TaxTMI Updates e-Newsletter
Apr 20,2016

Current repairs - revenue expenditure - capital expenditure - deduction for current repairs under Section 31 - residuary deduction under Section 37(1) - life extension program - replacement and overhauling of parts as preservation/maintenance - enduring advantage test - composite asset versus independent machine doctrine

Current repairs - revenue expenditure - capital expenditure - deduction for current repairs under Section 31 - residuary deduction under Section 37(1) - life extension program - replacement and overhauling of parts as preservation/maintenance - enduring advantage test - composite asset versus independent machine doctrine - Whether expenditure incurred on the Life Extension Program of TPS I and on rejuvenation of Bucket Wheel Excavators is revenue expenditure (deductible as current repairs or under Section 37(1)) or capital expenditure. - HELD THAT: - The Court held that the determinative question is whether the expenditure merely preserved or maintained an existing asset without bringing a new asset into existence or conferring a fresh or enduring advantage. Applying the established principles in the authorities cited, the Court accepted the factual findings that the assessee replaced or overhauled critical components but did not replace the entire boiler/BWE and that the works restored the assets to working condition rather than creating a new asset. The Assessing Officer's comparison of options (commissioning a new plant at a much higher cost versus the life extension at a fraction of that cost) did not warrant treating the life extension as equivalent to commissioning a new asset. The tribunal's conclusion that the replacements and overhauls were aimed at preservation and maintenance and therefore constituted current repairs/revenue expenditure was upheld. The Court rejected the Department's estoppel argument that prior capitalization by the assessee precludes the claim of revenue treatment. While recognising the principles in Saravana Spinning Mills and Mangayarkarasi Mills (including the limited exceptions where replacement may be treated as current repairs), the Court found on the facts that those exceptions did not apply to convert the life extension works into capital expenditure. Consequently, the expenditures in the assessment years in issue were held to be revenue in nature and deductible accordingly. [Paras 5, 29, 31, 32, 33]

The Tribunal was right in treating the Life Extension Program and BWE rejuvenation expenditure as revenue expenditure (current repairs/revenue deduction) and the appeals are dismissed.

Final Conclusion: The High Court answered the questions of law against the Revenue, upholding the Tribunal's finding that the expenditures on the Life Extension Program of TPS I and rejuvenation of BWEs were revenue in nature (preservative/maintenance), and dismissed the appeals.

Meaning of "rent" under Section 194-I - Liability to deduct tax at source under Section 194-I - Distinction between premium and rent - Payment to Government v. payment to lessor for TDS liability under Section 194-I

Meaning of "rent" under Section 194-I - Distinction between premium and rent - Liability to deduct tax at source under Section 194-I - Whether the upfront amount paid in the competitive bid and subsequently remitted by the Joint Venture Company to TIDCO constituted 'rent' liable to deduction under Section 194-I. - HELD THAT: - The Court examined the definition of "rent" in the explanation to Section 194-I and emphasised that the term is exhaustive: to qualify as rent the payment must be "under any lease, sub-lease, tenancy or any other agreement or arrangement for the use of any land or any building." The facts showed a two-step process: (i) selection of a joint venture partner by competitive bidding (the bidder offered the quoted amount to secure the partnership), and (ii) subsequent execution of the lease in favour of the joint venture company. The quoted amount was determined and offered prior to the birth of the lessee and prior to finalisation of the lease; it was a consideration for becoming the joint venture partner and thereby securing the right to obtain a 99 year lease for the company to be created. Accordingly, the payment was not made under an existing lease or for the use of land by an existing lessee and therefore did not fall within the exhaustive meaning of "rent" under Section 194 I. The Court held that when an amount is fixed and paid before an agreement for lease is finalised, it cannot be treated as rental income for the purposes of TDS; the authorities below erred in treating the transaction as rent commencing from the lease date. [Paras 9, 11, 15, 31, 32]

The upfront payment does not constitute 'rent' under Section 194-I; question answered in favour of the appellant.

Payment to Government v. payment to lessor for TDS liability under Section 194-I - Liability to deduct tax at source under Section 194-I - Whether the amount which was collected and paid to the Government could be treated as payment to TIDCO (lessor) attracting withholding obligations under Section 194-I. - HELD THAT: - The Court noted the contractual and governmental framework by which TIDCO was to retain only a prescribed small portion and remit the balance to the Government. The bidding process, government orders and subsequent actions established that the bulk of the consideration was payable to the Government and not as consideration to TIDCO as lessor. Since the relevant amount was, in substance and effect, a payment to the Government (the real owner), it could not be treated as a payment to a person liable to tax deduction under Section 194 I. Consequently, there was no obligation on the appellant to withhold tax in respect of the amount that ultimately went to the Government. [Paras 33, 34]

Amount payable to and collected for the Government is not a payment to the lessor for purposes of Section 194-I; question answered in favour of the appellant.

Final Conclusion: The appeal is allowed on merits: the Court answered questions of law (ii) and (iii) in favour of the appellant - the upfront payment was not 'rent' within the meaning of Section 194 I and the amount remitted to the Government was a payment to the Government (not to the lessor) and therefore not subject to TDS under Section 194 I. The first question on limitation was not decided.

Non-compete premium - income from capital gains - business receipt under section 28(va) - transfer within section 2(47) - Article 7 of DTAA (business profits and permanent establishment) - revision under section 263 (erroneous and prejudicial)

Non-compete premium - business receipt under section 28(va) - income from capital gains - Article 7 of DTAA (business profits and permanent establishment) - revision under section 263 (erroneous and prejudicial) - Characterisation and taxability in India of the non-compete premium received by a non-resident assessee for AY 2008-09. - HELD THAT: - The Tribunal examined whether the non-compete premium constitutes a transfer taxable as capital gains under the proviso to section 55(2)(a) read with proviso to section 28(va), or is taxable as business receipt under section 28(va). Applying the ratio of the Supreme Court in Gufic Chem (P.) Ltd., the Tribunal observed that while payments under negative covenants were historically capital receipts, the Finance Act, 2002 (w.e.f. 1.4.2003) brought non-compete receipts within section 28(va) as taxable business income. However, the assessee is a United Kingdom resident company without a permanent establishment in India. Under Article 7 of the DTAA between India and the UK, business profits of an enterprise of a contracting state are taxable only in that state unless the enterprise carries on business in the other state through a permanent establishment situated therein. The revenue did not contend that the assessee had a permanent establishment in India. Consequently, although the receipt is a business receipt assessable under section 28(va), by virtue of the DTAA the income is taxable in the UK only. The Tribunal therefore held that the assessing officer's failure to tax the amount in India did not render the assessment order erroneous and prejudicial to the revenue; the DIT(IT)'s revision under section 263 was without basis and was quashed. [Paras 7, 9]

Non-compete premium is a business receipt within section 28(va) but, as the assessee is a non-resident without a permanent establishment in India, the income is taxable only in the UK under Article 7 of the DTAA; revision under section 263 is quashed.

Final Conclusion: Appeal allowed; the revision order of DIT(IT) under section 263 is quashed. The non-compete premium is held to be business income under section 28(va) but, in view of Article 7 of the DTAA and absence of a permanent establishment in India, is taxable only in the UK; the assessment order is not erroneous or prejudicial to revenue.

Disallowance of excess food and accommodation expenditure - computation of reasonable profit per person in tour/hajj operators - use of comparable firms' profit to estimate income - appeal rendered infructuous where income is to be assessed in another proceeding

Disallowance of excess food and accommodation expenditure - computation of reasonable profit per person in tour/hajj operators - use of comparable firms' profit to estimate income - Whether the addition on account of excess food and accommodation expenditure for A.Y. 2009-10 was justified and what profit per pilgrim should be applied for determining reasonable income. - HELD THAT: - The Tribunal noted the assessee provided Hajj services to 394 persons with total collections not disputed by revenue. The assessing officer had estimated income by reference to another Hajj organisation where profit per person worked out to Rs. 6,500. The Tribunal regarded Rs. 6,500 per person as a reasonable yardstick in the facts of the case and held that, after applying that figure, the difference between the profit per person adopted by the CIT(A) and Rs. 6,500 should be deleted. The Tribunal further observed that the primary assessment of income of the Hajj firms was to be carried out in proceedings against M/s Alhind Tours and Travels Pvt. Ltd., rendering the present appeal infructuous except for its utility in determining disallowance under food and accommodation head. [Paras 8, 9, 10, 11]

The Tribunal applied a profit of Rs. 6,500 per pilgrim for A.Y. 2009-10, deleted the excess portion as indicated, and treated the appeal as infructuous in view of assessment of the Hajj firms being to be made in the other proceeding.

Disallowance of excess food and accommodation expenditure - computation of reasonable profit per person in tour/hajj operators - use of comparable firms' profit to estimate income - Whether additions made on account of excess food and accommodation expenditure for A.Y. 2010-11 and A.Y. 2011-12 should be sustained, and the appropriate profit per person to be adopted for determining reasonable income for those years. - HELD THAT: - For the various assessees and assessment years falling in 2010-11 and 2011-12 the Tribunal considered the profits declared per pilgrim by the assessees and the profits determined in comparable group firms for subsequent years. Noting that assessing officers in comparable cases had determined profit at Rs. 10,000 per pilgrim for A.Y. 2012-13 and that in certain group firms the assessee itself had declared higher per person profits (for example Rs. 13,566 and Rs.13,870 in particular years), the Tribunal held that where the declared or objectively reasonable profit per person equalled or exceeded the comparable benchmark, no further addition on account of food and accommodation was warranted. Accordingly, in multiple appeals the additions limited by the CIT(A) were deleted or the disallowance was to be made on the basis of Rs. 10,000 per person as the reasonable profit for the relevant assessments. The Tribunal again observed that the primary assessment of the Hajj firms' income was to be carried out in the proceedings against M/s Alhind Tours and Travels Pvt. Ltd., rendering the appeals infructuous for other purposes while preserving the order for determining disallowance under food and accommodation head. [Paras 63, 64, 67, 68, 69]

For the assessment years 2010-11 and 2011-12 the Tribunal deleted the additions limited by the CIT(A) where the declared or reasonable profit per pilgrim met or exceeded the comparable benchmark and directed that, in specified cases, disallowance be computed on the basis of Rs. 10,000 profit per pilgrim; the appeals were otherwise held infructuous in view of assessment to be made in the separate proceeding.

Final Conclusion: The Tribunal, applying profits per pilgrim derived from comparable group firms and the assessees' own declared per person profits, either deleted the additions made by the authorities or directed disallowance to be computed on a benchmark of Rs. 10,000 per pilgrim (and Rs. 6,500 for the A.Y. 2009-10 case as indicated), and held the appeals generally infructuous insofar as overall assessment of the Hajj firms' income is to be determined in the proceedings against M/s Alhind Tours and Travels Pvt. Ltd.

Speculative loss - hedging versus speculation - set-off of speculative loss against business income - recognised stock exchange / recognised association under the proviso to section 43(5) - genuineness of purchases / inflated purchases - unexplained cash credits under section 68 - remand for reconsideration

Speculative loss - hedging versus speculation - recognised stock exchange / recognised association under the proviso to section 43(5) - Treatment of losses on trading in commodity futures (including gold and silver) as speculative or business loss for the assessment years 2007-08 and 2008-09. - HELD THAT: - The Tribunal held that the assessee could not claim the statutory exception for trades on a recognised stock exchange/association because the notification relied upon post-dated the transactions; therefore the transactions fall for consideration under the law as it stood at the time of the transactions. Relying on the decision in Varsha Corporation Ltd., the Tribunal concluded that, for the years in question, there was no statutory exemption permitting settlement otherwise than by actual delivery and hence losses arising from commodity futures (including gold, silver and other commodities dealt on MCX) are to be treated as speculative loss. The Tribunal rejected the CIT(A)'s classification of a part of the loss as business loss and held that the Assessing Officer was justified in treating the losses as speculative and disallowing set-off against business income. [Paras 5]

Revenue's ground allowing disallowance of the commodity trading loss as speculative is allowed; the assessee's plea to treat part of the loss as business loss is dismissed.

Genuineness of purchases / inflated purchases - Disallowance of claimed purchases of old gold as inflated purchases for assessment years 2007-08 and 2008-09. - HELD THAT: - The Tribunal observed that while the jewellery trade commonly involves exchange of old jewellery, the assessee failed to produce adequate, contemporaneous supporting evidence (such as parties' details and complete vouchers) to substantiate the local purchases of old gold. The Tribunal held that acceptance by sales tax authorities or reliance on general trade practice does not substitute for the proof required in income-tax proceedings. In the absence of necessary records, the Assessing Officer was justified in disallowing the purchases claimed as inflated. [Paras 9]

Revenue's challenge succeeds; the additions for inflated purchases are upheld.

Unexplained cash credits under section 68 - remand for reconsideration - Deletion by the CIT(A) of additions made under section 68 in respect of sundry creditors (chit collections, security deposit, purchases) and cash deposits credited to director's loan account. - HELD THAT: - The Tribunal found the CIT(A)'s conclusions to be cryptic and inadequately reasoned. In respect of sundry creditors (claimed chit collections, security deposit and purchases) the Tribunal directed remand to the CIT(A) for a detailed examination and a reasoned order after verification. Similarly, the CIT(A)'s deletion of the addition relating to cash deposits (director's loan) was set aside for lack of detailed reasoning and the matter was remitted to the CIT(A) for fresh consideration and a speaking order in accordance with law. [Paras 10, 13]

Both issues remitted to the CIT(A) for reconsideration and a detailed speaking order.

Final Conclusion: For assessment years 2007-08 and 2008-09 the Tribunal upheld the Assessing Officer's treatment of commodity futures losses as speculative and disallowed set-off; sustained additions for inflated purchases of old gold; and remitted the questions relating to unexplained creditors and cash deposits under section 68 to the CIT(A) for fresh, detailed consideration.

Eligibility for deduction under section 80IB(10) - ownership of land not a condition for entitlement - developer versus contractor distinction - entrepreneurial risk test

Eligibility for deduction under section 80IB(10) - ownership of land not a condition for entitlement - developer versus contractor distinction - entrepreneurial risk test - Assessee entitled to deduction under section 80IB(10) for the housing project despite land and plan approval being in the name of the housing society - HELD THAT: - The Tribunal found on the facts that the assessee bore the risks and rewards of the housing project. Relying on the coordinate-bench reasoning in Shri Umeya Corporation and the Gujarat High Court decision in CIT v. Radhe Developers, the Tribunal held that section 80IB(10) does not make ownership of the land a pre condition for claiming the deduction. What is determinative is whether the assessee has assumed the entrepreneurial risk in executing the project: where profits or losses of the project belong predominantly to the assessee and the assessee has authority and responsibility to execute the development, the activity qualifies as developing and building housing projects for the purposes of section 80IB(10). The Tribunal noted that prior authority distinguishing a mere contractor from a developer (including the three member view in B T Patil) did not apply to the facts where the assessee had assumed the substantive risks and rewards; hence the Assessing Officer's reliance on contractor status and on ownership and approval being in the society's name was not a legally sustainable basis to deny the deduction.

Disallowance under section 80IB(10) set aside and deduction allowed as the assessee had assumed entrepreneurial risk and was engaged in developing and building the housing project.

Final Conclusion: Appeal dismissed; the Tribunal, following precedent, directed deletion of the disallowance and allowed deduction under section 80IB(10) for AY 2003-04 as the assessee bore the risks and rewards of the housing project notwithstanding that the land and approval were in the name of the housing society.

Hindu Undivided Family as "relative" for exemption under section 56(2)(vi) - exemption of gifts received from relatives - remand for fresh consideration of unexplained investment and source of funds

Hindu Undivided Family as "relative" for exemption under section 56(2)(vi) - exemption of gifts received from relatives - Whether a gift received by the assessee from a HUF is to be treated as received from a "relative" and therefore exempt under section 56(2)(vi). - HELD THAT: - The Tribunal, following the Coordinate Bench decision dealt with the character of an HUF as a collective of relatives and held that a gift from an HUF should be read as a gift from the relatives constituting that HUF. The reasoning accepted that though an HUF is a distinct taxable unit, it is formed by a group of relatives and, applying the Explanation to section 56(2)(vi), a gift from the HUF falls within the exemption accorded to gifts from relatives. On that basis the addition made by the Assessing Officer and confirmed by the CIT(A) was set aside and the amount received from the HUF was directed to be treated as exempt under the provision. [Paras 6]

Addition of Rs. 1,00,000 treated as deleted; A.O. directed to treat the gift from the HUF as exempt under section 56(2).

Remand for fresh consideration of unexplained investment and source of funds - Whether the investment of Rs. 50,000 in M/s. Mahadevi Industries was properly disallowed as unexplained investment in assessment when the assessee had given an explanation before the CIT(A). - HELD THAT: - The assessee had pleaded sources for the investment before the CIT(A), but the CIT(A) did not consider or adjudicate that ground of appeal. In consequence, the Tribunal declined to decide the question on merits and remitted the matter to the file of the CIT(A) for reconsideration in light of the explanation and evidence filed by the assessee. [Paras 7]

Ground relating to the unexplained investment is remitted to the CIT(A) for fresh adjudication.

Final Conclusion: Appeal partly allowed: the addition treating the gift from the HUF as taxable is deleted and the amount is to be treated as exempt; the addition concerning the unexplained investment is remitted to the CIT(A) for reconsideration.

Taxability of foreign bank account deposits of non-resident - income accrual or receipt in India - onus of proof in recovery of alleged undisclosed foreign balances - taxability of remittances from NRE/NRO/foreign accounts - treatment of security deposits vis-a -vis deemed dividend - presumptive interest on undeclared foreign balances - utilisation of capital gains within statutory period for exemption - assessment under section 153A framed consequent to search

Taxability of foreign bank account deposits of non-resident - income accrual or receipt in India - Deletion of additions made by AO on account of peak deposits/ balances in foreign bank accounts (HSBC Geneva, Deutsche Bank Singapore, ICICI London) upheld. - HELD THAT: - The Tribunal upheld the CIT(A)'s conclusion that the AO had not adduced any evidence linking the amounts kept in the assessee's foreign bank accounts to income accruing or arising in India or to proceeds of Indian defence contract payments. Reliance was placed on earlier judgments/orders in the assessee's own cases and the finding that enquiries under DTAAs and other references were pending; in the absence of positive evidence connecting the foreign balances to Indian sources, the amounts could not be taxed in India. Consequential additions and those premised on presumptive treatment of such foreign deposits were therefore not sustainable. [Paras 8, 13, 15, 42]

Orders of the CIT(A) deleting additions relating to balances in HSBC Geneva, Deutsche Bank Singapore/India and ICICI London are upheld and the revenue grounds dismissed.

Taxability of remittances from NRE/NRO/foreign accounts - taxability of foreign bank account deposits of non-resident - Deletions of additions based on remittances from the assessee's foreign accounts (including transfers to NRE account) sustained. - HELD THAT: - Following the determinative finding that the assessee is non-resident for the relevant years and that amounts held in foreign accounts were not shown to have arisen in India, remittances from those foreign accounts into domestic accounts (including NRE) could not be treated as taxable income. Earlier appellate decisions in the assessee's own matters on the same factual matrix were followed. [Paras 19, 21, 23]

Additions based on remittances from foreign accounts (including NRE transfers) deleted and CIT(A)'s order upheld.

Treatment of security deposits vis-a -vis deemed dividend - deemed dividend - Addition treated as deemed dividend under the definition was deleted where amounts were security deposits received for letting property. - HELD THAT: - The Tribunal agreed with the CIT(A) that amounts received as security deposits in commercial lease transactions are payments for consideration and not loans or advances 'in the nature of loan' falling within the ambit of deemed dividend. The security deposits were refunded on termination/cancellation of lease, and commercial character of the receipts precluded treatment as deemed dividend under the relevant provision. [Paras 31, 33]

Additions on account of deemed dividend in respect of security deposits are deleted.

Presumptive interest on undeclared foreign balances - taxability of foreign bank account deposits of non-resident - Additions on account of presumptive interest on HSBC Geneva balances deleted. - HELD THAT: - Because the principal amounts held in the HSBC Geneva account were held not taxable (on the basis that they did not accrue or arise in India and the assessee was non-resident), any consequential addition by way of presumed interest on those balances could not be sustained in law. The Tribunal therefore held that taxing presumed interest on non-taxable principal was impermissible. [Paras 15, 42]

Presumptive interest additions deleted.

Utilisation of capital gains within statutory period for exemption - Addition on account of alleged non-utilisation of capital gains deposit within three years deleted. - HELD THAT: - Although facts showed the capital gains deposit was not formally utilised within the statutory three-year period, the Tribunal found that total expenditure incurred by the assessee for acquiring/constructing the new house property substantially exceeded the capital gains amount; on that basis, the deposit was deemed to have been utilised for the new asset and the addition was deleted. [Paras 44, 47]

Addition of the amount relating to non-utilisation of capital gains is deleted.

Assessment under section 153A framed consequent to search - onus of proof in recovery of alleged undisclosed foreign balances - Cross-objection alleging error in upholding assessments under section 153A where no incriminating material was found considered and treated in light of Kabul Chawla jurisprudence. - HELD THAT: - Applying the ratio of the jurisdictional High Court in Kabul Chawla, the Tribunal observed that where additions are not based on incriminating material discovered during search and the issues are decided in favour of the assessee on merits (including non-resident status), the assessment under section 153A is liable to be quashed. However, because the revenue appeals on the substantive issues were disposed in favour of the assessee, the Cross Objection became infructuous and was dismissed accordingly. [Paras 34, 35]

Cross-objection alleging invalidity of assessments under section 153A is dismissed as infructuous in view of merits decisions for the assessee.

Onus of proof in recovery of alleged undisclosed foreign balances - Claim that onus lay on assessee to prove amounts in HSBC account did not belong to him rendered academic. - HELD THAT: - Since additions relating to HSBC balances were deleted on merits, any ground asserting that the assessee bore the onus to establish non-ownership/non-taxability became academic and was accordingly dismissed. [Paras 36, 37]

Ground on onus of proof dismissed as academic.

Refund of tax paid where addition deleted - Direction to refund tax and not to realize taxes/interest where additions deleted. - HELD THAT: - The Tribunal agreed with the assessee that where CIT(A) deleted the additions relating to HSBC balances, the assessee was not liable to pay tax or interest thereon; the AO was directed to refund any tax paid in excess in accordance with appellate orders. [Paras 38, 39]

Assessee entitled to refund of tax paid in excess; no liability to pay tax/interest on deleted additions.

Final Conclusion: Revenue appeals for the assessment years before the Tribunal are dismissed; deletions made by the CIT(A) in respect of additions relating to foreign bank balances, remittances from foreign accounts, security deposits (not being deemed dividends), presumptive interest and the capital gains utilisation issue are upheld; cross objections are partly allowed in consequence, with directions for refunds where applicable.

Apportionment of research and development expenditure between eligible and non eligible units - Requirement of DSIR approval in Form 3CL for deduction under section 35(2AB) - Deduction under section 35(2AB) as special incentive for in house R&D - Section 14A disallowance for expenditure in relation to tax free income - Application of Rule 8D for computation of expenditure attributable to exempt income

Apportionment of research and development expenditure between eligible and non eligible units - Requirement of DSIR approval in Form 3CL for deduction under section 35(2AB) - Deduction under section 35(2AB) as special incentive for in house R&D - Whether the weighted deduction claimed under section 35(2AB) for R&D expenditure could be apportioned among the assessee's units and whether the claim could be admitted without production of DSIR approval in Form 3CL. - HELD THAT: - The Tribunal noted that the assessee claimed the weighted deduction under section 35(2AB) for R&D recorded at the Hosur unit while the Assessing Officer apportioned R&D expenditure to the Pondicherry unit (eligible under section 80IB) on a turnover basis because all units manufactured the same product. The Tribunal observed that mere recognition by DSIR of an in house R&D facility is not a substitute for the mandatory approval process: claim of deduction under section 35(2AB) requires submission of the prescribed report and communication of approval in Form 3CL by the Secretary, DSIR to the DGIT(Exemption). The assessee had asserted DSIR recognition of the Hosur facility but the Assessing Officer had not called for the Form 3CL approval when admitting the claim. Consequently, the Tribunal held that the question of apportionment could not be decided in the absence of verification of DSIR approvals; if DSIR has recognized only the Hosur unit, the Assessing Officer lacks jurisdiction to apportion the R&D deduction to other units that were not recognized. The Tribunal therefore set aside the CIT(A) order on this issue and remitted the matter to the Assessing Officer to call for and verify the report(s) in the prescribed format and the Form 3CL approval(s) and thereafter decide the claim in accordance with law after affording opportunity to the assessee. The Tribunal also clarified that the date of Form 3CL approval cannot be treated as a cut off for allowing the deduction and that the DSIR alone determines recognition of in house R&D units. [Paras 5, 6]

Order set aside and issue remitted to the Assessing Officer for verification of DSIR report(s) and Form 3CL approval(s); if approval relates only to Hosur unit, apportionment to other units cannot be made.

Section 14A disallowance for expenditure in relation to tax free income - Application of Rule 8D for computation of expenditure attributable to exempt income - Whether the disallowance under section 14A read with Rule 8D in respect of expenditure attributable to exempt dividend income for AY 2008 09 was correctly made. - HELD THAT: - The Tribunal recorded that the assessee held investments and earned dividend income while not maintaining separate books for investment activities; funds were pooled and borrowings (and interest) were substantial. The Tribunal accepted the Assessing Officer's approach of segregating probable financial and overhead expenses attributable to investment activities and applying section 14A read with Rule 8D. Relying on precedent which treats Rule 8D (notified on 24.03.2008) as applicable from assessment year 2008 09, the Tribunal found the invocation and application of Rule 8D to be correct. The Tribunal rejected the assessee's reliance on earlier decisions relating to pre Rule 8D years, noting the factual matrix here (pooled funds, no separate books) justified apportionment under Rule 8D. [Paras 7, 9]

Disallowance under section 14A read with Rule 8D confirmed; assessee's ground dismissed.

Final Conclusion: Appeal partly allowed in part (statutory remand on the R&D deduction issue for verification of DSIR Form 3CL and related records) and dismissed in part (section 14A/Rule 8D disallowance upheld) for Assessment Year 2008 09.

Provision for expenses - Ascertained liability vs contingent liability - Revenue cost matching principle - Percentage completion method - Conditions of sanction under Slum Redevelopment Scheme

Provision for expenses - Ascertained liability vs contingent liability - Conditions of sanction under Slum Redevelopment Scheme - Revenue cost matching principle - Whether the provision of Rs. 1,22,10,000 made by the assessee for construction of Municipal staff quarters and Road Depot is an ascertained liability deductible in the assessment year 2010-11 or a contingent liability liable to be disallowed - HELD THAT: - The assessee relied on the sanction terms of the Slum Redevelopment Scheme to contend that it was under an obligation to construct and hand over specified built-up areas free of cost, and therefore the provision represented an ascertained project expenditure to be matched against revenue. The Tribunal accepted that a liability is imposed by the sanction but examined the factual matrix and conduct of the assessee. The tax authorities and the CIT(A) found that the relevant portion of land for constructing the stated buildings had not been handed over to the assessee even up to 2013, and the assessee had not incurred identifiable expenditure against the provision by the assessment date. Because the obligation to construct would arise only upon allotment/handing over of the land, and there was no clear performance or expenditure establishing an actual liability, the Tribunal held that the claimed sum was contingent upon future allotment and not an ascertained liability under the matching principle. In these circumstances, and given absence of expenditure evidence despite passage of time, the provision was properly disallowed by the assessing authorities and upheld by the CIT(A). [Paras 8, 9, 10]

Provision disallowed as it was a contingent liability, not an ascertained deductible expense; order of CIT(A) upheld.

Final Conclusion: The Tribunal dismissed the appeal and upheld the disallowance of the provision for expenses made by the assessee in assessment year 2010-11, concluding the liability was contingent upon allotment of land and not an ascertained expenditure.

Unexplained cash credit under section 68 - proof of identity, creditworthiness and genuineness of creditors - disallowance under section 40(a)(ia) for failure to deduct TDS - obligation to deduct tax under section 194C linked to applicability of section 44AB

Unexplained cash credit under section 68 - proof of identity, creditworthiness and genuineness of creditors - Treatment of cash credits of Rs. 2,50,000 received from three persons and whether these amounts are explained for the purposes of section 68 - HELD THAT: - The Tribunal examined the evidence supporting loans from Ashwinkumar L. Patel (Rs.75,000), Sumitraben J. Patel (Rs.1,25,000) and Falguniben Patel (Rs.50,000). For the first two creditors the assessee produced only affidavits and partial ledger/bank extracts from later years, with no corroborative material such as PAN, bank statements or returns to establish identity, creditworthiness or genuineness; such affidavits were held insufficient to satisfy section 68 and those amounts remained unexplained. In respect of the Rs.50,000 received from Falguniben Patel, payment was by account-payee cheque and the source of funds in her bank account was adequately traced to gifts from her grandfather, past savings and earlier withdrawals; particulars of the grandfather (retired rail employee owning agricultural land) and bank withdrawals were accepted as showing a plausible source. On that basis the Tribunal held the Rs.50,000 to be explained and deleted that part of the addition, while affirming the balance addition for lack of satisfactory proof. [Paras 8]

Addition of Rs.2,50,000 under section 68 partly deleted to the extent of Rs.50,000 (loan from Falguniben Patel); the remaining amount affirmed as unexplained.

Disallowance under section 40(a)(ia) for failure to deduct TDS - obligation to deduct tax under section 194C linked to applicability of section 44AB - Whether the disallowance under section 40(a)(ia) for failure to deduct TDS under section 194C was justified for Asst. Year 2005-06 - HELD THAT: - Section 194C imposes TDS obligations on persons whose business turnover in the preceding financial year falls within the audit thresholds of section 44AB. The Tribunal applied this nexus to the facts: liability to deduct for the assessee in AY2005-06 would depend on coverage under section 44AB for the immediately preceding year (AY2004-05). The assessee's return and computation for AY2004-05 showed income under the deeming provisions applicable to running heavy vehicles and did not fall within section 44AB thresholds for that year. Since the assessee was not within the ambit of section 44AB for the relevant preceding year, it was not obliged to deduct tax under section 194C for AY2005-06 and the impugned disallowance under section 40(a)(ia) was unsustainable. [Paras 9]

Disallowance of Rs.2,50,507 under section 40(a)(ia) deleted; assessee was not liable to deduct TDS under section 194C for Asst. Year 2005-06.

Final Conclusion: The appeal is partly allowed: the addition under section 68 is reduced by Rs.50,000 (explained loan from Falguniben Patel) while the remaining addition stands; the disallowance under section 40(a)(ia) for non-deduction of TDS is deleted as the assessee was not liable to deduct under section 194C for Asst. Year 2005-06.

Unsecured loans and cash credits under section 68: proof of creditworthiness and genuineness - estimation of interest income from fixed deposits in absence of particulars - treatment of security deposits and ledger transfer evidence - deductibility and applicability of section 43B for unpaid interest and related charges - ad hoc disallowance for unverifiable expenses and requirement of verifiable ledger/accounts - taxability of extraordinary income included in the return and burden of proof for subsequent exclusion

Unsecured loans and cash credits under section 68: proof of creditworthiness and genuineness - Addition made in respect of unsecured loans from promoters (difference between closing and opening unsecured loan balances) confirmed. - HELD THAT: - Assessing Officer added the difference between closing and opening balances of unsecured loans because the assessee did not furnish details of fresh loans taken from promoters. On appeal the assessee failed to produce books, ledger evidence or creditworthiness proof for loan creditors except a single confirmation for one lender; even that confirmation lacked supporting evidence of the lender's creditworthiness. The Tribunal found no infirmity in the appellate authority's conclusion that the addition was justified in absence of satisfactory corroborative material establishing genuineness of cash credits. [Paras 6]

Addition confirmed and ground rejected.

Estimation of interest income from fixed deposits in absence of particulars - Addition in respect of interest on FDRs of Rs. 27,107/- deleted. - HELD THAT: - Assessing Officer estimated interest on FDRs at 10% of the closing FDR balance because particulars (dates and rates) were not furnished and had also used an incorrect closing FDR amount of a prior year. CIT(A) corrected the quantum partly but upheld the residual addition. The Tribunal observed that the assessee had accounted for interest income on actual basis and that the assessee's claimed interest was close to the AO's estimate on the correct FDR balance. In the facts of the case and absence of a material discrepancy, the Tribunal held the addition unjustified and deleted it. [Paras 10]

Addition deleted and ground allowed.

Treatment of security deposits and ledger transfer evidence - Part deletion of addition relating to increase in security deposits; specific amounts attributable to certain parties deleted, balance confirmed. - HELD THAT: - The assessee produced security deposit account entries showing receipt and an alleged transfer of security to the customer account for one large party (Shiva Steel). Ledger copies, however, did not corroborate the transfer for Shiva Steel. For Madhyeshiya Traders and a small party, ledger evidence showed transfer or the amounts were immaterial; thus the Tribunal deleted additions of Rs. 50,000 and Rs. 2,000. The remainder of the addition, where no supporting ledger transfer was established, was confirmed. [Paras 16]

Part relief granted by deleting minor/established items; balance addition confirmed.

Deductibility and applicability of section 43B for unpaid interest and related charges - Disallowance of interest and finance charges under section 43B deleted. - HELD THAT: - AO disallowed the entire interest and finance charges since the accounts were unaudited and payment timings were not ascertainable. On appeal, the assessee furnished ledger accounts, bank statements and details showing that, except for interest on certain ICDs and some discounting charges (to which section 43B does not apply), there was no outstanding interest subject to section 43B. The Tribunal accepted that money to which section 43B applied had been paid and that remaining items were not within section 43B. Accordingly the disallowance under section 43B was held unjustified and deleted. [Paras 20]

Disallowance deleted and ground allowed.

Ad hoc disallowance for unverifiable expenses and requirement of verifiable ledger/accounts - Ad hoc disallowances of (i) 25% of repair & maintenance expenses, (ii) 40% of salary/wages/bonus, and (iii) Rs. 2 crore out of various expense heads were deleted. - HELD THAT: - (i) For repair and maintenance expenses, the assessee stated that ledger accounts and vouchers were available and there was no finding by CIT(A) rejecting those assertions; the Tribunal found no justification for a 25% ad hoc disallowance. (ii) The 40% disallowance of employees' remuneration was based on an incorrect gross comparison: part of the AO's higher figure included a gratuity provision already separately disallowed. Excluding that gratuity provision, current year salaries/wages were comparable to the preceding year; the Tribunal deleted the disallowance. (iii) For the Rs. 2 crore ad hoc cut across multiple heads, the assessee produced a chart showing these heads had decreased compared to the preceding year; on that basis the Tribunal found no justification for the ad hoc reduction and deleted it. [Paras 24, 25, 26]

All three ad hoc disallowances deleted and grounds allowed.

Taxability of extraordinary income included in the return and burden of proof for subsequent exclusion - Addition of extraordinary income included in the computation upheld. - HELD THAT: - The Assessing Officer observed that extraordinary income had been included by the assessee in the computation filed with the return and that no satisfactory evidence or reason was furnished to exclude it subsequently. The Tribunal held that where an assessee includes an item in the computation and later seeks its exclusion, it is the assessee's burden to produce supporting evidence; in absence of such material the appellate order confirming inclusion was not interfered with. [Paras 30]

Addition sustained and ground rejected.

Procedure for appellate prosecution: non-pressing of grounds - Grounds not pressed by the appellant were dismissed as not pressed. - HELD THAT: - Grounds relating to unpaid bonus and gratuity (grounds 4 & 5) and disallowances in grounds 11 and 12 were not pressed before the Tribunal and accordingly were dismissed / rejected as not pressed. [Paras 12, 28]

Not pressed; dismissed/rejected as not pressed.

Final Conclusion: The appeal is partly allowed: additions and disallowances relating to interest on FDRs, interest and finance charges under section 43B, ad hoc disallowances (repairs, salary/wages and the Rs. 2 crore cut) were deleted; additions for unsecured loans, most of the security-deposit increase and inclusion of extraordinary income were sustained or partly sustained; several grounds were dismissed as not pressed.

Arm's Length Price - Transfer Pricing Officer's adjustment - Comparable Uncontrolled Price method - Net Realizable Value - Valuation of inventories - Slow moving/old stock - Accounting Standard AS-2

Slow moving/old stock - Net Realizable Value - Valuation of inventories - Accounting Standard AS-2 - Whether the goods exported to the overseas associated enterprise were old/slow moving stock and whether the assessee's valuation/write-down under AS-2 supported that classification - HELD THAT: - The Tribunal examined the materials considered by the CIT(A) and the TPO, including the assessee's stock records, invoices and the Group policy and notes to accounts evidencing a write-down of inventories to net realizable value. The Tribunal accepted CIT(A)'s finding that the inventory in question was old/slow moving and that the assessee's valuation (toned down amount reflected in the notes to accounts) was in accordance with AS-2 principles for net realizable value. The Tribunal found the Revenue's contention that the goods were not old stock and had been directly sold to a third party to be incorrect, noting the CIT(A)'s assessment of dispatches, timing and documentary records which showed the goods were sold through the overseas associated enterprise and that the time gap between transactions was negligible. [Paras 10]

The classification of the inventory as old/slow moving and the assessee's valuation under AS-2 were accepted, supporting the CIT(A)'s finding in favour of the assessee.

Arm's Length Price - Transfer Pricing Officer's adjustment - Comparable Uncontrolled Price method - Whether the TPO's determination of Arm's Length Price by applying the assessee's overall gross profit margin (22.64%) to the written-down stock and making an adjustment is sustainable - HELD THAT: - The Tribunal considered the TPO's approach of determining ALP by applying the assessee's gross profit margin and the Revenue's argument that the two-quote evidence did not demonstrate an open market sale. The assessee and CIT(A) relied on evidence showing the sales were effected through the overseas AE and on the suitability of CUP by comparing the assessee's invoices with the AE's subsequent sale to an independent purchaser. The Tribunal found that the CIT(A) had correctly evaluated the evidence, concluded that the goods were sold through the AE, and that the TPO's use of the asserted gross profit to revalue the written-down stock was not justified. Accordingly the Tribunal upheld CIT(A)'s deletion of the adjustment made by the TPO. [Paras 10, 11]

The TPO's upward adjustment to determine Arm's Length Price was not sustained; CIT(A)'s deletion of the adjustment was upheld.

Final Conclusion: The Revenue's appeal is dismissed; the CIT(A)'s deletion of the TPO's transfer pricing adjustment is upheld and the addition stands deleted.

Disallowance under section 14A read with rule 8D(2)(ii) - disallowance under rule 8D(2)(iii) - presumption that investments are made from own funds where reserves exceed investments - application of rule 8D(2)(iii) limited to the amount of exempt income

Disallowance under section 14A read with rule 8D(2)(ii) - presumption that investments are made from own funds where reserves exceed investments - Deletion of addition of Rs. 75,67,905 made under rule 8D(2)(ii) challenged by the Revenue - HELD THAT: - The CIT(A) deleted the addition after concluding that the assessee's reserves and surplus exceeded the investments, permitting a presumption that investments were made out of interest free/own funds and not out of borrowed funds. The CIT(A) relied on precedents holding that where an assessee has adequate own funds, it is to be presumed that investments were made from such funds and therefore interest disallowance is not called for. The Tribunal found no reason to interfere with that conclusion and upheld the CIT(A)'s deletion of the disallowance under rule 8D(2)(ii). [Paras 6, 9]

Revenue appeal dismissed; deletion of the addition of Rs. 75,67,905 under rule 8D(2)(ii) upheld.

Disallowance under rule 8D(2)(iii) - application of rule 8D(2)(iii) limited to the amount of exempt income - Whether any disallowance under rule 8D(2)(iii) was called for in respect of dividend income of Rs. 29,000 and if so its quantum - HELD THAT: - The Tribunal accepted the legal proposition, as reflected in Maxopp Investment Ltd., that once exempt income is earned some expenditure relating to that exempt income must be disallowed under the formula in rule 8D(2)(iii). However, applying that principle to the facts, the Tribunal held that the quantum of disallowance under rule 8D(2)(iii) should be restricted to the exempt dividend income actually earned in the year. Consequently the assessee's appeal was partly allowed on that basis. [Paras 10, 11]

Assessee's appeal partly allowed; disallowance under rule 8D(2)(iii) applies but limited to the dividend income of Rs. 29,000.

Final Conclusion: The Tribunal dismissed the revenue's appeal upholding the CIT(A)'s deletion of the major disallowance under rule 8D(2)(ii) on the basis that investments were presumed to be from own funds, and partly allowed the assessee's appeal by confirming that rule 8D(2)(iii) applies but restricting the disallowance to the exempt dividend income earned in the year.

Power of appellate authority to enhance income - onus on assessee to prove genuineness, identity and creditworthiness of sundry creditors - burden of proof to establish labour payments and identity of labourers - estimation and disallowance where records are inadequate - comparative year as guiding factor for quantification

Power of appellate authority to enhance income - estimation and disallowance where records are inadequate - Validity of enhancement made by the Commissioner of Income Tax (Appeals) in respect of issues not specifically subject-matter of the assessment-stage inquiry. - HELD THAT: - The Tribunal held that the question whether the CIT(A) can make enhancement is governed by the decision of the jurisdictional High Court in CIT v. Kashi Nath Candiwala, which after considering Apex Court precedents, sustains the appellate authority's power to enhance income coterminous with the Assessing Officer. Applying that binding view, the Tribunal rejected the assessee's plea that enhancement was impermissible merely because the matter was not considered by the AO at assessment stage. Consequently the enhancement power exercised by the CIT(A) was held legally valid. The Tribunal therefore decided the jurisdictional/competence challenge against the assessee and proceeded to examine the merits of the enhancements. [Paras 6]

Enhancement by the CIT(A) was valid in law; the contention that enhancement could not be made on an issue not subject-matter of assessment is rejected.

Burden of proof to establish labour payments and identity of labourers - estimation and disallowance where records are inadequate - comparative year as guiding factor for quantification - Merit and quantum of additions: disallowance out of labour charges and addition on account of sundry creditors. - HELD THAT: - On labour charges the Tribunal examined the CIT(A)'s findings that (a) labour payments had increased though job-work receipts declined, (b) large portion of labour charges remained as long-term payables at year-end, and (c) identity and payment evidence (photocopies of ledgers, hand-written attendance, thumb impressions, cash payments) did not satisfactorily discharge the assessee's onus under section 37(1). While the Tribunal accepted that comparative year figures cannot be a binding guide unless that year was assessed under section 143(3), it regarded the preceding year as a reasonable yardstick for quantification. Applying a guided estimation, the Tribunal reduced the CIT(A)'s 50% disallowance to 25% of labour charges (amounting to disallowance of Rs. 5.95 lacs), as meeting the ends of justice. Concerning sundry creditors, the Tribunal noted that the balance-sheet list comprised many parties but confirmations were produced for only five small accounts (with PAN available in two), and the assessee admitted inability to trace numerous old creditors. The CIT(A)'s limited lump-sum addition of Rs. 15.00 lacs (and not the entire creditor balance) was found to be reasonable in view of failure to prove genuineness, identity and creditworthiness; the Tribunal sustained that addition. [Paras 7, 8, 9]

Disallowance of labour charges reduced to 25% (disallowance sustained to the extent quantified by the Tribunal) and addition of Rs. 15.00 lakhs out of sundry creditors sustained.

Final Conclusion: The appeal is partly allowed: the legal validity of the CIT(A)'s power to enhance is rejected as a ground for the assessee, the labour disallowance is sustained but reduced to 25% (as quantified), and the addition of Rs. 15.00 lakhs in respect of sundry creditors is upheld; appeal otherwise dismissed.

Power of rectification under Section 154 of the Customs Act, 1962 - redemption fine in lieu of confiscation - provisional release and return/appropriation of bank guarantee and cancellation of bond - distinction between penalty for offence and redemption fine - error apparent on the face of the record - functus officio

Redemption fine in lieu of confiscation - provisional release and return/appropriation of bank guarantee and cancellation of bond - distinction between penalty for offence and redemption fine - Whether the appellate authority's direction linking payment of penalties to return of the bank guarantees and cancellation of bonds in respect of provisionally released goods was legally tenable and whether that portion of the appellate order should be struck down. - HELD THAT: - The appellate authority modified the adjudicating authority's order and directed return of bank guarantees and cancellation of bonds upon payment of redemption fine and "penalty if any". The High Court observed that redemption fine imposed in lieu of confiscation is distinct in character from penalties imposed for offences and, on the facts, the bank guarantees/bonds had been furnished for provisional release and ought to be returned on payment of the substituted redemption fine. Although powers of rectification under Section 154 do not extend to effecting a review, an authority may correct errors apparent on the face of the record. The Court found that linking return of the bank guarantee and cancellation of bonds to payment of penalty was either an oversight or without legal justification, and therefore that portion of the appellate order required correction. The Court accordingly directed deletion of the words "and penalty if any, (7.5% penalty already paid by them as predeposit for filing appeal)" from paragraph 29 of the appellate order, while permitting the petitioners to pursue their remaining grievances before the Tribunal. [Paras 9, 11]

The words "and penalty if any, (7.5% penalty already paid by them as predeposit for filing appeal)" in paragraph 29 of the appellate order are deleted; the return of bank guarantees and cancellation of bonds shall follow on payment of the redemption fine, and the petitioners may pursue their pending appeal to the Tribunal on other grounds.

Final Conclusion: The High Court struck down the portion of the appellate order that conditioned return of bank guarantees and cancellation of bonds on payment of penalties, ordered deletion of the said words so that return/cancellation follow on payment of the redemption fine, and permitted the petitioners to continue the appeal before the Tribunal on remaining issues.

Redemption fine on confiscated prohibited goods where re-export is permitted - penalty under

Mis-declaration of value - onus of declaration on the importer - bonafide mistake - confiscation and redemption fine - penalty under Section 114A of the Customs Act, 1962 - payment of differential duty and interest as mitigation

Mis-declaration of value - onus of declaration on the importer - confiscation and redemption fine - penalty under Section 114A of the Customs Act, 1962 - bonafide mistake - Mis-declaration of MRP on the Bill of Entry and the legality of confiscation, redemption fine and penalty imposed - HELD THAT: - The Tribunal found that the MRP declared in the Bill of Entry differed from the MRP affixed on the packages and that there was no evidence to substantiate the importer's plea of a bonafide mistake. The onus to declare the correct MRP rests on the importer, and had Customs not detected the discrepancy the goods would have been cleared on the mis-declared value. In view of these findings, the Tribunal upheld the adjudicating authority's conclusion that the mis-declaration amounted to a contravention warranting seizure and confiscation and sustained the imposition of penalty under Section 114A. [Paras 4]

Mis-declaration established; confiscation and penalty sustained.

Payment of differential duty and interest as mitigation - confiscation and redemption fine - Whether the redemption fine should be reduced in view of payment of differential duty and interest prior to issuance of the Order-in-Original and part payment of penalty - HELD THAT: - The Tribunal took into account that the importer had paid the differential duty and interest before issuance of the Order-in-Original and had also paid 25% of the penalty within 30 days of the OIO. Considering these facts and the overall circumstances, the Tribunal exercised its discretion to moderate the financial consequence of redemption. Accordingly, the redemption fine imposed by the Original Adjudicating Authority was found excessive and was reduced. [Paras 5, 6]

Redemption fine reduced from the amount imposed by the adjudicating authority to Rs. 7 lakhs; otherwise the OIO is upheld.

Final Conclusion: The appeal is disposed by upholding the Order-in-Original as to mis-declaration, confiscation and penalty, but modifying the redemption fine to Rs. 7 lakhs in view of prior payment of differential duty and interest and part payment of penalty.