Direct Tax

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January 2016

CA. Paras K. Savla & CA. Lalchand Choudhary


Spentex Industries Ltd vs. CCE (Supreme Court)

CBDT & Government are bound by their own interpretation of a statutory provision. Principle of “contemporanea expositio” explained. The word “or” can be interpreted as “and” if the former leads to unintelligible and absurd results

The Supreme Court held that It is to be borne in mind that it is the Central Government which has framed the Rules as well as issued the notifications. If the Central Government itself is of the opinion that the rebate is to be allowed on both the forms of excise duties the Government is bound thereby and the rule in-question has to interpreted in accord with this understanding of the rule maker itself. Law in this respect is well-settled and, therefore, it is not necessary to burden this judgment by quoting from various decisions.

Hero Cycles (P) Ltd vs. CIT (Supreme Court)

S. 36(1)(iii): Law on when interest expenditure on loans diverted to sister concerns and directors can be allowed as business expenditure explained

The Supreme Court held that once it is established that there is nexus between the expenditure and the purpose of business (which need not necessarily be the business of the assessee itself), the Revenue cannot justifiably claim to put itself in the arm-chair of the businessman or in the position of the Board of Directors and assume the role to decide how much is reasonable expenditure having regard to the circumstances of the case. It further held that no businessman can be compelled to maximise his profit and that the income tax authorities must put themselves in the shoes of the assessee and see how a prudent businessman would act. The authorities must not look at the matter from their own view point but that of a prudent businessman.

DCIT vs. Zuari Estate Development & Investment Co. Ltd. (Supreme Court)

Ss. 143(1)/147: As a section 143(1) intimation is not an assessment, there is no question of “change of opinion” by the AO
The Supreme Court held that an Intimation u/s. 143(1) cannot be equated with an assessment order. The intimation under Section 143(1)(a) was deemed to be a notice of demand under Section 156, for the apparent purpose of making machinery provisions relating to recovery of tax applicable. By such application only recovery indicated to be payable in the intimation became permissible. And nothing more can be inferred from the deeming provision. Therefore, there being no assessment under Section 143(1)(a), the question of change of opinion, as contended, does not arise.

Knorr - Bremse India Pvt. Ltd. vs. ACIT (P&H High Court)

Rule 10A(d): Law on when multiple transactions can be regarded as a single composite transaction for determining arm’s length price explained. Fact that a transaction results in a profit or a loss has no bearing on whether it is at arm’s length price

The High Court held that the answer to the issue whether a transaction is at an arm’s length price or not is not dependent on whether the transaction results in an increase in the assessee’s profit. A view to the contrary would cause considerable confusion and lead to arbitrary, if not illogical, results. A view to the contrary would then raise a question as to the extent of profitability necessary for an assessee to establish that the transaction was at an arm’s length price. A further question that may arise is whether the arm’s length price is to be determined in proportion to the extent of profit. Thus, while profit may reflect upon the genuineness of an assessee’s claim, it is not determinative of the same.

Varshaben Sanatbhai Patel vs. ITO (Gujarat High Court)

S. 143(1)/ 147: If the assessment is reopened on the ground of “bogus purchases”, the reasons must contain an averment of which details on record reflect the bogus purchases

The returns filed by the assessee have been processed under section 143(1) of the Act. The Assessing Officer in the reasons recorded for the purpose of reopening the assessment has placed reliance upon the record of the case. As noted hereinabove, there is no assertion as regards on what basis the Assessing Officer has stated that the assessee had made claim in respect of bogus purchases in the Trading and the Profit and Loss Account as expenditure. The Assessing Officer has stated that on verification of the details available on record, it has been noticed that the assessee has made bogus purchases; however, no specific averments are made as regards which details available on record reflected such bogus purchases.

Maruti Suzuki India Limited vs. CIT (Delhi High Court)

Transfer Pricing: Important legal principles on whether an adjustment for Advertisement & Market Promotion (AMP) expenses can be made on the basis that there is an assumed “international transaction” with the AE because the advertisement expenditure of the Indian company is “excessive” explained.

The High Court held that the transfer pricing adjustment is not expected to be made by deducing from the difference between the ‘excessive’ AMP expenditure incurred by the assessee and the AMP expenditure of a comparable entity that an international transaction exists and then proceed to make the adjustment of the difference in order to determine the value of such AMP expenditure incurred for the AE. And, yet, that is what appears to have been done by the Revenue in the present case. It first arrived at the ‘bright line’ by comparing the AMP expenses incurred by MSIL with the average percentage of the AMP expenses incurred by the comparable entities. Since on applying the BLT, the AMP spend of MSIL was found ‘excessive’ the Revenue deduced the existence of an international transaction. It then added back the excess expenditure as the transfer pricing ‘adjustment’. This runs counter to legal position explained in CIT vs. EKL Appliances Ltd. (2012) 345 ITR 241 (Del), which required a TPO “to examine the ‘international transaction’ as he actually finds the same”. In other words the very existence of an international transaction cannot be a matter for inference or surmise

CIT vs. Thyssen Krupp (Bombay High Court)

Transfer Pricing: An adjustment with respect to transfer pricing has to be confined to transactions with Associated Enterprises and cannot be made with respect to transactions with unrelated third parties.

The High Court held that in terms of Chapter X of the Act, re-determination of the consideration is to be done only with regard to income arising from International Transactions on determination of ALP. The adjustment which is mandated is only in respect of International Transactions and not transactions entered into by assessee with independent unrelated third parties. This is particularly so as there is no issue of avoidance of tax requiring adjustment in the valuation in respect of transactions entered into with independent third parties. The adjustment as proposed by the Revenue if allowed would result in increasing the profit in respect of transactions entered into with non-AE. This adjustment is beyond the scope and ambit of Chapter X of the Act.

CIT vs. Gujarat Reclaim & Rubber Products (Bombay High Court)

Commission earned by a non-resident agent who carried on business of selling Indian goods outside India cannot be said to be deemed income which has accrued and/or arisen in India. Circular No. 23 of 1969 & Circular No.786 of 2000 were withdrawn on 22/10/2009. The withdrawal of a Circular cannot have retrospective operation.

The High Court held that in CIT vs. Toshoku Ltd. 125 ITR 525 the Apex Court held that the commission earned by the non-resident agent who carried on the business of selling Indian goods outside India, cannot be said to be deemed income which has accrued and/or arisen in India. Circular No. 23 of 1969 and its reiteration in Circular No.786 of 2000 were in force during the Assessment Years. It was only subsequently i.e. on 22nd October, 2009 that the earlier Circular of 1969 was withdrawn. However, such subsequent withdrawal of an earlier Circular cannot have retrospective operation as held in UTI vs. P. K. Unny 249 ITR 612.
Jaya Hind Sciaky vs. DCIT (Bombay High Court)

Though there is a difference between leasehold right and ownership right as per the Transfer of Property Act, a leasehold land in the possession of the assessee for a term of 95 years is “belonging” to the assessee and is liable for wealth-tax.

The High Court held that the word ‘belonging to the company’ has advisedly been used by the Parliament in Section 40(2) of the Act. In case the Parliament sought to equate the word ‘belonging to’ to mean ownership then in such a case, there would be no reason to use the word ‘belonging to’ and instead use the word ‘owner of”. The intent in using the word ‘belonging to’ is to include within the provisions of the Act, assets in possession of the Company without full ownership, but sufficient domain over it, to exercise the powers which would otherwise normally vest in the owner on the valuation date. Therefore, the concept of less than full ownership is sought to be introduced by the use of the word ‘belonging to’.


Hema Hiren Dand vs. JCIT (ITAT Mumbai)

The object of introduction of Securities Transaction Tax (STT) was to end litigation on the issue of whether profit earned from delivery based sale of shares is capital gains or business profit. Merely because the assessee liquidates its investment within a short span of time, which had given better overall earning to the assessee, would not lead to the conclusion that the assessee had no intention to keep on the funds as investor in equity shares, but was actually intended to trade in shares.

The ITAT opined that the idea behind introduction of security transaction tax (STT) is to end the litigation on the issue, whether the profit earned from delivery based sale of shares is capital gains for business profit. Thus, w.e.f. 1/10/2004; on the share transactions subjected to STT, concessional tax rate of 10% (which has been increased to 15% from AY 2009-10) is applicable in respect of STCG whereas no tax is chargeable in respect of LTCG. It is also noted that the CBDT vide its Circular No. 4/2007, dated 15/6/2007 has also recognised possibility of two portfolios, i.e. one ‘Investment portfolio’ comprising of securities which are to be treated as capital assets and the other ‘Trading portfolio’ comprising of stock-in-trade which are to be treated as trading assets. In view of these facts, profit arising on shares in respect of delivery based transactions are liable to be taxed as capital gain and not as business income.

DCM Ltd. vs. DCIT (ITAT Delhi)

S. 14A/Rule 8D: The AO must give reasons before rejecting the assessee’s claim. He must establish nexus between the expenditure & the exempt income. The disallowance cannot exceed the exempt income

The AO has neither recorded his satisfaction nor given reasons as to how the claim of expenditure in relation to tax free income has not been correctly made by the assessee as envisaged under section 14A(2). The AO has mechanically invoked Rule 8D. The AO has not established any nexus between the investments made and the expenditure incurred under the head interest expenditure and administrative expenses, before disregarding the disallowance suo motu made by the assessee. Disallowance u/s.14A cannot exceed the amount of exempt income.

(Note: In this case, ITAT, Delhi has taken a view that disallowance u/s. 14A cannot exceed tax-free Income)

Suvaprasanna Bhattacharya vs. ACIT (ITAT Kolkata)

S. 271(1)(c): A penalty notice u/s. 274 which does not strike out the irrelevant portion & which does not specify whether the penalty is for “concealment” or for “furnishing inaccurate particulars” renders the penalty order void

The ITAT held that the show cause notice u/s. 274 of the Act which is in a printed form does not strike out as to whether the penalty is sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”. On this aspect we find that in the show cause notice u/s. 274 of the Act the AO has not struck out the irrelevant part. It is therefore not spelt out as to whether the penalty proceedings are sought to be levied for “furnishing inaccurate particulars of income” or “concealing particulars of such income”.

Micro Ink Limited vs. ACIT (ITAT Ahmedabad)

Entire law on transfer pricing implications of (i) allowing excess credit to AE’s on account of sale of goods and (ii) issue of corporate guarantee to AEs (after insertion of Explanation i(c) to s. 92B by FA 2012) explained.

The ITAT took a view that If the international transaction of exports of goods which has been benchmarked on TNMM basis is duly accepted by the TPO, making an adjustment for interest on excess credit allowed on sales to AEs will vitiate the picture, in as much as what has already been factored in the TNMM analysis, by taking operating profit figure which incorporates financial impact of the excess credit period allowed, will be adjusted again separately as well because the interest levy for late realisation of debtors is inextricably connected with the sales and is also part of operating income. When such an interest is includible in operating income and the operating income itself has been accepted as reasonable under the TNMM, there cannot be an occasion to make adjustment for notional interest on delayed realisation of debtors.

ITO vs. Superline Construction P. Ltd. (ITAT Mumbai)

S. 68 (bogus share capital): Despite statement of Mukesh C. Choksi & Jayesh Sampat admitting bogus share capital, addition cannot be made in assessee-company’s hands

The ITAT took a view that if the share application money is received by the assessee company from alleged bogus shareholders whose names are given to the AO then the department is free to proceed to reopen their individual assessments in accordance with law but it cannot be regarded as undisclosed income of assessee company.

Sesa Resources vs. ACIT (ITAT Panaji)

S. 195/40(a)(ia): In view of retrospective amendment to section 195 to provide that section 195 applies whether or not the non-resident person has a residence or place of business or business connection in India, commission to non-resident agents for services rendered outside India is liable for TDS u/s. 195 and has to suffer disallowance u/s. 40(a)(ia)

In respect of the issue as to whether the assessee was liable to deduct TDS u/s. 195 and whether the disallowance was liable to be made u/s. 40(a)(ia) of the Act, it is noticed that the provisions of section 195 has been amended by the introduction of the Explanation-II to the said section by the Finance Act, 2012, with retrospective effect from 1/4/1962, whereby it is clarified that ‘the obligation to comply with sub-section (1) and to make deduction there under applies and shall be deemed to have applied and extends and shall be deemed to have always extended to all persons, resident or non-resident, whether or not the non-resident person has (i) a residence or place of business or business connection in India…’ In view of the introduction of Explanation II to section 195, the disallowance would have to be restored.


CBDT Enhances Monetary Limits for filing appeals by the Dept & gives it retrospective effect

The CBDT has, as a measure for reducing litigation, issued Circular 21/2015 dated 10/12/2015 increasing the monetary limits for filing of appeals by the department before the ITAT and High Courts and SLP before the Supreme Court. The notable aspect is that the CBDT has directed that the said instruction shall apply retrospectively to pending appeals and that all appeals below the specified tax limits should be withdrawn/ not pressed. However, appeals before the Supreme Court are to be governed by the limits operative at the time that the appeal was filed

CBDT directs Dept. to extend benefits of Amendments to section 43B retrospectively in light of Apex Court verdict in Alom Extrusions

Accordingly, w.e.f. 1/4/1988, the settled position is that if the assessee deposits any sum payable by it by way of tax, duty, cess or fee by whatever name called under any law for the time being in force, or any sum payable by the assessee as an employer by way of contribution to any provident fund or superannuation fund or gratuity fund or any other fund for the welfare of employees, on or before the ‘due date’ applicable in his case for furnishing the return of income under section 139(1) or the Act, no disallowance can be made under section 43B of the Act.

CBDT relaxes rules regarding furnishing of information in respect of Payments made to Non-Residents

The CBDT has issued a press release dated 17/12/2015 stating that Section 195 of the Income-tax Act (‘the Act’) empowers the Central Board of Direct Taxes to capture information in respect of payments made to non-residents, whether chargeable to tax or not. Rule 37BB of the Income-tax Rules has been amended to strike a balance between reducing the burden of compliance and collection of information under section 195 of the Act.