TIOL Update - 2016-TIOL-INSTANT-ALL-339

NOTIFICATIONS/ CIRCULARS

CBEC notifies new exchange rates from tomorrow

CBEC marginally hikes Tariff value of Gold, Silver & Palmolein

CASE LAWS

2016-TIOL-2138-HC-KOL-CX

ARCL ORGANICS LTD Vs CCE: KOLKATA HIGH COURT (Dated: September 06, 2016)

CX - Review - Application for review is entertainable under Order 47 Rule 1 and clauses mentioned thereunder - There is hardly any scope to equate alleged mistake of Counsel in not pointing out any law with "mistake" or "error" as meant within provision under Order 47 Rule 1 of Code - Subsequent amendment would not be applicable as order impugned was based on consent of petitioner that their clients were ready and willing to deposit 50% of duty - Moreover, on concession though opportunity to deposit Rs.35 lakhs only was obtained on September 4, 2015, instead of its deposit, rather causing loss of revenue, has been utilising said amount as their own under garb of this application - Therefore, Court fails to look eye to eye with submission of assessee to accept his contention that there was any mistake or error apparent on face of record, to entertain review application, since provision of amended Section 35-F was not placed - Rather since penaltimate portion of order under review had given opportunity of preferring appeal in lieu deposit of a portion of sum of penalty to the tune of Rs.35 lakhs on basis of concession, review application has got no merit.

Though period of limitation has been explained by assessee in their own manner but had there been meritorious grounds to entertain the review, in that event Court could have thought otherwise for consideration of said application proposing condonation of such inordinate delay - In view of taking note of having no merit in review application and since judgment under review is found as beyond the scope of review, application for condonation of delay stands rejected - Consequently, application for review also stands dismissed: HC

Application dismissed

2016-TIOL-2137-HC-MUM-CUS

USMS SAFFRON COMPANY INC Vs UoI: BOMBAY HIGH COURT (Dated: September 6, 2016)

Cus - Petition filed seeking to quash and set aside impugned SCN dated 5th February, 2016, issued by second respondent and all proceedings in furtherance thereof - Petitioners imported saffron in course of their business without payment of duty - They purchased a duty free import authorisation issued to various exporters of "Assorted Confectionery and Biscuits" on strength of which they lodged 90 bills of entry, particulars of which are set out in Annexure-A - These bills of entry were either provisionally assessed or finally assessed and reliance is placed upon certain appellate orders - Subject SCN is issued to deny exemption granted in respect of saffron.

While it is true that proceedings from Court's judgment and order, copy of which is Annexure-M dated 15th February, 2016, are pending in Supreme Court of India, bearing in mind that Revenue desires to adjudicate and take said SCN, to its logical end and conclusion, keeping all contentions of petitioners to contrary intact, court called upon Additional Solicitor General to take instructions as to whether Revenue is ready and agreeable to grant the request of petitioners for crossexamination of such officials of department who have endorsed bills of entry at relevant time - Additional Solicitor General, on instructions, states that Revenue is agreeable to do so - Petitioners permitted to furnish details of bills of entry which have been endorsed by officers on a given date and time and their designation and thereupon Revenue would agree to make them available for cross-examination by petitioners' representative during course of adjudication of SCN: HC

Petition disposed of

2016-TIOL-2136-HC-P&H-CUS + Story

PEE JAY INTERNATIONAL Vs CC: PUNJAB AND HARYANA HIGH COURT (Dated: September 7, 2016)

Cus - Since a specific finding is recorded by the lower appellate authorities that the appellant was not party to the fraud with the seller of DEPB; that DEPB was found to be a genuine document, though obtained by seller by producing forged documents, to which the appellant was not a party, duty cannot be demanded: High Court [para 10, 11, 14, 16, 17]

Appeals allowed

2016-TIOL-2135-HC-MUM-IT + Story

Hindustan Lever Ltd Vs CIT: BOMBAY HIGH COURT (Dated: September 8, 2016)

Income Tax - Sections 37(1) & 256(1).

Keywords: deposit - share application money - public issue expenses - interest income - foreign share holding - industrial license - capital expenditure - bonus shares - letter of credit.

Whether expenditure incurred by the assessee in connection with the issue of share capital with a dominant objective to dilute its foreign shareholding under Government directive to enable it to carry on business in India, is in the nature of capital expenditure - YES: HC

Whether if the share application money has been kept in the separate account as statutorily required till allotment of shares, interest earned on the deposit of share application money is directly linked with the issue, hence it cannot be brought to tax as income but has to be taken into account to reduce the expenditure incurred on issue of shares - YES: HC

Whether the interest income earned by an assessee on investment of share investor's money is to be classified under 'income from other sources' - YES: HC

The assessee company had embarked on major expansion and diversification programme for which it had obtained necessary industrial licence for manufacture of Sodium Tri Poly Phosphate (STPP). However, the industrial licence was conditional upon the assessee diluting foreign equity share holding in it. There was a condition attached to the industrial licence as per which the company should issue fresh shares to the Indian public to the exclusion of the foreign shareholders, to the extent of which will, after the proposed issue of bonus shares in the proportion of one new share to every six shares reduce the shareholding of the nonresident shareholders during the course of implementation of this project only. Consequent to the above, the assessee issued shares to the Indian Public in order to reduce the percentage of foreign share holding in it. Assessee had for the purpose of issuing shares to Indian Public incurred an expenditure of Rs.33.74 lakhs. In the assessment proceedings, assessee claimed that the expenses of Rs.33.74 lakhs on account of issue of additional shares to the Indian public were in the revenue field and sought deduction of the same while computing its income chargeable to tax. However, AO did not accepted the assessee's contention, holding that any expenditure for issue of additional share capital, would be in the capital field and thus not allowable for deduction as a revenue expenditure.

On appeal before CIT(A), the assessee urged that the entire expenses of Rs.33.74 lakhs should be allowed as it was an expense incurred with the object of carrying on its business to increase its profitability, in view of conditional licence granted to it. Alternatively, it was submitted that in any event, a sum of Rs.4.88 lakhs being the interest earned on the amounts received on issue of shares and deposited in the bank, subject to the allotment of shares, should be excluded while computing the total income. The CIT(A) allowed the appeal of the assessee by holding that the issue of shares for diluting the foreign share holding was issued as per the Government of India's directions and failure to do so would have resulted in stopping its expansion / diversification programme affecting its business. Thus, the expenses incurred on issue of shares to Indian public have to be allowed as a deduction while computing the total income. In the above view, the alternative submission urged for excluding the interest earned on the amounts received on allotment of shares, was not considered.

On further appeal before Tribunal, the assessee filed its cross-objection before the Tribunal on the issue of interest earned on the share application money till allotment of shares not to be included in computing its income. The Tribunal allowed the Revenue's Appeal by holding that raising additional capital, being in the capital field, cannot be allowed as a revenue expenditure. It placed reliance upon the decision of the Kerala High Court in Commissioner of Income Tax v/s. Common Wealth Trust Ltd. 167 ITR 365 wherein it is held that expenditure incurred for changing the capital structure of the company was capital in nature and not revenue. So far as the alternative contention raised by assessee in its cross-objection was concerned, the Tribunal held that the interest earned on share application money, had to be taxed as income from other sources. Accordingly, the cross-objection filed by assessee, was rejected.

Held that,

++ we find that SC in Kodak India Ltd. has held that expenses incurred in connection with issue of public shares to Indian public even when the issue of shares was done to comply with the directions of the RBI, would be an expenditure incurred in the capital field. The facts before the SC in Kodak India Ltd., were that Kodak had to increase its share capital amongst the Indian public as it had been directed by RBI to reduce the foreign shareholding, if it wanted to continue to do business in India. On the aforesaid facts, the Court held that the object of the Assessee therein was to increase share capital and at whose instance, it was done, was not material. In the present facts also, the issue of fresh shares, was to comply with the condition imposed by Government of India for obtaining a manufacturing licence. This licence would enable it to carry on business, and yet it would be in the capital field just as in the case of Kodak (I) Ltd. Thus, this issue is no longer resintegra before us and stands concluded against the assessee. However, assessee urges that the decision of SC in Kodak India Ltd., would not apply to the present facts as it relied upon its earlier decision in Punjab State Development Corporation. It is urged by assessee that if the principle laid down in Punjab State Development Corporation, is applied to the present facts, then the expenditure incurred on account of issue of shares would be a revenue expenditure. The SC in Punjab State Development Corporation was concerned with the issue whether the filing fees paid to the Registrar of Company for enhancement of capital by issue of shares is to be considered as a capital or revenue expenditure. The Court held that any expenditure directly related to expansion of the capital base of the company would be a capital expenditure although incidental benefit may be for running of its business and making of profit. Thus, in the aforesaid facts, the filing fee was held to be on capital account. Taking a cue from the words 'directly related' and 'incidental benefit' as used by SC, Mr. Pardiwalla, urges that in this case, the issue of share capital was primarily for doing business and increasing its profits. The change in capital structure was incidental. Thus, SC in Kodak India Ltd., on an identical fact situation applied the ratio of the Punjab State Development Corporation to conclude that it would apply to cover expenditure incurred for issue shares even if done to comply with the RBI directions for the purpose of carrying on business. Thus, the decision of SC in Kodak India Ltd. would apply to the facts of thepresent case and no fault can be found in view of the Tribunal. A direct decision of the SC in Kodak India Ltd. which was rendered on identical fact situation as arising in this case, would cover the controversy herein. In the above view, question (A) is answered in the affirmative i.e. in favour of the Revenue and against the assessee;

++ we find that this issue has been held in favour of the assessee by the decision of Gujarat HC in CIT v/s. Shree Rama Multi Tech Ltd. 214 Taxman 650, wherein an identical issue was raised. The Gujarat HC held that assessee was statutorily required to keep the share application money in a separate account, till the allotment of shares is completed. Therefore, interest earned on such separately kept amount was adjustable towards the expenditure incurred for raising share capital. This is so as the earning of interest was inextricably linked with the requirement to raise share capital. In support, reliance was placed upon the decisions of SC in Commissioner of Income Tax v/s. Bokaro Steel Ltd.2002-TIOL-161-SC-IT and Commissioner of Income Tax v/s. Karnal Cooperative Sugar Mills Ltd. 2002-TIOL-878-SC-IT. We are in respectful agreement with this decision of the Gujarat HC. The reliance placed by Gujarat High Court on Bokaro Steel Ltd. and Karnal Cooperative Sugar Mills Ltd. was apposite. In Bokaro Steel Ltd., SC held that during the construction of the steel plant, M/s. Bokaro had charged rent, hire charges and interest on advances from its contractors. The Revenue sought to tax the above as revenue receipts. The SC held the above income went to reduce the cost of construction and were capital receipts. In Karnal Cooperative Sugar Mills Ltd. the amount had been deposited in a bank to open a letter of credit for purchase of a machinery required for setting up a plant. The deposit so made to open the letter of credit earned interest. This interest is inextricably linked with the purchase of the machinery and such interest income has necessarily to be taken into account to reduce the cost of acquisition of asset, being income incidental to the purchase of the asset. In this case also, the share application money has been kept in the separate account as statutorily required till allotment of shares and any interest earned on the deposit of share application money is directly linked with the issue and allotment of fresh shares. Consequently, it cannot be brought to tax as income but has to be taken into account to reduce the expenditure incurred on issue of shares;

++ assessee's counsel very fairly brought to our notice a decision of a single Judge of the Karnataka HC in Southern Herbals Ltd. v/s. Settlement Commission and Anr. 261 ITR 681. In the above case, the Court, while dismissing a petition under Article 226 of the Constitution of India, upheld the order of the Settlement Commission that interest earned by an assessee on investment of share investor's money is to be classified under 'income from other sources' and not as 'business income'. It applied the principle laid down in the decision of SC in Tuticorin Alkali Chemicals and Fertilizers Ltd. v/s. Commissioner of Income Tax 2002-TIOL-489-SC-IT-LB, where interest was earned on loans taken before the commencement of business and such interest was held to be chargeable to tax. However, the Apex Court in Karnal Cooperative Sugar Mills Ltd. on identical facts, as arising herein, had occasion to consider both the decisions of the Apex Court in Bokaro Steel Ltd., and Tuticorin. On consideration on the fact situation, it held that the ratio of SC in Tuticorin would not apply to the present facts but the SC decision in Bokaro Steel Ltd. would apply. In any case, the Karnataka High Court's decision was rendered in the context of Article 226 of the Constitution of India and completely different considerations apply in writ petitions as opposed to Appeals/References. In the above view, question (B) as raised for our opinion is answered in the negative, i.e. in favour of the Assessee and against the Revenue.

Assessee's appeal partly allowed

2016-TIOL-1648-ITAT-MUM

ATUR INDIA PVT LTD Vs ACIT: MUMBAI ITAT (Dated: September 2, 2016)

Income Tax - Sections 14A & 23(1)(a).

Keywords - Administrative expenses -House Property - Investments - Rent - Service charges.

Whether disallowance u/r 8D(2)(ii) is not warranted if the assessee's own funds are adequate for making investments - YES: ITAT

Whether the service charges earned from maintainance of rented properties fall under the head 'income from other sources' - NO: ITAT

Whether the assessment can be done on notional basis, when sec 23(1)(c) does not provide for the same - NO: ITAT

The assessee was a company. In the relevant year the assessee filed its return and claimed expenses as to indirect interest expenses and administrative expenses. During the assessment proceedings the AO disallowed the same. The assessee had let out a property and collected rent by way of two components, viz., Rent and Service charges. The assessee offered both the receipts as income under the head Income from House Property. However, the AO assessed the services charges as income under the head income from other sources and the same was also upheld by the CIT(A). Further the assessee had terminated the lease with M/s Athma Productions P Ltd and the said party had also vacated the premises. The assessee furnished a copy of letter written by it to M/s Athma Productions P Ltd acknowledging peaceful possession of the property. The assessee submitted that the very same premise was let out to M/s Meridhun Entertainment P Ltd under an agreement subsequently. During the course of assessment proceedings, the AO asked the assessee to reconcile the rental income with the rental agreements. The AO noticed that there was a difference. After further reconciliation, there was still a difference in the case of rental agreement entered with M/s Athma Productions P Ltd. The AO assessed the same as income of the assessee. Accordingly the CIT(A) upheld the order passed by the AO.

The Tribunal held that,

++ it can be noticed that own funds available with the assessee in each of the three years is more than investment made and hence disallowance u/r. 8D(2)(ii) of the I.T. Rules is not called for in view of the decision rendered by Bombay High Court in the case of HDFC Bank Ltd. Accordingly, we set aside the order of CIT(A) passed on this issue and direct the Assessing Officer to delete the disallowance made u/r. 8D(2)(ii) of the;

++ in our view, connected with normal renting of properties and hence they cannot be considered to be specialized services necessitating the assessment of charges, if any, collected for that purpose as income under the head Income from other sources. Though the assessee has split the rental receipts into rent and service charges, we are of the view that the same may be ignored in the facts and circumstances available in instant case, since the service charges are not related to any kind of specialized services. Accordingly, we set aside the order passed by CIT(A) on this issue in both the years cited above and direct the AO to treat the service charges also as part of rental income;

++ it is not the case of the AO that the assessee has let out this property during this year itself, after it was vacated by M/s Athma Productions P Ltd. The assessee has stated that the property was only let out in June 2009 and the same has not been proved to be wrong. In view of the above, we are unable to agree with the view expressed by CIT(A) on this issue. Accordingly we set aside the order passed by CIT(A) on this issue and direct the AO to delete the assessment of Rs.10,02,400/- made on notional basis.

Assessee's appeal allowed

2016-TIOL-1647-ITAT-DEL

ITO Vs BRAHMOS AEROSPACE PVT LTD: DELHI ITAT (Dated: September 14, 2016)

Income Tax - Sections 248, 154, 195 & 200A.

Keywords - Advertisement and exhibition expenses - Ground rent - TDS.

Whether a foreign entity is not liable to pay tax in India if it has no PE - YES : ITAT

Whether TDS obligation does not arise if non-resident has no PE - YES: ITAT

The assessee was a Joint Venture Company between India and Russia. The assessee filed an application u/s 154 requesting for rectification of mistake apparent from record in the intimation u/s. 200A. In said intimation, certain amount was determined as payable u/s. 200A by the deductor in the TDS statement. The applicant deductor was found to have committed a default of Short Deduction. Accordingly, a demand was raised. The assessee stated that it had made remittances to foreign countries. The said remittances related to rent for office accommodation, expenses incurred toward exhibitions outside India and Advertisement in foreign journals towards display of its products. On these payments, it had erroneously deducted the TDS at minimum rates. However, as per the intimation a rate of 20% had been applied by the AO owing to non-availability of foreign parties. Thereafter, AO rejected the application of the assessee filed u/s. 154 of Act. Aggrieved with the aforesaid order, assessee preferred an appeal before the CIT(A), who allowed the appeal of the assessee. Aggrieved Revenue filed appeal before the Tribunal.

After hearing parties, Tribunal held that,

++ after going through the findings of the CIT(A), as aforesaid, I find from the details of payments and TDS as furnished by the assessee that the taxes have been withheld by the assessee after grossing up and taxes so withheld have been deposited into credit of central government. Therefore, pre-conditions as mentioned in section 248 of the Act are satisfied. Further, it is seen that payments made to foreign entities are in nature of rent, advertisement and exhibition expenses and therefore are in the nature of business receipts in hands of payee. Such business receipts are taxable in India only if payee had 'PE' in India within meaning of relevant DTAA. From the facts, it has been observed that foreign entities did not have PE in India and therefore payments were not chargeable to tax in India. Accordingly, the assessee was under no obligation to deduct taxes at source while making these payments. Accordingly, CIT(A) has rightly held that the taxes were not required to be withheld u/s. 195(1) of the Act on the impugned payments made by the assessee and allow the issue in dispute in favour of the assessee which in my considered opinion, does not need any interference on my part, hence, I uphold the order of the Ld. CIT(A) on the issue in dispute and reject the grounds raised by the raised by the Revenue.

Revenue's appeal dismissed