KAY ARR Enterprises vs. JCIT [2005] 97 ITD 291 (Chennai);
Order dated 26-7-2005
A large business house was controlled by many families but
to avoid litigation among families, they reached at a family arrangement to
rearrange the shareholdings between the elders of the families as it was
necessary to control the companies effectively by the major shareholders to
produce better profit and exert effective supervision both in the
administration and production for the functioning of the companies. The
assessee and his family members were one part of that group of companies and
other part was ‘G’ and his family members. By way of this family arrangement,
the assessee and his family transferred their interests in the two companies
to the family of ‘G’ and in lieu thereof, ‘G’ transferred his entire
shareholdings in one company to the assessee and his family. The Assessing
Officer held that the assessees were liable to pay capital gains tax on such
transfer as there was no family arrangement in writing and further, the family
of ‘G’ has offered capital gain tax arising out of transfer of their shares in
a company to the assessees. On appeal, the Commissioner (Appeals) upheld the
impugned order.
The Tribunal held that the arrangement was entered into
between the family members who transacted the shares and in view of the nature
of arrangement, that arrangement could not be called as a transfer within the
meaning of section 2(47). The word ‘family’ in the context of a family
arrangement is not to be understood in a narrow sense of being a group of
persons who are recognized in law as having a right of succession or having a
claim to a share in the property in dispute. If the dispute is settled between
near relations, then the settlement of such a dispute can be considered as a
family arrangement. It is well settled in law that admission is best evidence
of a point in issue and though not conclusive, is decisive of the matter
unless successfully withdrawn or proved erroneous. An admission is an
extremely important piece of evidence but it cannot be said that it is
conclusive and it is always open to the person who made the admission to show
that it is incorrect. In the instant case, the admission was not made by the
assessee, rather the other party had accepted the transaction as a transfer
and, accordingly paid capital gains tax. That would not debar the assessee
from contesting the issue from the facts and circumstances of the case. It was
clear that it was an admission of other party which would not bind the
assessees. Accordingly, the argument of the revenue was to be rejected.
Therefore, the rearrangement of shareholdings in the companies to avoid
possible litigation among family members seemed to a prudent arrangement which
was necessary to control the companies effectively by the major shareholders
to produce better prospects and exert active supervision. Accordingly, the
same could not be held as a transfer of shares which was exigible to capital
gain tax. No doubt, the family arrangement was not reduced into writing and
there was no need to reduce the family arrangement in writing compulsorily and
it need not be registered. Thus, it was clear that those two families were
part of bigger families. Accordingly, those transactions were not exigible to
capital gain tax.
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Deduction of tax at source – Section 192, read with
section 195A, of the Income-tax Act, 1961 – Salary – Payment made to
expatriate technicians by foreign employer, having permanent establishment in
India, on account of remuneration for services rendered by them in India, is
liable to tax in India irrespective of their stay in India – Foreign employer
is liable to deduct tax at source while making such payments to expatriates –
A.Y. 1988-89
Pride Foramer S.A. vs. ACIT [2005] 97 ITD 86 (Del); Order
dated 14-7-2005
The assessee was non-resident company incorporated in
France. It had executed manning and management services contracts with ONGC
for supervision of drilling activities carried on by ONGC on its own rigs in
India. For the purpose of executing these contracts, the assessee engaged the
services of number of technicians. The assessee did not deduct the tax from
the salary paid to expatriates who were engaged for rendering services on ONGC
rigs and whose stay in India did not exceed 183 days, on the ground that
salaries paid to them was exempt under article XIV(2) of Double Taxation
Avoidance Agreement. It was also claimed that income from manning and
non-management contracts was taxable as technical fees as per article III of
DTAA and not as business profit. The Assessing Officer rejected the contention
of the assessee holding that income is taxed under section 44BB and,
therefore, benefit of provisions of article XIV(2) was not available. The
assessee was held as an assessee in default under section 201(1). On appeal,
the Commissioner (Appeals) observed that the assessee had a permanent
establishment in India and salaries for the projects executed in India were
borne out by permanent establishment in India. He, therefore, held that by
simply not debiting the salary to the profit and loss account pertaining to
Indian operations, it would not absolve the assessee from deducting tax at
source and, thus, upheld the order of the Assessing Officer.
The Tribunal held that there was no dispute that during the
year under consideration, the assessee had permanent establishment in India.
As such, condition (c) of article XIV(2) would be applicable. There was no
dispute that the assessee agreed to be assessed under provisions of section
44BB for manning and management services rendered by it. The contention of the
assessee that in computing profits in India, the salary of the expatriates had
not been debited had no relevance, when income was computed in accordance with
the provisions of section 44BB. From recording of payments on account of
salaries paid to expatriate technicians for rendering services in India in the
books of account of the head office outside India, it could not be said that
the assessee had not incurred expenditure in India. Moreover, debiting of
expenditure relating to permanent establishment in India in head office
accounts was a colourable device adopted by the assessee to avoid the payment
of tax. Thus, payments made to expatriate technicians on account of
remuneration by the foreign employer having permanent establishment in India,
irrespective of their stay in India, was liable to tax in India. In
interpreting a provision creating a legal fiction, the Court is to ascertain
for what purpose the fiction is created and after ascertaining this, the Court
is to assume all those facts and consequences which are incidental or
inevitable corollaries to give effect to the fiction. Therefore, the deeming
provisions of section 44BB not only aim at estimation of income but by
necessary implication also decides that remuneration paid to expatriates is
included in 90 per cent of the amount allowed as deduction under section 44BB.
The income of the technicians being chargeable to tax in India irrespective of
the period of stay, the assessee was liable to deduct tax at source while
making the payment to expatriates. Non-existence of similar provision as that
of section 44AD explaining expenditure deemed to have been allowed, would not
make any difference. Therefore, there was no infirmity in the order of the
Commissioner (Appeals) holding that the assessee was a defaulter under section
201(1).
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Interest under s. 234C – Chargeability – Assessment of
company under s. 115JA. S. 115JA was inserted by the Finance (No. 2) Act,
1996, which got the assent of the President on 28th Sept., 1996, and had not
come into effect on 15th June, 1996, and 15th Sept., 1996, when the first and
second installments respectively of the advance tax fell due – Assessee having
incurred losses was not liable to pay advance tax on these two dates –
Assessee however, committed default of non-payment of later two installments –
Interest under s. 234C chargeable only for said default – Asst. yr. 1997-98
JCIT vs. Arihant Industries Ltd. (2005) 98 TTJ (Chd) 52;
Order dated 19-1-2005
S. 115JA had been brought on statute by the Finance (No. 2)
Act, 1996 w.e.f. 1st April, 1997 and applicable to the previous year relevant
to A.Y. 1997-98. The Finance (No. 2) Act, 1996, got the assent of President of
India on 28th Sept., 1996 and before this date this section was not on
statute. Admittedly, first installment of the advance tax becomes due on 15th
June and the second on 15th September. In the case of the assessee these dates
were prior to the date when the Finance (No. 2) Act, 1996 got the assent of
President of India. In that view of the matter, the assessee was not liable to
pay advance tax for these two dates. However, when s. 115JA had been
incorporated which contains specific provisions relating to applicability of
other provisions of the Act, i.e. the payment of advance tax. The assessee
committed default for non-payments of installments of advance tax due on 15th
Dec., 1996 and 15th March, 1997. For these two installments, interest under s.
234C was chargeable.
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Income from house property – Section 24 of the
Income-tax Act, 1961 – Deductions – Assessee had availed house building
advance from his employer – In terms of contract, interest on such advance was
payable in installments immediately after payment of principal sum in full –
Assessee repaid entire principal amount by January, 1999 and thereafter
started to pay interest. Interest payable on house building advance could be
claimed by assessee as deduction under section 24(1)(vi) in year in which it
was actually paid as per terms of contract – Assessment year 2001-02
Shanmugam Narayanaswamy vs. ITO [2005] 97 ITD 1 (Hyd.);
Order dated 17-1-2005
The assessee had availed house building advance (HBA) from
his employer. The principal sum was recoverable in monthly installments
commencing from the month falling after completion of the house and the
recovery towards interest would start immediately after the liquidation of the
principal in monthly installments. The assessee repaid the entire principal
amount by January 1999 and thereafter interest was paid in installments.
During the relevant assessment year, the total amount paid towards interest
was set off by the assessee against the income from house property and the
resultant loss was declared under the head property income. The Assessing
Officer, relying upon circular No. 363 issued by the CBDT stating that where
the interest amount is recovered after the payment of principal amount, the
interest allowable for deduction under section 24(1)(vii) would be on the
basis of accrual of interest which would start running from the date of drawal
of the advance, disallowed the claim of deduction. On appeal, the Commissioner
(Appeals) upheld the order of the Assessing Officer holding that the principal
amount having been recovered in the earlier years, interest on HBA did not
accrue during the relevant assessment year and, hence, no interest was payable
during year.
The Tribunal held that in the year in which the interest is
calculated, it can be said to be payable though the time for payment is
deferred by virtue of a contract. In the clarification issued by the CBDT in
its circular No. 363, dated 24-6-1983, it was stated that deduction under
section 24(1)(vi) would be on the basis of accrual of interest which would
start running from the date of drawal of advance. However, while considering
the provisions of section 43B, the Andhra Pradesh High Court in the case of
Srikakollu Subba Rao & Co. vs. Union of India [1988] 173 ITR 708 observed
that the term ‘payable’ can be understood as the time when the liability has
to be discharged either by statute or by virtue of contract, though the
liability to pay has accrued in the preceding years. Thus, interest payable on
house building advance by an employee can be claimed as deduction under
section 24(1)(vi) either in the year when the liability to pay interest
accrues (as per the circular No. 363 issued by the CBDT and binding on the
departmental authorities, being beneficial to the assessee) or in the year in
which it was actually paid as per the terms of contract since the agreement
with the employer imposed a duty on the assessee to pay interest in
installments immediately after payment of principal sum in full. Since there
were two views possible on that aspect, in the light of the decision of the
Supreme Court in the case of CIT vs. Vegetable Products Ltd. [1973] 88 ITR
192, the view which was in favour of the assessee had to be adopted. Under
those circumstances, the Assessing Officer was directed to allow the claim of
deduction of interest paid during the relevant assessment year under section
24(1)(vi).
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Interest on borrowed capital – Section 36(1)(iii) of the
Income-tax Act, 1961– Proviso to section 36(1)(iii) is applicable
prospectively and not retrospectively – Assessment year 1998-99
Swaraj Engines Ltd. vs. JCIT [2005] 97 ITD 45 (CHD.); Order
dated 29-6-2005
The assessee-company claimed deduction under section
36(1)(iii) on account of interest paid on loan. However, it did not debit said
interest to its profit and loss account and instead capitalized the same. The
Assessing Officer disallowed the claim on the ground that it had acquired new
plant and machinery and building and, hence, interest on the loan, which was
utilized for creating capital assets, was not permissible. On appeal, the
Commissioner (Appeals) confirmed the impugned order.
The Tribunal held that it is not disputed that there is an
amendment in section 36(1)(iii) and when section 36(1)(iii) is read with
Explanation 8 to section 43A, the claim of the assessee for deduction under
section 36(1)(iii) for the interest paid for the money utilized for purchase
of capital assets may not be permissible if the said section is applied
retrospectively. The Rajasthan High Court in the case of CIT vs. Hindustan
Zinc Ltd. [2004] 269 ITR 369 held that the amendment in section 36(1)(iii)
is applicable prospectively and not retrospectively. Admittedly, there is a
decision of the Calcutta High Court to the contrary in the case of JCT Ltd.
vs. Dy. CIT [2005] 197 CTR 509. However, since there is no decision of the
Jurisdictional High Court on that issue, the view which is favourable to the
assessee should be accepted. Accordingly, one should proceed on the basis that
proviso to section 36(1)(iii) is applicable prospectively and not
retrospectively. The assessee had categorically stated that no new unit was
set up by the assessee and that the purchase of machinery, construction of
building and other capital expenditure was incurred in connection with the
expansion of the existing business. It is evident from the several decisions
that deduction in respect of interest paid on borrowed money utilized for
investment in capital assets acquired in connection with the expansion of
existing business is allowable. The mere fact that the assessee had
capitalized the interest in the books of account would not debar the
allowability of the claim.
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Income escaping assessment – Section 17 of the
Wealth-tax Act, 1957 – General – Assessing Officer is bound by decision of
Tribunal unless and until same is reversed by High Court or Supreme Court and
mere pendency of Reference Application cannot be a reason to reopen assessment
in respect of an issue which has already been decided by Commissioner
(Appeals) and subsequently confirmed by Tribunal – A.Y. 1985-86
T.T. Narasimhan vs. ACWT [2005] 97 ITD 197(Chennai); Order
dated 13-7-2005
On appeal filed by the assessee against assessment order,
the Commissioner (Appeals) directed the Assessing Officer to value the shares
on yield basis. Accordingly, the Assessing Officer filed an appeal before the
Tribunal against the order of the Commissioner (Appeals). During the pendency
of appeal before the Commissioner (Appeals), the Assessing Officer reopened
the assessment for adopting another method of valuation of shares on the basis
of judgment of the Supreme Court. Subsequently, the Tribunal affirmed the
order of the Commissioner (Appeals). The Assessing Officer passed reassessment
order thereafter. On appeal, the assessee contended that once the Commissioner
(Appeals) and the Tribunal passed an order directing the Assessing Officer to
value the shares on yield basis, the order of the Assessing Officer merged
with the order of the Tribunal and, therefore, the Assessing Officer could not
reopen the assessment. On the other hand, the Assessing Officer justified his
action on ground of pendency of reference application before the Tribunal.
The Tribunal held that it was true that in the case of
Bharat Hari Singhania vs. CWT [1994] 207 ITR 1, the Supreme Court held
that the shares have to be valued as per rule 1D of the Wealth-tax Rules,
1957. It was also held that rule 1D is mandatory. This judgment was delivered
by the Supreme Court after the Tribunal’s order in the instant case.
Therefore, it might be a good reason for the Assessing Officer to move the
High Court for setting aside the order of the Tribunal and the order of the
Commissioner (Appeals) or the Assessing Officer might have moved the Tribunal
under section 254(2) to rectify the order on the basis of the judgment of the
Supreme Court. So long as the order of the Tribunal and the order of the
Commissioner (Appeals) remained undisturbed, the Assessing Officer could not
reopen the issue which was concluded by an order of the Commissioner (Appeals)
and the Tribunal. The Assessing Officer had a very good reason for filing a
Reference Application before the High Court or filing a rectification petition
under section 254(2) before the Tribunal on the basis of the judgment of the
Supreme Court in Bharat Hari Singhania’s case (supra). However, without moving
the High Court or the Tribunal, the Assessing Officer had no right to go
against the orders of the Commissioner (Appeals) and the Tribunal. The
judicial discipline requires that the lower authorities have to follow the
decision of the higher authority in the judicial hierarchy. If any one of the
party before the Tribunal felt that the decision of the Tribunal was against
the order of the Supreme Court or the High Court, it was open to them to move
the High Court for setting aside the order of the Tribunal. However, they
could not take the law in their own hands and act against the decision of the
Tribunal. The Assessing Officer was bound by the decision of the Tribunal
unless and until the same was reversed by the High Court or the Supreme Court.
As on today, admittedly, the decision of the Tribunal remained and it was
nobody’s case that order of the Tribunal was reversed or set aside by the High
Court or the Supreme Court. In those factual circumstances, there was no
justification on the part of the Assessing Officer to reopen the assessment in
respect of an issue which was already concluded by the orders of the
Commissioner (Appeals) and the Tribunal.
UNREPORTED DECISIONS
Change in Method of accounting from FIFO basis to
specific cost basis while computing capital gains on sale of shares –
Resulting in reduction in short term capital gains – Addition made by applying
FIFO basis – not justified – Specific cost method is the proper method to be
adopted – Bona fide change in method of accounting which is subsequently
followed must be accepted even if it is detrimental to revenue
M/s. Carona Shoe Co. Ltd. vs. DCIT, ITA No. 3491/Bom/1994,
Bench ‘A’, A.Y. 1990-91, order dated 13th August, 2002 Counsels for assessee/revenue:
Shri S. M. Lala/ Ms. Jyothi Kumari
The assessee, a Limited Company was engaged in investment
and financial activities. The assessee company had been computing the
profit/loss on sale of shares by taking the cost of shares on first in first
out ‘(FIFO)’ basis. During the relevant year, the assessee changed the method
of accounting of the cost of shares from ‘First In First Out basis’ to
‘Specific Cost Basis’ for the purpose of ascertaining profit / loss on sale of
shares. Due to this change in the method of accounting, the capital gains had
been reduced by Rs. 22,93,381/-. The lower authorities did not accept the
change in the method of accounting on the ground that it was detrimental to
revenue and increased the capital gains by Rs. 22,93,381/-. Before the
Tribunal assessee placed reliance on Ornamental Trading Enterprises vs.
ACIT 47 ITD 416 (Bom) wherein it has been held, inter alia, that
where the assessee, a share dealer was valuing stock at cost or market value,
whichever was lower, applying the FIFO method was not justified as this would
bring into account anticipated profits on shares which were still held in
stock; and that there was an additional factor to be considered for
ascertaining capital gain on shares, that the actual cost had to be compared
with the fair market value as on 1-1-1954 (or subsequent dates as amended
later). It was therefore necessary to pin-point a particular share so that
these provisions could be made effective. The actual cost basis was thus
stated to be the only acceptable and workable method. The assessee also placed
reliance on the following decisions for the proposition that a bona fide
change in method of valuation must be accepted even if the same is detrimental
to the revenue more so if the same is followed consistently in subsequent
years.
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Indo Commercial Bank Ltd. vs. CIT, 44 ITR 22 (M)
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CIT vs. Delta Plantation Ltd., 114 CTR 271 (Cal)
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United Credit Ltd. vs. ACIT, 57 TTJ 220 (Cal).
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Rajiv Investment P. Ltd. vs. ITO, 28 TTJ 561 (Cal)
The Tribunal held that it is amply clear that the assessee
was well within its rights to change the method of valuation. Judicial
precedent as quoted on behalf of the assessee makes it evident that in such
like cases, specific cost basis is the proper method to be adopted. The
factual matrix has not been disputed. As such, we hold that the specific cost
basis was rightly employed by the assessee as a changed-over from the FIRST IN
FIRST OUT method. It has not been disputed that the changed method has since
been consistently used by the assessee. This aspect of the matter is, hence,
decided in favour of the assessee and against the department.
