section 40(a)(i) is upheld and the Revenue's appeal is dismissed.

Deduction under section 80IB - disallowance of expenses under section 14A - computation under Rule 8D and its prospective application - allowability of sundry balance written off and travel expenses - onus on assessee and requirement of supporting particulars

Allowability of sundry balance written off - allowability of travelling expenses - onus on assessee to prove expenditure - requirement of supporting particulars - Disallowance of sundry balances written off and part of travelling expenses by AO and confirmation by CIT(A). - HELD THAT: - The Tribunal found that the assessee had filed limited particulars (party name, amount, date for sundry write offs; date wise payments to a travel agency) but that these particulars did not explain whether the amounts had been taken into account earlier years or how the travel payments related to business. Because the AO had not examined those aspects, further details and scrutiny were necessary before determining allowability. The Tribunal therefore set aside the assessment order and directed the AO to re examine the claims after allowing the assessee an opportunity of hearing, applying the observations made as to the insufficiency of the particulars on record. [Paras 2]

Order of AO and confirmation by CIT(A) set aside; matter remitted to AO for fresh examination and opportunity to assessee.

Disallowance of expenditure attributable to exempt income - section 14A - method of computation prescribed by Government - prospective application of Rule 8D as held by Bombay High Court - Validity of applying Rule 8D to compute disallowance under section 14A for assessment year 2006-07. - HELD THAT: - The Tribunal noted that Rule 8D prescribes the method for computing disallowance under section 14A. While a Special Bench had earlier held Rule 8D retrospective, the Bombay High Court in Godrej and Boyce Manufacturing Co. Ltd. held that Rule 8D is prospective and applies only from AY 2008-09; for prior years disallowance must be made on a reasonable basis after affording opportunity to the assessee. Since the assessment year in dispute is 2006-07, Rule 8D was held not to apply. The Tribunal set aside the orders of the lower authorities and restored the matter to the AO to compute any disallowance on a reasonable basis and after hearing the assessee, in accordance with the Bombay High Court ruling. [Paras 3]

CIT(A) order set aside; matter remitted to AO to determine disallowance under section 14A on a reasonable basis and after hearing, Rule 8D not applicable for AY 2006-07.

Deduction under section 80IB - whether conversion of rough marble blocks into polished products amounts to manufacture - precedential effect of Tribunal's earlier decisions in assessee's own case - Allowability of deduction under section 80IB for activity of converting rough marble blocks into polished and finished marble slabs, tiles and table tops. - HELD THAT: - The Tribunal observed that the identical question had been decided in favour of the assessee in its own earlier appeals for AYs 2000-01 and 2001-02, where the Tribunal held that subjecting rough marble blocks to various processes (mechanical and manual) produced end products commercially distinct from the raw material and therefore constituted manufacture. The Tribunal also noted subsequent allowance of the claim by the AO in a later year. Applying the same reasoning to the facts of the year under appeal, which are identical to those earlier years, the Tribunal found no infirmity in CIT(A)'s allowance of the deduction and sustained that conclusion. [Paras 4]

CIT(A)'s allowance of deduction under section 80IB upheld; revenue's appeal dismissed.

Final Conclusion: For AY 2006-07 the Tribunal remanded the claims for sundry write offs and travel expenses to the AO for fresh examination with opportunity to the assessee; held Rule 8D inapplicable to AY 2006-07 and restored matter to AO to compute any section 14A disallowance on a reasonable basis after hearing; and upheld the allowance of deduction under section 80IB (revenue appeal dismissed).

Capital gain versus business income - investment activity - trading activity - holding period - use of own funds - precedent in assessee's own case

Capital gain versus business income - investment activity - trading activity - holding period - use of own funds - precedent in assessee's own case - Nature of income from purchase and sale of shares for the assessee in Assessment Year 2006-07 was capital gain and not business income. - HELD THAT: - The Tribunal accepted the CIT(A)'s finding that the assessee had been an investor since its incorporation in 1954 and that the primary object of the company was investment in shares. The assessee's transactions included long holding periods in many cases (up to ten years), with occasional shorter sales undertaken to reshuffle the investment portfolio; investments were made mostly from owned funds. The Revenue pointed to high volume of scripts and earlier sales and the AO treated the activity as trading to deny capital gain treatment. However, no distinguishing features were shown by the Revenue to rebut the long-standing investor character of the assessee. The Tribunal also relied on the fact that on similar facts the assessee's claim had been accepted in its own case for Assessment Year 2003-04. On these facts and circumstances the Tribunal found no infirmity in CIT(A)'s conclusion that the receipts were capital gains arising from investment activity rather than business income.

Order of CIT(A) treating the share transactions as capital gains is upheld and the Revenue's appeal is dismissed.

Final Conclusion: The Tribunal upheld the CIT(A)'s conclusion that the assessee's sale and purchase of shares for AY 2006-07 constituted investment leading to capital gains; the Revenue's appeal is dismissed and the assessee's cross-objection is dismissed as infructuous.

Unaccounted income - reassessment under section 147 and addition of unexplained income - sale on approval - admissions in proceedings under the Negotiable Instruments Act as evidentiary of sale - computation of taxable profit by allowing purchase cost deduction - claim for bad debt deduction requiring prior recognition in books - claim of business loss requiring actual loss in relevant year

Sale on approval - admissions in proceedings under the Negotiable Instruments Act as evidentiary of sale - unaccounted income - Whether the delivery of diamonds to M/s Alpha Exports was a confirmed sale chargeable to tax in the year under consideration or merely a supply on approval not taxable in that year. - HELD THAT: - The Tribunal upheld the finding that the transaction was a confirmed sale in the year under consideration. The assessee's own petition filed under section 138 of the Negotiable Instruments Act expressly stated that cut and polished diamonds worth the stated amount were sold and delivered to M/s Alpha Exports vide the bill dated 10-06-2000. Further, the assessee received and deposited a cheque of Rs.15 lakhs from M/s Alpha Exports and pursued recovery by initiating proceedings under section 138 when the cheque bounced. These facts, when coupled with the bill issued by the assessee, demonstrate that the amount represented sale proceeds and not merely goods supplied on approval; consequently the profit from that sale was chargeable to tax in the year under consideration, and the addition of income as unaccounted sale proceeds was justified. [Paras 5]

The delivery was a confirmed sale and the profit therefrom was taxable in the year under consideration; the addition of unaccounted sale proceeds was sustained.

Computation of taxable profit by allowing purchase cost deduction - reassessment under section 147 and addition of unexplained income - Whether the addition ought to be the entire sale consideration or only the net profit after allowing purchase cost. - HELD THAT: - The Tribunal accepted the alternative approach taken by the CIT(A) that only the net profit could be taxed insofar as the assessee had disclosed corresponding purchase cost. The assessee himself had shown the purchase price of the diamonds at the stated amount, and that purchase figure was allowable in computing profit. On that basis the addition was restricted to sale proceeds less the allowed purchase cost, reflecting taxable profit rather than the gross sale consideration. There was no material before the Tribunal to show a higher purchase cost or any further adjustment. [Paras 4]

Addition reduced to taxable net profit by allowing the purchase cost shown by the assessee; the reduced addition was sustained.

Claim for bad debt deduction requiring prior recognition in books - claim of business loss requiring actual loss in relevant year - Whether the amount may be allowed as a bad debt or as a business loss in the year under consideration. - HELD THAT: - The Tribunal rejected both alternative contentions. A deduction as a bad debt requires that the debt have been recognized as such in the assessee's books and then written off as irrecoverable; here the transaction was not recorded in the books and no entry existed to be written off. Likewise, a business loss can only be allowed if the loss was actually suffered in the relevant year; pending recovery proceedings under section 138 showed that the claim was unresolved and the loss was not established as having been incurred in the year under consideration. Accordingly neither a bad debt nor a business loss deduction could be allowed. [Paras 6]

Claim for bad debt and claim for business loss rejected for lack of book recognition and absence of actual loss in the relevant year.

Normal profit margins in trade - computation of taxable profit by allowing purchase cost deduction - Whether the addition should be restricted to a notional normal profit margin (2%-8%) instead of the net profit computed by allowing actual purchase cost. - HELD THAT: - Having held that there was a confirmed sale and that the purchase cost shown by the assessee was allowable, the Tribunal found no basis to substitute a notional profit margin. There was no evidence to show that the purchase price was higher than the amount declared by the assessee or that a settlement in a later year altered the profit arising in the year under consideration. The only permissible deduction remained the purchase price as shown by the assessee, already allowed by the CIT(A). Therefore the suggestion to limit the addition to a prescribed margin was not accepted. [Paras 7]

Request to restrict addition to a notional 2%-8% margin rejected; net profit computed after allowing declared purchase cost is the correct basis.

Final Conclusion: The assessee's appeal is dismissed; the Tribunal affirms that the delivery to M/s Alpha Exports constituted a confirmed sale chargeable to tax in the year under consideration, allows deduction of the purchase cost shown by the assessee in computing taxable profit, and rejects claims for bad debt, business loss or substitution of a notional profit margin.

Appropriation of seized cash towards tax liability - interest under sections 234B and 234C - request for adjustment made before advance-tax due date - binding precedent of the jurisdictional High Court - equity in adjustment of seized cash

Appropriation of seized cash towards tax liability - request for adjustment made before advance-tax due date - interest under sections 234B and 234C - binding precedent of the jurisdictional High Court - Assessing Officer ought to adjust part of cash seized in search against assessee's advance-tax liability on the date the assessee requested such adjustment - HELD THAT: - The Tribunal held that the facts of the present case are in pari materia with K.K. Marketing, where the jurisdictional High Court accepted that a request for adjustment of seized cash made before the date when advance-tax fell due must be given effect to and interest computed accordingly. In the present case cash of Rs. 90 lakh was seized on 19.01.2009 and the assessee requested adjustment on 12.03.2009, prior to the advance-tax due date of 15.03.2009. Given that the request preceded the due date and the advance-tax liability was lower than the seized cash, there was nothing to show the assessee was shirking payment; equity and the binding High Court precedent required the seized cash to be appropriated towards the advance-tax liability as prayed. Consequently the CIT(A) was correct in directing recomputation of interest under sections 234B and 234C by treating the adjustment as having been made on 12.03.2009. [Paras 5, 6]

The CIT(A)'s direction to the AO to adjust the seized cash against advance-tax liability on 12.03.2009 and to re-compute interest under sections 234B and 234C is upheld.

Final Conclusion: The revenue's appeal is dismissed; the AO is directed to give effect to the appropriation of seized cash towards advance-tax as of 12.03.2009 and recompute interest accordingly, in view of the binding Delhi High Court precedent.

Revisional jurisdiction under Section 263 - limitation for exercise of revisional power - effect of appellate order on commencement of limitation - time-barred revisional order - Tribunal's power to set aside revisional order on limitation ground

Revisional jurisdiction under Section 263 - limitation for exercise of revisional power - effect of appellate order on commencement of limitation - time-barred revisional order - Validity of the revisional order dated 20.2.2001 under Section 263 insofar as it relates to the assessment order dated 27.2.1997 for Assessment Year 1994-95 on limitation grounds. - HELD THAT: - The court examined whether the Commissioner could validly exercise revisional powers more than two years after the assessment order dated 27.2.1997. The Revenue contended that a subsequent appellate or consequential order of 31.3.1999 by the assessing authority reset the commencement point for the two-year limitation. The court held that the assessment position in respect of the deduction claimed for foreign tax credit remained on record since the original order of 21.2.1997 (assessment order dated 27.2.1997) and did not undergo any material variation to the detriment of the Revenue that would justify treating 31.3.1999 as the starting point. On that basis the revisional order dated 20.2.2001 was beyond the two-year period applicable to exercise of revisional jurisdiction and therefore time-barred. The Tribunal was correct in setting aside the Commissioner's revisional order as barred by limitation. [Paras 5, 6, 7]

Revisional order of 20.2.2001 is time-barred insofar as it relates to the assessment order dated 27.2.1997 for AY 1994-95; the Tribunal correctly set aside the revisional order on limitation grounds.

Final Conclusion: The appeal is dismissed; the Tribunal's order setting aside the Commissioner's revisional order for Assessment Year 1994-95 on the ground of limitation is upheld.

Transfer of appeal between benches - administrative transfer of pending appeals - liberty to make application for transfer - direction to consider application expeditiously - judicial restraint where administrative remedy is available

Transfer of appeal between benches - liberty to make application for transfer - Petitioner's request for transfer of appeals from the Customs, Excise and Service Tax Appellate Tribunal, South Zonal Bench, Chennai, to its co-ordinate Bench at Bangalore and permission to apply for such transfer - HELD THAT: - The petitioner informed the Court that two appeals were pending before the Tribunal's South Zonal Bench, Chennai, and sought transfer to the co-ordinate Bench at Bangalore because the South Zonal Bench was not sitting. The Court noted that the learned counsel for the respondents raised no objection to the petitioner making an application for administrative transfer. Rather than directing an immediate transfer, the Court granted the petitioner liberty to file an application before the appropriate administrative authority (the third respondent) seeking transfer, and required that on receipt of such application the third respondent consider and pass appropriate orders as expeditiously as possible and in accordance with law, taking into account the difficulties expressed by the petitioner, provided there are no legal impediments to granting such relief. The Court accordingly disposed of the writ petition while leaving the substantive administrative decision to the competent authority.

Petitioner granted liberty to apply to the third respondent for transfer; third respondent directed to consider and pass appropriate orders expeditiously and as per law.

Direction to consider application expeditiously - judicial restraint where administrative remedy is available - Extent of judicial intervention in an administrative transfer request and disposal of the writ petition - HELD THAT: - The Court exercised judicial restraint by refraining from ordering a direct transfer and instead directed the administrative authority to consider the petitioner's application promptly. The writ petition was disposed of because the appropriate course was to permit the petitioner to seek the administrative remedy and to require the administrative authority to act expeditiously and in accordance with law. The Court recorded no costs and closed the connected miscellaneous petitions.

Writ petition disposed of; administrative authority directed to consider the transfer application expeditiously; no costs; connected M.Ps closed.

Final Conclusion: Writ petition disposed of after granting the petitioner liberty to apply to the appropriate administrative authority for transfer of the appeals; the authority is directed to consider and pass appropriate orders expeditiously and in accordance with law, no costs awarded, and connected miscellaneous petitions closed.

Right of a citizen to file a private complaint under the Prevention of Corruption Act, 1988 - previous sanction for prosecution under Section 19 of the Prevention of Corruption Act, 1988 - stage at which sanction arises in relation to taking of cognizance - competent authority's duty to examine material for prima facie disclosure of offence and communicate decision - time-limit for grant of sanction as directed in Vineet Narain and CVC guidelines - sanctioning decision is administrative, not quasi judicial

Right of a citizen to file a private complaint under the Prevention of Corruption Act, 1988 - A citizen has the right to file a complaint for prosecution of a public servant under the 1988 Act. - HELD THAT: - The Constitution Bench precedent in A.R. Antulay v. R.S. Nayak and subsequent authorities establish that, absent an express statutory bar, any person may set criminal law in motion by filing a private complaint. Section 19 of the 1988 Act does not prohibit a citizen from filing a complaint; it operates to bar taking of cognizance by a court without prior sanction where applicable. The Court applied these principles and held that the appellant was entitled to file a complaint for prosecution of respondent No.2 under the Act. [Paras 18, 19]

The appellant had the right to file a complaint for prosecuting respondent No.2 under the 1988 Act.

Stage at which sanction arises in relation to taking of cognizance - previous sanction for prosecution under Section 19 of the Prevention of Corruption Act, 1988 - The requirement of previous sanction under Section 19 is not confined to a stage after the court takes cognizance; the contention that sanction can arise only at the stage of taking cognizance is untenable. - HELD THAT: - The Court analysed the meaning of 'cognizance' and surveyed precedents interpreting cognizance and the interplay between sanction provisions and court procedure. It rejected the Attorney General's submission that sanction arises only when a court takes cognizance, observing that the plain language of Section 19 and judicial precedents (including decisions distinguishing Section 19 from Section 197 CrPC and authority on Special Judges taking cognizance on private complaint) do not support that contention. The Court noted that the question of sanction may arise at different stages and that authorities and courts must apply established legal tests concerning prima facie disclosure rather than treat sanction as a matter strictly post-cognizance. [Paras 22, 23, 24, 25, 26]

The argument that sanction arises only at the stage of taking cognizance is rejected; sanction-process and cognizance are distinct and questions of sanction may be considered prior to or at stages antecedent to issuance of process.

Competent authority's duty to examine material for prima facie disclosure of offence and communicate decision - time-limit for grant of sanction as directed in Vineet Narain and CVC guidelines - sanctioning decision is administrative, not quasi judicial - Competent authorities must decide on requests for sanction by examining whether the material prima facie discloses an offence, communicate the decision to the complainant, and, in future, adhere to the Vineet Narain directions and CVC guidelines (including the time-limit prescription in paragraph 58(I)(15)). - HELD THAT: - The Court held that grant or refusal of sanction is an administrative function requiring the authority to be satisfied whether the facts and materials placed before it prima facie disclose commission of an offence; the person sought to be prosecuted need not be heard before sanction is considered. The CVC guidelines (reiterating that sanctioning authority should not conduct detailed inquiry or hold parallel investigations, and should adhere to time-limits) align with this principle. The Court referred to Vineet Narain para 58(I)(15), which prescribes a three-month period (with possible one-month extension for consultation) for grant of sanction, and directed that competent authorities shall take appropriate action on citizens' representations strictly in accordance with Vineet Narain and CVC guidelines. The Court criticised the delay in processing the appellant's representation and observed that officers advising the competent authority failed to place the true factual and legal position, thereby causing undue delay. [Paras 29, 30, 31, 33, 34]

Competent authorities must examine material for prima facie disclosure, communicate their decision to the complainant, and in future act in accordance with Vineet Narain and the CVC guidelines (including the three month time limit with a possible one month extension).

Final Conclusion: Appeal allowed; impugned High Court order set aside. It is declared that the appellant had the right to file a complaint for prosecuting respondent No.2; since the Special Judge, CBI has already taken cognizance, no further directions are necessary, but henceforth every competent authority must decide citizens' requests for sanction strictly in accordance with Vineet Narain and the CVC guidelines (including the prescribed time limit).