TaxTMI 
TaxTMI 
2013 (9) TMI 126
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....ch, following grounds have been raised:- 1) On the facts and in the circumstances of the case and as per Law, the Ld. CIT(A) erred in directing the A.O. to allow the expenditure of Rs. 1,48,71,588/- incurred by the assessee for exploration and production of oil and gases as revenue expenditure. 2) On the facts and in the circumstances of the case and as per Law, the Ld.CIT(A) erred in directing the A.O. to exclude the profits from Oman Branch and Qatar Branch for tax purposes in India, holding that as the assessee has been carrying on business through a permanent Establishment in Oman and Qatar and as the income from the aforesaid Branch in Oman and Qatar ere derived there from, it was only the Oman and Qatar Government which was entitled to Levy the tax as per Article 7 of DTAA ignoring the fact that as the assessee is a Resident of India, it has to be taxed on its entire income in India as per section 5(1) of the I.T. Act 1961, which includes all the income: - i) Received or deemed to be received. ii) Accrues or arises or deemed to accrue and arise. iii) Accrues or arises outside India. 3) On the facts and in the circumstances of the case and as per Law, the Ld.CIT(A) erred....
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....ding of petro products. In the computation of income, the assessee has claimed deduction of Rs. 1,48,71,588, being expenditure incurred during the year for setting-up of the project of refining of crude oil and was treated as deferred revenue expenditure. The assessee, in response to the show cause notice issued by the Assessing Officer, submitted that it is engaged in the business of operation of rigs for extraction of oil, undertaking off-shore contracts for laying of pipeline set-up for refinery and marketing of petro products. During the year under appeal, the company was in the process of setting-up of project of refining crude oil and for this purpose, it has incurred expenditure on exploration sites and on bidding of tenders, traveling etc. These expenditures are revenue in nature, however, in the books of account, they have been treated as deffered revenue expenditure. Looking to the nature of expenses, which are directly related to on-going business, the entire expenditure incurred during the financial year should be allowed in this year. Reliance was also placed on the decision of the Tribunal in assessee's own case for assessment year 1996-97. Further, reliance was a....
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....icer did not allow the 'expenditure as claimed by the assessee on the ground that expenditure incurred on bidding for exploration was capital in nature. The CIT(A) also agreed with the finding of the assessing officer and confirmed the disallowance. 13.1 There is no doubt about the fact that the basic business operations of the assessee company are operation of rigs for extraction of oil and understanding other oil related activities. Therefore, in the interest of assessee's business and in continuation of the business carried on by it, the assessee company had to explore the chances of development in the field of oil exploration for which it had to submit itself for bidding and tenders. Submitting tenders and bids in the field of oil exploration is a highly sophisticated technical task for which the assessee company had to incur substantial amount of expenditure. The potential status of the site has to be studied, visits to the proposed sites have to be undertaken, technical consultancy has to be arranged for and feasibility has to be studied. As the matter is highly complex and technical, even for making a bid, the assessee company has to incur huge amount of expenditure....
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....see company." 7. The aforesaid findings of the Tribunal have been followed in the subsequent years also. Since there is no change in the facts and circumstances of the present issue, therefore, following the earlier year's precedence, we do not find any good reason to interfere with the order passed by the learned Commissioner (Appeals) on this issue and decline to interfere in this matter as such. We also find that this issue has also come up for consideration before the Jurisdictional High Court in an appeal preferred by the Revenue under section 260A, wherein the substantial question of law on this point has not been admitted and the Revenue's appeal has been dismissed. Accordingly, ground no.1, raised by the Revenue is treated as dismissed. 8. The issue involved in ground no.2 and 3, are by and large, same and, therefore, both the grounds are being discussed and adjudicated together. 9. Facts in brief:- The assessee, which is carrying out a contract work of drilling oil wells through its energy division, has shown following results in the Profit & Loss account:- S. No. Name of the Branch Profit earned Remark (i) Oman (Muscat) 3,20,80,443 Not offered for tax ....
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....202 ITR 508 (Kar.), wherein in the context of Indo-Malaysian treaty, it was held that income specified in Articles-6 and 7, relating to the P.E. were outside the purview of taxation in India. Drawing the similarity between the Article-7 of Oman and Qatar and Article-7 of Malaysian treaty, it was submitted that if the income has been taxed in the contracting State, then the same cannot be taxed in India. Besides this, reliance was also placed on the judgment of Hon'ble Supreme Court in CIT v/s P.V.A.L. Kulandagan Chettiar, [2004] 267 ITR 654 (SC) wherein the view taken by the Karnataka High Court in R.M. Muthaiah (supra) and Madras High Court judgment in CIT v/s S.R.M. Firm and others, [1994] 208 ITR 400 (Mad.) wherein similar view was taken, has been affirmed. 11. The Assessing Officer did not accept the assessee's contentions on the ground that Article-7 deals with profits attributable to the P.E. which is treated as distinct and separate. However, the Indian resident is taxed on his global income in India in view of section 5(1) of the I.T. Act, and, therefore, the income earned by the assessee from foreign countries has to be included in the total income of the assessee....
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.... particular with Mauritius. As the DTT entered by Indian Government with Oman and Qatar has mirror image clause with that Mauritius, the circular issued for interpreting Mauritius treaty squarely applies to interpretation of Oman and Qatar treaty. In Azadi Bacho Andolan's case, the circular no. 789 was held by Delhi High Court as void. The Central Government Challenged this decision and appealed to Supreme Court. Supreme Court upheld the said circular and while deciding the said case had also observed the decisions of certain High Court including RM Muthiah (supra) In Kulandagan Chettiar's case, Supreme Court held while interpreting Malaysian tax treaty regarding income from PEs. Including capital gains arising therein, that by entering into tax treaty, the Indian Government gave away its right to tax capital gains arising in other countries with whom it entered into tax treaties. It is to be noted that Malaysian Treaty never had a separate clause dealing with capital gains as that Malaysia does not tax capital gains. Where as, Qatar and Oman has separate clause in treaty like Mauritius to tax capital gains. In RM Muthiah, the High Court of Karnataka held that the stand....
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....axed in other contracting State. The phrase "may also be taxed" means that the India has also right to tax on the income of its resident and whatever tax has been paid in other contracting State the credit shall be given as per Article-25. He analysed various paragraphs of Article-15 of Oman Treaty and observed that wherever the word "may' has been used, the taxability of that particular income lies in both the countries and where the word "shall" is used, then the taxability of that income is with one particular country. The taxability, in case of Indian resident, shall always be in India wherever the word "may" has been used in the DTAA and the credit will be given for the tax paid in other contracting State. Accordingly, he treated the entire long term capital gain including Oman and Qatar to be taxable in India and since no tax was paid in Oman, therefore, no credit was given. 15. Before the learned Commissioner (Appeals), with regard to the issue of business income from Oman and Qatar projects, it was submitted that this issue has come up for consideration in assessee's own case for the assessment year 1999-2000 to 2002-03 wherein this issue has been decided in favour....
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.... of the CBDT referred to by the appellant is in an identical situation. Here also despite the use of the phrase "may" taxability in India has been clarified to be not the intention. The appellant has raised a very strong issue about the residuary clause. If the phrase "may" gives an option then the residuary clause Article 15(6) of DTAA with Oman and Article 13(6) of DTAA with Qatar becomes devoid of any content. This also leads to the conclusion that the intention of using the phrase "may" was never to give an option. Tax treaties are considered to be mini legislations containing within themselves all the relevant aspects or features which are at variance with the general taxation laws of the respective countries. Such variations are in some cases in addition to the existing local tax laws and in other cases in lieu thereof. Hence it should be give full impact and needs to be read in toto for arriving at a conclusion. The argument of redundancy of the residuary clause for taxing capital gains itself has to be given due weightage in interpretation of the nature involved here. I can not subscribe to the view that any portion of a taxing statute can be accepted as redundant while mak....
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....rmed now in this year for the various reasons, firstly, the main issue involved is the interpretation of the phrase "may be taxed" as appearing in Article-7(1) and Article-15 of Oman DTAA and Article-7(1) and Article-13 of Qatar DTAA and the Hon'ble Supreme Court P.V.A.L. Kulandagan Chettiar (supra) has refrained from interpreting the phrase "may be taxed". The said decision was based on its own facts and the Court was besized with the issue of close economic relationship between the tax payer and Malaysia and whether the tax payer was deemed resident of Malaysia or not. The Hon'ble Supreme Court has specifically refrained itself from giving any interpretation for the phrase "may be taxed" and secondly, in any case, all the judgments which have been referred to by the learned Commissioner (Appeals), were rendered on the issues involved prior to the assessment year 2004-05 as, w.e.f. 1st April 2004, sub-section (3) of section 90 has been introduced which empowers the Government to issue notifications for clarifying various terms used in the DTAA as referred to in sub-section (1) of section 90. In pursuance thereof, the CBDT has issued, Notification no. 91 of 2008 dated 28th ....
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.... has strongly reflected its intention that the phrase "may be taxed" has to be understood in the manner that the Government of India has a right to tax its resident and whatever taxes has been paid by the resident in other contracting State the credit of such taxes would be given. The earlier interpretation given by the Courts should not be taken into cognizance in view of this clarification by the Government. Under the treaty, which are entered into by the diplomats, intention of the parties has to be seen and in the wake of these notifications and amendments, the intention of the Government of India is absolutely clear. 20. Ld. D.R. further elaborating this point, submitted that even otherwise also, there are various other decisions which have been rendered independent of notification wherein it has been held that the phrase "may be taxed" in various Articles of the treaty is to be reckoned as right to tax by the resident State also. Wherever the phrase "may be taxed" has been used, it envisages that a right to tax the income has been given to other contracting State i.e., the foreign country and also reserving the right to tax in the resident country. This has been held so by t....
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....no point in going for detail interpretation and discussion about the issue of the phrase "may be taxed" as the Tribunal has held that once the assessee has paid the tax on the profits attributable to its P.E. in Oman and Qatar, the same income cannot be taxed in India. Similarly, on the issue of capital gain also, same reasoning has to be applied. In any case, he submitted that the interpretation of the expression "may be taxed" has come up for consideration not only before the various High Courts but also before the Hon'ble Supreme Court. This issue, for the first time, has come up for consideration before the Karnataka High Court in R.M. Muthaiah (supra) which was in relation to Indo-Malaysian DTAA. Here also, the High Court had an occasion to deal with the phrase "may be taxed" as given in Article-6(1) which read as "income from immovable property may be taxed in the contracting State in which such property is situated". The High Court held that the result of this clause is that where the income from immovable property in Malaysia has been expressed as may be taxed by the Government of Malaysia, then it operates as a bar on the power of the Indian Government to tax such inco....
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....ibition or embargo upon the authorities exercising the powers under Indian Income Tax Act from assessing the income concerned does not have any merit as once the assessee has paid taxes in relation to the income earned in other contracting States under their law, the same cannot be taxed in India. Secondly, the reliance placed on OECD commentary and Articles of model convention of 1997 on behalf of the Revenue is inappropriate and unjustified and; Thirdly, the income from immovable property can be taxed only by the contracting State in which such property is situated and there is no scope of taxing the same in other contracting state. 24. Mr. Dastur, pointed out that the decision of R.M. Muthaiah (supra) has been approved by the Hon'ble Supreme Court in Union of India v/s Azadi Bachao Andolan & Anr., [2003] 263 ITR 706 (SC). He drew our specific attention to Pages-723 and 724 (of the ITR publication), wherein the Hon'ble Supreme Court has approved the reasoning of the said decision. In this case, the Hon'ble Supreme Court was dealing with the scope of total income specified in sections 4 and 5 vis-a-vis the scope of section 90 in relation to Indo-Mauritius DTAA. He ref....
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....t. He also admitted that even though the Hon'ble Supreme Court has refrained itself for giving any kind of interpretation of the phrase "may be taxed" to mean any kind of allocation of power to tax by which contracting State, however, the Hon'ble Supreme Court has affirmed the entire judgment of the Madras High Court and has also referred to R.M. Muthaiah (supra) case. This, inter-alia, mean that the ratio and the decision of S.R.M. Firm & Ors. (supra), wherein the High Court has categorically expressed its view on the issue of exclusion of tax where the enabling words "may be taxed" has been used, stands affirmed. Once the tax has been paid in foreign country on an income, then the same cannot be taxed in India. Apart from these decisions, the Madhya Pradesh High Court in DCIT v/s Turquoise Investments and Finance Ltd., [2008] 299 ITR 143 (M.P), has followed the decision of S.R.M. Firm & Ors. (supra) and P.V.A.L. Kulandagan Chettiar (supra). In this case, the High Court while dealing with the issue of dividend income as given in Article-9 of Indo-Malaysian treaty has given a finding that the dividend income would be taxed only in the contracting State where such income has....
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.... the interpretation of the words "may be taxed" as given by the AAR is wholly contradictory to the law laid down by the High Court and as approved by the Hon'ble Supreme Court. The Tribunal, Mumbai Bench, in Ms. Pooja Bhatt v/s DCIT, [2008] 26 SOT 574 (Mum.) has given a very detail reasoning as to why the AAR ruling in S. Mohan (supra) cannot be followed in this case. The Tribunal has again after considering the various phrases used in different Articles of the treaty, has held that insofar as the expression "may be taxed" in other contracting State has been used, then it means that the only the contracting State of the source has the authority to tax such an income and resident State is precluded from taxing such an income. In this present case also, the judgments of Hon'ble Supreme Court in P.V.A.L. Kulandagan Chettiar (supra), Turquoise Investments and Finance Ltd. (supra) and High Court decision in S.R.M. Firm & Ors. (supra) and R.M. Muthaiah (supra) was referred and relied upon to arrive at this conclusion. He drew our specific attention to Paras-6 to 10 of the said order. Regarding the decision of the Tribunal, Chennai Bench, in Data Software Research Co. Pvt. Ltd. (s....
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....ows Muthaiah which is approved by Supreme Court b) Affirmed by Supreme Court in Chettair Union Of India & Anr. v/s Azadi Bachao Andolan & Anr 07.10.2003 Supreme Court Muthaiah approved Section 90(3) 01.04.2004 Repealed on 30.9.09 CIT v/s Kulandagan Chettair 26.05.2004 Supreme Court Affirms the conclusion of SRM Firm. Does not doubt High Court's reasoning. DCIT v/s Turquoise Investments Finance Ltd. 28.03.2006 M.P. High Court Holds that the Supreme Court in Chettair squarely upholds the decision of the Madras High Court in SRM Firm Assessee's case for A.Y. 99-00 to 00-01 31.01.2007 ITAT DCIT v/s Patni Computer Systems - Revenue supported Azadi view 29.06.2007 ITAT Holds that Azadi approves Muthaiah and SRM Firm In re : S. Mohan 24.08.2007 AAR In Pooja Bhatt's case Tribunal holds that the AAR decision is given without considering the scheme of taxation under the treaty. ITO v/s Data Software Research Co. Pvt. Ltd. 27.11.2007 ITAT In view of binding Supreme Court decision, this decision will not be applicable. Assessee's case for A.Y. 2001-02 31.12.2007 ITAT Allowed in favour of the assessee on same facts and issue. DCIT v/s Turquoi....
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....Madhya Pradesh High Court has used the said phrase "may be taxed" as words. Various dictionary meanings were provided before us for the meaning of the usage of the word "term". Thus, the notification no.91 issued by the CBDT, has used the phrase "may be taxed" as "term" which is not correct as it does not come within the ambit of the word "term". Section 90(3) makes it abundantly clear that the Government can issue notification only with regard to "any term" which has not been defined under the Income Tax Act, 1961, or in the agreement and not to any simple phrase or word. His second limb of argument on the notification no.91 issued by the CBDT on 28th August 2008 is that, it is beyond the scope of section 90(3) wherein the Government is empowered to issue notification to clarify the terms used in the agreement which is not defined either in the Act or in the agreement. He submitted that in view of the expressed law laid down by the High Courts and the Supreme Court as cited above, that wherever an Article in DTAA provides that income of a resident of India "may be taxed" in other State, it means that other State alone has a right to tax the income and India is barred from taxing i....
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....e set at naught by the notification. In the present case, the Jurisdictional High Court in assessee's own case has given a ruling in favour of the assessee by upholding the decision of the Tribunal, that the income which has been taxed in Oman cannot be taxed in India. Therefore, such a notification cannot overrule the binding precedence of the jurisdictional High Court in case of the assessee. 31. The learned Sr. Counsel, Mr. Dastur, further raised an important contention that sub-section (3) of section 90, has been omitted by Finance (No.2) Act, 2009 with effect from 1st October 2009 and has been substituted by a new sub-section (3). The notification by the Government of India was issued on 28th August 2008, i.e., under the old sub-section (3). Now, on account of the omission of the old sub-section (3), under which the Notification was issued, the said Notification no longer remains in existence. Since the old sub-section (3) is no longer in existence, the Notification issued there under also cannot survive since the very provision under which it was issued no longer remains in the statute. The mere fact that the old sub- section (3) and the new sub-section (3) are similarly....
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....t it will not alter the position in case of the assessee as Explanation 3 to section 90 has been inserted in the statute with effect from 1st October 2009 and applies where a meaning is assigned to a term by a notification issued under sub-section (3) of section 90. As the Explanation has been added to the substituted or new sub-section (3), therefore, it will apply to a notification, if any, issued under the new sub-section (3). The present notification in question has not been issued under the new sub-section (3) and, therefore, the Explanation (3) has no application here in this case. Further, Explanation (3) requires that the Notification must be in force, whereas the present Notification is no longer in force. This is further supported by the fact that Explanation (3) is given retrospective effect from 1st October 2009 only (being the date when the new sub-section (3) was inserted) and not from 1st April 2004, (when the old sub-section (3) was inserted). This, inter-alia, means that Explanation (3) cannot be given retrospective effect i.e., prior to 1st October 2009. If at all, the Explanation (3) will apply only to a notification issued after 1st October 2009 and not prior to....
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....aka High Court in R.M. Muthaiah (supra)'s case was whether the agreement entered into between the Government of India and Government of Malaysia takes away power of the Indian Government to levy tax in respect of the income received from various sources referred to in the said agreement. Therefore, the High Court was not adjudicating the issue of the phrase "may be taxed" as being used world over. Further, neither any of the commentaries nor any international view was considered by the High Court with regard to the interpretation nor the meaning of the phrase "may be taxed". The High Court has missed a very vital point that intention of the contracting parties has to be considered while assigning any meaning to any phrase used in the treaty. This aspect has not been dealt upon by the High Court in any manner. Moreover, the agreement with Malaysia was revised in the year 2004 and protocol added therein clearly provides that right to tax under Article 6 which was the subject matter of the appeal before the High Court has been given to the Country of the resident. This shows that the intention of the parties were not to give exclusive right to the country of source only. The High ....
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....tate of source, however, the legal consequences in the State of residence remains open. The taxation is left to the state of source in some cases subject to limitation in the amount. He also referred to the meaning of the phrase "shall be taxed" as expressed by the learned author. Thereafter, he also referred to the OECD commentary which has been referred to and relied upon by the Tribunal, Delhi Bench, in Telecommunication Consultant India Ltd. (supra). 38. Replying on the issue whether the Hon'ble Supreme Court in Azadi Bachao Andolan (supra)'s case has laid down a law on the phrase "may be taxed", he submitted that it is not so, because the Hon'ble Supreme Court was mainly dealing with the Article-13 of Mauritius DTAA wherein the words used were "shall be taxed" and the issue was more of routing of money through tax haven and the primacy of the section 90 vis-a-vis sections 4 and 5 of the Act. He pointed out certain observations of the Hon'ble Supreme Court as given in Page-722 (of the Income Tax report) that the reasoning on which the decision of R.M. Muthaiah (supra) has been affirmed by the Hon'ble Supreme Court is with regard to the primacy of section 90....
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....he Supreme Court so as to have any binding effect as a judicial precedence. He referred to the memorandum of the Finance Act, 2003, by which section 90(3) was introduced and the purpose for which the same was brought in statute w.e.f. 1st April 2004 i.e., the assessment year 2004-05. He submitted that by this amendment, the legislature has empowered the Central Government to issue notification for assigning any meaning to a term used in the agreement which has been neither defined in the Act nor in the agreement. The purpose of the notification was that a proper meaning should be given which, according to the Government of India, is the true intention for understanding the various terms used in the treaties. The memorandum explaining the said amendment provides that in order to address the problem arising due to contracting interpretation of the term it has proposed to insert new provision empowering the Central Government to define such term by way of notification in the official gazette. 40. On the definition and the meaning of the word "term", which has been argued by the learned Sr. Counsel that it connotes for any kind of a noun having a particular meaning, he submitted that ....
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....ss that these words have different meaning and for different purposes. While distinguishing the decision of Rayala Corporation Pvt. Ltd. & Ors. (supra), he submitted that the issue involved before the Supreme Court was whether the notification issued under the rule that has ceased to exist and the offence committed during that period in which the rule was enforced can be taken into cognizance for enforcing the punishable offence. There, it was a case of omission and not of substitution. Similarly, in case of W.N.S. Global Services (supra), the Tribunal was dealing with the omission of section and its operation in the succeeding years. Thus, none of these judgments are applicable on the issue of substitution of the provisions of the Act because in the present case, this section has been substituted later without any substantial change as the language of the section remains exactly the same. This does not mean that any action taken under section 90 prior to its substitution cannot be enforced at all in the year in which they were applicable. He further reiterated that Explanation (3) to section 90, which was brought in statute with retrospective effect from 1st October 2009 only rein....
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....s to show that the intention of the legislature and the Government of India that meaning assigned by the Central Government in the notification has to be reckoned from the date of the agreement. 43. Thus, according to Ld. D.R. in the entire scenario, the issue of the phrase "may be taxed" has to be interpreted in a manner that the country of the source can levy taxes but the country of residence does not loose its right to tax the resident. Both the countries have a simultaneous jurisdiction except for the fact that either of the contracting States will give credit of such a tax paid in other contracting States. 44. Learned Sr. Counsel, Mr. Dastur, sought permission of the Bench to give rejoinder of some of the submissions made by the learned Departmental Representative as these were not part of his original pleadings. Such permission was granted by the Bench. 45. The learned Sr. Counsel for the assessee, first of all, submitted that there is no distinction made for the phrase "may be taxed" in the old treaty and in the model convention treaty. The words "shall be taxed only", "may be taxed" and "may also be taxed" are continued to be used in the old treaty as well as in model c....
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.... Court by which the decision of the High Court have been upheld wherein precisely the issue of the phrase "may be taxed" has been dealt with. Regarding the view of Prof. Klaus Vogel, he submitted that such a view cannot override the decision of the High Court and the Hon'ble Supreme Court which are prevailing in India. He also filed relevant extract of another eminent author Philip Baker wherein he has taken a view that the Karnataka High Court decision in R.M. Muthaiah's case supra and the decision of Madras High Court in S.R.M. Firm & Ors. (supra) are wholly erroneous view and does not give correct interpretation of the phrase used in the treaty specifically "may be taxed". Such a view cannot be upheld by the Indian Courts because it is binding upon the Indian Courts and such a view has to be out rightly rejected. In India, the decision of the Hon'ble Supreme Court is the law of the land by virtue of Article-141 of the Constitution. Regarding OECD commentary, he submitted that the same cannot be relied upon as, firstly, the High Court in S.R.M. Firm & Ors. (supra), has specifically declined to follow OECD commentary and; secondly, India is not a party to OECD. He furt....
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....nkataraman & Co. (supra), he submitted that they are not applicable as the assessee has not argued for striking off the notification. He relied upon various other case laws in support that the Tribunal has power to interpret the notification whether it was consistent with the provisions of the Act or not. The main such decisions relied upon by him are the decision of Andhra Pradesh High Court in CIT v/s Hyderabad Asbestos Cement Products Ltd. [1998] 172 ITR 762 (A.P) and the decision of Madras High Court in CIT v/s Elgi Equipments Ltd., [2000] 242 ITR 460 (Mad.). He submitted that section 90(3) provides that notification should not be inconsistent or contrary to the Act or agreement. The notification has been issued by the CBDT is directly in contravention of the Act as it is contrary to the Hon'ble Supreme Court decision which is the law of the land. He also relied upon the decision of the Hon'ble Supreme Court in CIT v/s Taj Mahal Hotel, [1971] 82 ITR 44 (SC), that even the income tax rules cannot take away what is conferred by the Act. Therefore, the Tribunal is absolutely competent to hold that in the matter of notification if it is inconsistent with the decision of the....
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.... has incurred losses of Rs. (-) 90,38,012. After setting- off the losses of Qatar, the net income worked out to Rs. 2,30,42,431, which was not included in the total income of the company in the return of income filed in India. The reason for not including the same was that the assessee has also been filing the return of income in the respective countries i.e., Oman and Qatar and is being assessed on the profit as per the domestic law. In this regard, the assessee has taken shelter of Article-7(1) of the DTAA. The Assessing Officer held that the income from Oman and Qatar is also assessable in India and has to be added to the total income in India. Accordingly, he has also given credit of taxes paid at Rs. 50,40,215, in Oman. The assessee's contentions mainly have been that by virtue of Article-7(1) of the Indo-Oman DTAA, once the taxes have been paid in the source country (i.e., Oman), the same profit cannot be taxed in the country of resident i.e., in India. The main reliance in this regard was placed on the phrase used in the Article-7(1) "may be taxed in other contracting State", which, according to the assessee, means that the country of residence i.e., India looses its rig....
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....faulted." 52. On the issue of the capital gain, the learned Commissioner (Appeals) again relying upon the phraseology used in Articles-13 and 15 of the respective DTAAs "may be taxed" held that once the capital gain is taxable in these countries, then by virtue of DTAA, the same cannot be taxed in India. Again reliance was also placed on the aforesaid three decisions and accordingly this issue was decided in favour of the assessee. PHRASES USED IN THE ARTICLES 53. The taxability of a business profit of a P.E. has been dealt with in Article-7(1) of Indo-Oman DTAA, the relevant portion of which is reproduced below:- "ARTICLE 7 : Business profits-1 The profits of an enterprise of a Contracting State shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other Contracting State but only so much of them as is attributable directly or indirectly to that permanent establishment." From the above, it can be inferred that firstly, the profit of an enterprise of a contracting State i....
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....ness property of a permanent establishment which an enterprise of a Contracting State has in the other Contracting State or of movable property pertaining to a fix base available to resident of a Contracting State in the other Contracting State for the purpose of performing independent personal services, including such gains from the alienation of such a permanent establishment (alone or with the whole enterprise) or of such fixed base, may also be taxed in that other State." In this Article, the phraseology used is slightly different and instead of the phrase "may be taxed", the phrase "may also be taxed in other contracting State" has been used. Thus, these phraseologies "may be taxed", "may also be taxed" and "shall only be taxed" would be the subject matter of our discussion in the succeeding paragraphs as this is the core issue before us. 54. The words and the phrase "may be taxed" are not appearing in the statute but are appearing in the DTAAs. Nowhere in the Income Tax Act, 1961, or in the respective DTAAs, this phrase has been defined or explained. From the arguments which have been noted by us at length in the forgoing paragraphs, it emerges that there are two school of ....
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....e provisions confer on the State of source or situs a full or limited right to tax, the State of residence must allow relief- as to avoid double taxation; this is the purpose of Articles 23A and 23 B. The Convention leaves it to be the Contracting State to choose between two methods of relief, i.e. the exemption method and the credit method." 56. The summary of the assignment principle of taxation under the OECD commentary on model convention has been succinctly put by the Prof. Klaus Vogel in his book "Double Taxation Convention" 3rd Edition, as filed by the learned Departmental Representative in the following manner:- "Assignment rules: The "assignment principle" applied in the OECD MC comprises: (a) Certain income "shall be taxable only" in a particular Contracting State. This term is mandatory and precludes the other State from exercising its right to tax. Therefore, the income or capital must be exempted from tax in the other Contracting State. (Examples: Articles 8(1), 8(2), 12(1), 13(3), 13(5), 15(2), 18, 19(1), 19(2), 21(1), 22(3), 22(4)). (b) Certain income "shall be taxable only in the Contracting State........unless". This term provides exclusive primary taxing right....
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....w has been expressed by Philip Baker in his book "Double Taxation Convention And International Law.'' VIEW MOSTLY PREVALENT IN INDIA:- 57. The other school of thought predominantly followed in India flows from the various judicial pronouncements by some of the High Courts. This view has been strongly canvassed by the learned Sr. Counsel before us for the proposition that these judgments have found judicial acceptance by the Hon'ble Supreme Court also and, hence, it is a law of the land insofar as interpretation of the phrase "may be taxed" is concerned. The important judgments which have been relied upon by the learned Sr. Counsel are as under:- i) CIT v/s R.M. Muthaiah, [1993] 202 ITR 508 (Kar.) In this case, the issue was that the assessee had earned income in Malaysia and had claimed it as exempt from tax in India in view of DTAA between India and Malaysia. The ITO did not accept the assessee's contention and included the income earned by the assessee in Malaysia in the total income of the assessee and stated that credit would be given after the assessee had paid tax on this income in Malaysia. The learned Commissioner (Appeals) held that the income earned in....
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.... other country. Similarly, clause (b) also refers to the avoidance of double taxation. We are not concerned with the other clauses of section 90 in the instant case. In other words, the parties to an agreement to avoid double taxation is to grant relief to the assessee in case the law of two countries operates on the same income and the assessee may have to pay tax in both countries. The Revenue's contention in the instant case is entirely based on sections 4 and 5. But these provisions shall have to be read subject to the provisions of the agreement in question. The agreement in question, by necessary implication, takes away the power of the Indian Government to levy tax on the income in respect of certain categories as per articles 6,7,8,9,10,11, etc. of the agreement. In case the income from a source is not covered by any of the provisions of the agreement, then the provisions of sections 4 and 5 of the Income -tax Act would operate on the said income and the tax certainly could be levied by the Indian Government. In such an event, to claim the benefit against double taxation, clause 2 of article 22 of the agreement shall have to be satisfied." The High Court also referred ....
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....ehalf of the Revenue on the commentaries on the articles of the model convention of 1977 presented by the Organization for Economic Co-operation and Development (OECD) is inappropriate and unjustified. Further, it is not really the format adopted that really matters when basically they differ in their content and approach. A perusal and comparison of the content and purport of the articles in the model convention and those actually found in the agreement with Malaysia under consideration would go to show the wide range of difference which would per se render the commentaries on the model convention wholly inapplicable and expose the unreasonable-ness and futility in seeking to apply the same as a guide for interpretation and construction of the articles in the agreement under consideration. We are of the view that the commentaries relied upon can be of no use and utility and cannot also afford a safe or reliable guide or aid for such construction." Thus, in this case, not only the High Court has specifically dealt with the phrase "may be taxed", but has also discarded the reliance placed in the commentaries given by the OECD on model convention. Thus, the interpretation of the phr....
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....Legislature to make a departure from the general Principal of chargeability to tax under section 4 and the general principal of ascertainment of total income under section 5 of the Act, then there was no purpose in making those sections "subject to the provisions" of the Act. The very object of grafting the said two sections with the said clause is to enable the Central Government to issue a notification under section 90 towards implementation of the terms of the DTAs which would automatically override the provisions of the Income-tax and ascertainment of total income, to the extent of inconsistency with the terms of the DTAC." Thus, the issue of interpretation of the phrase "may be taxed" was not directly dealt with by the Hon'ble Supreme Court but in a way it can be held that the entire reasoning of the decision of R.M. Muthaiah (supra) has been affirmed. On a perusal of the entire judgment, of Azadi Bachao Andolan, one very important feature is noticeable, which is a slight deviation from one of the view expressed by the Hon'ble High Court in S.R.M. Firm & Ors (supra) that the OECD commentary cannot be relied upon in the context of India, is that the Hon'ble Suprem....
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....lved around whether a person who is resident in both the contracting States is deemed to be a resident of that contracting State with which his personal and economic relations are closer. The brief facts emanating from the said decision are that the assessee firm owned an immovable property at Malaysia and during the year under assessment, the assessee earned income from the rubber estate. It also sold the property in Malaysia on which short term capital gain had arisen. The ITO assessed both the income as assessable in India and brought the same to tax in India. In the first appeal, the learned Commissioner (Appeals) held that under Article-7(1) unless the assessee has a P.E. of business in India, such business income in Malaysia cannot be included in the total income of the assessee and also no part of the capital gain arisen in Malaysia can be taxed in India. The order of the first appellate authority was also confirmed by the Tribunal One very important fact is that the decision of S.R.M. Firm & Ors. (supra) was also a subject matter of the appeal before the Hon'ble Supreme Court. The Hon'ble Supreme Court affirming the decision of High Court observed and held as under:....
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....ding the Treaty in question as a whole when it is intended that even though it is possible for a resident in India to be taxed in terms of ss. 4 and 5, if he is deemed to be a resident of a Contracting State where his personal and economic relations are closer, then his residence in India will become irrelevant. The Treaty will have to be interpreted as such and prevails over ss. 4 and 5 of the Act. Therefore, we are of the view that the High Court is justified in reaching its conclusion, though for different reasons from those stated by the High Court." If we analyse this judgment then in this case the Hon'ble Supreme Court has rendered its decision after considering the fact that there was a close economic relation between the assessee and Malaysia and the P.E. of the assessee was in Malaysia and there was no P.E. in India. Therefore, the assessee was deemed to be resident of Malayisa. Once the tax payer is deemed to be a resident of Malaysia, Indian residency was immaterial. From the analysis of the above decision, two things are absolutely clear firstly, the Hon'ble Supreme Court has refrained itself from giving any interpretation on the phrase "may be taxed", secondly....
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....e Court which is binding on all the subordinate Courts. Not only this, he submitted that in assessee's case, the Hon'ble Jurisdictional High Court has affirmed the said proposition and the same is binding. 57. If we analyse all the judgments as have been referred to above, it is evident that:- * Firstly, in R.M. Muthaiah (supra), the expression "may be taxed" has not been expressly dealt with, however, in the context of Article-6(1), wherein similar phraseology has been used, the High Court has given its decision that once it has been taxed in the foreign country, the same cannot be taxed in India. Thus, this decision in a way interprets the phrase "may be treated" to mean that source country has a right to tax to the exclusion of resident state; * Secondly, in S.R.M. Firm & Ors. (supra), the High Court has in a very clear terms, has interpreted the expression "may be taxed" to mean that once the income is taxable in other contracting State that is country of source then country of resident i.e., India is precluded from including the same income in India; * Thirdly, the Hon'ble Supreme Court in Azadi Bachao Andolan (supra), has approved the reasoning of R.M. Muthaia....
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....gment in P.V.A.L. Kulandagan Chettiar (supra) on the ground that the phrase "may be taxed" has not been expressly dealt with. However, this decision does not distinguish the other three High Court decisions and the judgment of Hon'ble Supreme Court in Turquoise Investments and Finance Ltd. (supra). (ii) Authority of Advance Ruling in case of S. Mohan, Re: [2007] 294 ITR 117 (AAR) In this case again, the decision on P.V.A.L. Kulandagan Chettiar (supra) was distinguished. However, this case has been specifically not followed by the Tribunal in case of Ms. Pooja Bhatt (supra). iii) ITO v/s M/s. Data Software Research Co. Pvt. Ltd., ITA no.2072/Mum./2006, order dated 27th November 2007 In this case, the Tribunal, Chennai Bench, has not made any reference to any High Court decision which has been referred to above and has also not analysed as to why these judgments are not applicable. 59. One very important fact in the present case is that prior to the assessment year 2003-04, in assessee's own case, the Tribunal and the High Court have upheld the contention of the assessee on the issue of Article-7(1) that once the profit has been taxed in Oman and Qatar, the same cannot b....
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....ion to the assessment year 2004-2005 and subsequent years. 61. By virtue of sub-section (3) of section 90, the legislature empowered the Central Government to define such term used in the DTAA which has not been defined either in the Act or in the agreement, by issuing notification in the official gazette. Such notification defining the term should not be inconsistent with the provisions of this Act or the agreement. In pursuance of this sub-section, the Central Government has issued a notification number 91/2008, dated 28th August 2008, wherein it has been expressly provided that where the tax treaty provides that any income of a resident of India "may be taxed" in other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of Income Tax Act, 1961, and relief shall be granted in accordance with the method of elimination or avoidance of double taxation provided in such agreement. The exact text of the notification is reproduced hereunder:- "Scope of words "may be taxed DOUBLE TAXATION RELIEF SECTION 90 - In exercise of the powers conferred by sub-section (3) of section 90 of the Income-tax Act, 1961 (43 of 1961),....
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.... words used in the statute is to see the true intention of the legislature i.e., sentential legis and the purpose for which such statute was enacted. The true purport of enacting section 90(3) thus gets clear as to what was the intention of the legislature, which is also evident from the memorandum clause as reproduced earlier. On the other hand the paramount goal in an interpretation of a treaty between the two sovereign States is also to look into the language used and the intention of the parties on plain reading of the provisions consistent with the goal / aim for which the agreement has been entered into between such parties. The meaning given in the agreement should be consistent with the genuine shared expectation of the contracting parties. Ordinary meaning should be assigned to words and phrases used in the agreement because the international conventions are not drafted as statute under the law but by diplomats on the basis of understanding and the purpose for which the treaty is negotiated. Thus, while interpreting the treaty the intention of the parties takes precedence over the expression used. Liberal approach should be taken while understanding the words used in the t....
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....at it meant by the said phrase "may be taxed". There could not be too much reading on such clarification issued by the Government of India. Accordingly, the interpretation and the clarification given by the Central Government has to be given precedence over the interpretation given by the Courts, at least once the Government, in exercise of statutory power has issued a notification clarifying its intent. WHETHER THE PHRASE "MAY BE TAXED" IS A TERM? 66. One of the objections of the learned Sr. Counsel was that the section gives mandate to the Central Government to issue notification for any "term" and "may be taxed" does not fall within the realm of the "term". He cited examples from the treaty itself wherein certain terms have been defined. For example, Article-3 of Oman treaty wherein various terms like "India", "contracting State", "Sultanate of Oman", "company", "competent authority", "enterprise of a contracting State", "fiscal year", etc. These words connote some kind of a proper or common noun to point out something which is defined. The words "may be taxed" cannot be referred as "term". He also stated instances from the decision of S.R.M. Firm and Ors. (supra) wherein the ....
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....ent year 2004-05, there was no enabling provision by which the Central Government could have clarified any term which has been used in the treaty which has not been defined either in the Act or in the agreement. Various Courts have interpreted certain expressions used in the treaty specifically the phrase "may be taxed" in a different manner. Various international commentaries and views have also spoken of various terms in different manner. To clarify the correct meaning and interpretation, the legislature has empowered the Government of India to assign the meaning of the term used in agreement in which Government itself is a party. In pursuance of such an enabling provisions in the statute, the Central Government has issued a notification which clarifies the intention of the Central Government that, as to, what is meant by a particular term or phrase used in the agreement and what would be the actual meaning for a particular reason and for a particular context. Such a notification has to be reckoned as mere clarificatory in nature and, in our opinion, will relate back from the effective period of the statute under which such notification has been issued. The notification does not ....
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.... entire section 90 has been substituted and in place new section 90 has been introduced. However, on a perusal of the language used in the entire new section, it is seen that there is no change in the language of the sections, specifically sub-section (3), barring one phrase in sub-section (1) which is "or specified territory outside India". The memorandum explaining the said amendment for which the said section was substituted was that:- "36. Empowering Central Government to enter into agreement with specified non-sovereign territories: 36.1 Section 90 of the Income-tax Act empowers the Central Government to enter into Double Taxation Avoidance Agreement (DTAA) with the Government of any other country outside India for granting double-taxation relief and facilitate exchange of information concerning avoidance or evasion of tax. 36.2 The scope of section 90 was restricted to 'any other country outside India". Need was felt to expand the scope of this cooperation b y entering into a DTAA or TIEA (Tax Information Exchange Agreement) with non-sovereign jurisdictions as well. 36.3 In order to enable the Government to enter into agreements with non- sovereign territories as well....
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....ution can be instituted. Once the rule was omitted all together, no new proceedings by way of prosecution could be initiated. It might be in respect of an offence committed earlier during the period that rule was in force. The Hon'ble Supreme Court agreeing with the said submission, observed that the language contained in the provisions of Defence of India Amendment Rules, 1965, can only afford protection to action already taken while the rule was in force but cannot justify the initiation of a new proceedings which will not be a thing done or omitted to be done under the rule but a new act of initiating a proceedings after the rule had ceased to exist. Therefore, complain made for the offence under rule 132A after 1st April 1965, when the rule was omitted has to be invalid. Thus, in this case, the complain was made for the offence under rule 132A after the said rule was omitted, the Hon'ble Supreme Court held that the prosecution could not be done under the said rule which stood omitted. In the present case, the situation is that section 90 sub-section (3) was brought in statute w.e.f. 1st April 2004, which empowered the Central Government to issue notifications for clarif....
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....y modify the position. Thus the operation of repeal or deletion as to the future and the past largely depends on the savings applicable. In a case where a particular provision in a statute is omitted and in its place another provision dealing with the same contingency is introduced without a saving clause in favour of pending proceedings then it can be reasonably inferred that the intention of the Legislature is that the pending proceeding shall not continue but a fresh proceeding for the same purpose may be initiated under the new provision. 39. In the present case, as noted earlier. Section 6 of the General Clauses Act has no application. There is no saving provision in favour of pending proceedings. Therefore, action for realization of the amount refunded can only be taken under the new provision in accordance with the terms thereof." Thus, the Hon'ble Supreme Court held that the rule made under an Act is not a central Act or regulation and if a rule is repealed by another rule, section 6 of General Clauses Act will not apply. Besides this, the Hon'ble Supreme Court has made further observation that effect of repealing a statute is to obliterate it from the statue book....
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....vations of the Hon'ble Supreme Court were as under:- "12. As noticed earlier, the omission of Section 2(27) and re- enactment of Section 80-JJ was done simultaneously. It is very well- recognized rule of interpretation of status that where a provision of an Act is omitted by an Act and the said Act simultaneously re-enacts a new provision which substantially covers the filed occupied by the repealed provision with certain modification, in that event such re- enactment is regarded having force continuously and the modification or changes are treated as amendment coming into force with effect from the date of enforcement of re-enacted provision. Viewed in this background, the effect of the re-enacted provision of Section 80-JJ was that profit from the business of livestock and poultry which enjoyed total exemption under Section 10(27) of the Act from Assessment Years 1964-65 to 1975-76 became partially exempt by way of deduction on fulfillment of certain conditions." This judgment clearly clinches the issue involved in support of the D.R.'s Contention. 75. The learned Departmental Representative further relying upon section 24 of the General Clauses Act, has submitted that....
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....odification or changes are treated as amendment coming into force with effect from the date of enforcement of the enacted provisions. We are, therefore, of the considered opinion that substitution of section 90 w.e.f. 1st October 2009, will not obliterate the earlier section 90 and specifically sub- section (3) of section 90 which has come into effect from 1st April 2004, and notification issued therein shall continue to hold at least up to 1st October 2009. 77. The learned Sr. Counsel has also relied upon one of the Tribunal decisions in WNS Global Services P. Ltd., ITA no.2566/Mum./2009, order dated 10th August 2012, wherein the Tribunal, while speaking through one of us (Judicial Member) in support of the contention that once a provision has been omitted from the statute, then all the action must stop where such omitted section comes into play. Here also, the Tribunal has strongly relied upon the decisions of the Hon'ble Supreme Court in Rayala Corporation Pvt. Ltd. & Ors. (supra) and Kolhapur Cane Sugar Works Ltd. (supra). The ratio of the said decisions will not be applicable here as section 10A(9) was omitted w.e.f. 1st April 2004 with no similar enactment of the provisi....
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....dum explaining the objects of the said Explanation along with the provisions of section 90, was given as under:- "Meaning assigned to a term used in Double Taxation Avoidance Agreement (DTAA). Section 90 of the Act, empowers the Central Government to enter into an agreement with foreign countries or specified territories for the purpose of granting reliefs particularly in respect of double taxation. Under this power, the Central Government has entered into various treaties commonly known as Double Taxation Avoidance Agreement (DTAA's). Section 90A of the Act similarly empowers the Central Government to adopt and implement an agreement between a specified association in India and any specified association in a specified territory outside India for granting relief from 'double taxation' etc. on the lines of section 90 of the Act. Sub-section (3) of sections 90 and 90A of the Act empowered the Central Government to assign a meaning, through notification, to any term used in the Agreement, which was neither defined in the Act nor in the agreement. Since this assignment of meaning is in respect of a term used in a treaty entered into by the Government with a particular ....
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.... said Explanation along with the memorandum of the object has to be seen from the context of the actual legislative intent and the intention of the Central Government which is one of the contracting parties. Thus, we cannot make ourselves oblivious of such an intent which has been reiterated in the Explanation (3). This only reinforces our conclusion. Beyond this, we are not entering into the semantics of retrospective effect of the said Explanation. All the other arguments raised by the learned Sr. Counsel and the learned Departmental Representative regarding retrospective effect of Explanation (3), are not dealt with in view of our conclusion that earlier notification dated 28th August 2008, will apply from the assessment year 2004-05. EFFECT OF EARLIER ORDERS IN CASE OF THE ASSESSEE:- 82. Similarly, in view of our aforesaid conclusion that the interpretation of the phrase "may be taxed" has to be seen from the angle of clarification issued by the Central Government by way of notification in the exercise of power given under section 90(3) w.e.f. 1st April 2004 i.e., assessment year 2004-05, the earlier decisions given by the Tribunal in assessee's own case confirmed by the ....
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....h is taxable in source country and other which is taxable in resident country. There would not be any issue of giving credit of taxes. But this is not so, as the world wide scheme followed by most of the countries is residency based taxation, irrespective of where the income is earned. Therefore, the State of resident has an obligation under the double taxation conventions to provide relief from double taxation of income either by following "exemption method" or "credit method". In India, the provisions of Income Tax Act, 1961, follow the resident rule of tax which are quite comprehensive so as to include the global income of a resident Indian. This residency rule is provided in section 5 and the criteria of residency rule have been provided in section 6. Section 5 r/w sections 4 and 6 empower the Government of India to tax the income of the resident from whatever source and wherever earned. Thus, section 5 is the triggering point of taxing the income of the resident. In order to eliminate double taxation of the income in the source country, section 90 provides for such relief. Section 5 is subject to relief under section 90 and any provision of treaty that is entered into by the G....
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....on to right to tax. Under both the situations, the credit of taxes is given under the treaty. If the phrase "may be taxed" is to be interpreted in the manner that country of source has the exclusive right to tax to the exclusion of the country of resident then probably phrase used in such a situation would have been "shall be taxable only in the other contracting State" i.e., the country of source. This can be viewed from another angle also that wherever the phrase used is "shall be taxable only" then the country of resident has a right to tax and wherever the phrase "may be taxed" is used, only country of source can tax. Perhaps, if this would have been the interpretation, then there would remain no conflict between the tax jurisdictions and there was no utility of providing any credit of tax. The later interpretation completely undermines the resident rule of tax which is a fundamental aspect of international taxation which permeates in all the tax treaty negotiations. That is the reason why in the DTAAs "shall be taxable only" is never used while giving the tax right to the country of source and it is only used in the context of taxing right to the State of residence. The phrase....
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....parties in the treaty, clinches the entire controversy. 86. The fundamental principle of interpretation in international law has been codified in Articles-31 to 34 of the Vienna Convention on the Law on Treaties (VCLT). Article-31 provides that a treaty must be interpreted in good faith with the ordinary meaning to be given to the terms of the treaty in the context and in the light of its object and purpose. Article 31(4) provides that a special meaning be given to a term if it is established that the parties so intended. For the sake of ready reference, Articles 31 and 32 of the VCLT are reproduced below:- "Article-31 1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. 2. The context for the purpose of the treaty shall compromise, in addition to the text, including its preamble and annexes. (a) Any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty; (b) Any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the ot....
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....t provided that such a meaning should not be inconsistent with the provisions of the Act or agreement. In pursuance of such a statutory empowerment, Central Govt. has issued a notification on 28th August, 2008, clearly specifying that where the DTAA entered into by the Central Govt. with the Govt. of any other country provides that any income of a resident of India "may be taxed" in the other country, such income shall be included in his total income chargeable to tax in India in accordance with the provisions of the Income Tax Act, 1961 and relief shall be granted in accordance with the method for elimination or avoidance of double taxation provided in such agreement. This meaning assigned to the term "may be taxed" has changed its complexion; ii) The notification dated 28th August 2008, reflects a particular intent and objective of the Government of India, as understood during the course of negotiations leading to formalization of treaty. Therefore, such a notification has to be reckoned as clarificatory in nature and hence interpretation given by govt. of India through this notification will be effective from 1st April 2004, i.e., from the date when provision of section 90(3) w....
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.... cases before us. Finally, in view of our aforesaid findings, ground no.2 and 4, as raised by the Revenue, are treated as allowed and finding of learned Commissioner (Appeals) is, accordingly, reversed. 90. In ground no.4, the Revenue has challenged allowance of proportionate interest on the investment made in jetty in the ratio of surplus funds to the borrowed funds as on 31st March 1997. 91. Facts in brief:- The assessee, in its computation of income, has claimed deduction of interest of Rs. 8,45,98,332. On being required by the Assessing Officer to justify the claim of interest relating to purchase of jetty as revenue expenditure, the assessee had submitted that it had purchased the jetty for the purpose of his business which was capitalized in the books and depreciation was claimed and allowed by the Department in the earlier years. The purchase consideration was paid partly out of own funds and partly out of loan taken for the purchase of refinery. In the books of account, the interest of loan has been put as an expenditure incurred during the construction as the refinery was under construction. Since the jetty was an independent asset and its commercial use was started, the....
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....e applied here also. 94. Before us, the learned Sr. Counsel, Mr. Dastur, submitted that, first of all, this issue has come up for consideration before the Tribunal in the assessment year 2002-03, wherein the proportionate allowance of expenditure has been upheld. He drew our attention to para-18 and 21 of the said order and submitted that identical issue has been dealt with by the Tribunal. Replying on the arguments raised by the learned Departmental Representative, he submitted that the decision on Reliance Utilities and Power Ltd. (supra), cannot be followed as that was the case of investment. In the present case, the issue relates to expenditure and there cannot be a presumption that the assessee must have utilised the entire surplus funds / own funds for the purpose of expenditure which is otherwise allowable. If it is inter-mingling of funds, then discretion is of the assessee. Here, the assessee has chosen a middle path and this is the most equitable way. He also relied upon the decision of the Hon'ble Supreme Court in Sutlej Cotton Mills Ltd. v/s CIT, [1991] 187 ITR 182 (SC) and specific attention was drawn at Page-185. 95. After carefully considering the rival submiss....
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....equipment from Man Industries and for this purpose, required Essar Steels Ltd. to supply steel to Man Industries and adjust the payments for the advance made by the assessee to them. Subsequently, it was noticed that Essar Steels Ltd. had supplied steel to Man Industries far more than what was required by them for making available the equipment for the assessee. Essar Steels Ltd. adjusted the advance against the excess supply of steel to the Man Industries. Accordingly, the assessee demanded interest from Essar Steels Ltd. on the amount of advance they had adjusted against the excess steel supplied to Man Industries. This interest works out at Rs. 1,48,62,816. 98. Before the learned Commissioner (Appeals), after explaining the entire nature of transaction, it was argued that the entire transaction was directly related to setting up of refinery project due to which they have reduced the interest income from cost of the project. Reliance was placed on the judgment of the Hon'ble Supreme Court in CIT v/s Bokaro Steels Ltd. [1999] 236 ITR 0315 (SC). The learned Commissioner (Appeals), after appreciating the contentions raised by the assessee and the facts of the case, observed an....
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....micals Ltd. v/s CIT, [2001] 251 ITR 0329 (SC), wherein the interest income of pre- commencement period was held to be taxable. 100. On the other hand, the learned Sr. Counsel submitted that the assessee has not given any kind of a loan on which interest has been received in excess but advance was given to the Essar Steels Ltd. for supply of material on which the assessee has demanded interest. Thus, the interest income has been capitalised in the books of account and the same has been reduced from the cost. This was the integral part of the setting up of the refinery project and it is inextricably linked with the setting-up of the project. The decision in Bokaro Steels Ltd. (supra), was clearly applicable. He also distinguished the decision in Bongaigaon Refinery and Petrochemicals Ltd. (supra) and submitted that in that case interest pertained to investments. Therefore, the said decision is not applicable at all in the present case. 101. We have carefully considered the rival contentions, perused the relevant findings of the Assessing Officer as well as the learned Commissioner (Appeals) and the material placed on record. It is undisputed fact that the advances were made to Essa....
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....hich had deposited the sale proceeds in the escrow account, has earned interest. It was claimed that the escrow account was opened n order to get the funds from the bank for which there was a condition that it has to deposit the sale receipts from the energy division and, therefore, it has a direct nexus with the setting-up of the refinery project. Though, in the books of account, it was it was credited to the Profit & Loss account but in the computation of income the same was capitalized. The Assessing Officer has treated the interest income under the head "Income From Other Source". The learned Commissioner (Appeals) accepted the assessee's contention and held that the interest resulting in escrow account can be capitalized and be adjusted against the expenditure on setting-up of refinery project. The relevant findings / observations of the learned Commissioner (Appeals), for the sake of ready reference, are reproduced below:- "9.2 I have perused the fact of the case. It appears that the concept of Escrow account has not been fully understood by the A.O. The word Escrow means an amount of money or property granted to somebody, for a short period and only released after a spe....
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....de in the return of income, the treatment given in the books of account will not make a difference. Thus, the learned Commissioner (Appeals) has rightly allowed this ground in favour of the assessee. 106. After carefully considering the rival submissions and also the nature of transactions which is not in dispute, we find that the reasons and findings given by the learned Commissioner (Appeals) are legally correct. The basic condition for grant of loan was that the assessee has to make deposits in the escrow account and based on these deposits, the assessee was to receive funds for setting-up of its refinery project. It can be very well be held that the said deposits were directly linked with the purpose of the assessee's business. Once the interest accrued on such deposits, the assessee in view of the principle laid down in the Bokaro Steels Ltd. (supra), can capitalize it in the books of account and can also reduce it from the cost of the project. The findings recorded by the learned Commissioner (Appeals) that deposit in the escrow account was essentially a security to the bank in order to effect the financing the refinery project and is akin to margin money that banks ordi....
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....sed. 113. In the result, Revenue's appeal for the assessment year 2004-05 is treated as partly allowed. We now take up assessee's appeal in ITA no.2428/Mum./2007, for the assessment year 2004-05. 114. The only ground raised by the assessee relates to disallowance of bad debt of Rs. 19,60,441 and Rs. 1,03,962, on account of advance given to various parties and employees respectively. 115. The assessee has claimed bad debt on account of old balance of Rs. 1,03,962, recoverable from employees and advances of Rs. 19,60,441, given to various parties. The Assessing Officer held that the advances made are not in the nature of debt, therefore, the provisions of section 36(2) and 36(1)(vii) are not fulfilled. 116. Before the learned Commissioner (Appeals), it was admitted that if the claim of bad debt is not allowed, then looking to the facts of the case, the same is to be allowed as loss under section 37(1). These advances were given in the course of business which has become irrecoverable. The learned Commissioner (Appeals) held that the Assessing Officer has rightly invoked section 36(2) as provisions of section 36(2) are applicable and these are not in the nature of debt. H....
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....t automatically waived. That would amount to violation of the will of the legislature when the statute specifically grants allowance under any of the sections 30 to 36 subject to certain express or implied conditions, such conditions cannot be nullified by claiming a deduction u/s 37(1), which is only a residuary section. Reliance is placed upon the following decision: 1. Subodhchandra v. CIT 24 ITR 566 2. CIT v. Rajaram 237 ITR 628 3. Rayaloo v. CIT 26 ITR 265 4. Tatasons v. CIT 18 ITR 460 5. Birla v. CIT 44 ITR 847 10.5 It is accordingly held that the nature of expenditure incurred by the appellant is same as specified in section 36(1)(vii) and in view of specific embargo in section 37(1) on allowing expenditure of the nature specified in any of the section 30 to 36, the particular expenditure cannot be allowed u/s.37(1). The ground of appeal of the appellant is therefore rejected." 117. Before us, the learned Sr. Counsel submitted that once it has been accepted by the learned Commissioner (Appeals) that this expenditure incurred is wholly and exclusively for the purpose of business, the same can be allowed as business loss also. Once these advances were given during the c....