Expenses incurred on abandoned projects are allowable under sec. 37(1)

Where assessee had incurred a liability under a contract, which was terminated and, therefore, no amount under contract or in pursuance of a claim was receivable, assessee was entitled to claim said amount as business expenditure.

Facts:

a)The Madhya Pradesh Electricity Board ('MPEB') awarded a contract to assessee-company for revival of a Thermal Power Station and paid certain amount as an advance.

b)The assessee gave a bank guarantee for such amount. The MPEB arbitrarily terminated the contract and invoked the bank guarantee. The assessee debited the amount, being the cost of abandoned project, in the profit and loss account.

c)The assessing authority was of the view that the assessee had been following mercantile method of accounting, thus, the expenditure on a particular project could not be allowed as an expenditure, unless there was a corresponding credit in the form of contract receipt or work-in-progress.

d)The CIT (A) as well as the Tribunal confirmed said disallowance. The aggrieved assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1)If the assessee incurred a liability when the contract was terminated and when no amounts under the contract or in pursuance of a claim were receivable, assessee was entitled to claim the said amount as expenditure for implementing the contract as a set off under section 37(1), read with section 28.

2)Though the assessee had incurred expenditure during the year in which he had not received any amount, yet when he would receive the money in pursuance of the award, the said amount would be chargeable to tax whether the business would be in existence or not in that year. Therefore, the interest of the revenue was fully protected.

3)Thus, assessee was entitled to claim the cost of abandoned project as business expenditure under Section 37(1). - ASIA POWER PROJECTS (P.) LTD. V. DY. CIT [2014] 49 taxmann.com 428 (Karnataka)

Cenvat credit couldn’t be denied merely because original manufacturer of inputs was non-traceable

Where assessee had complied with all procedures in availing of credit and had taken all steps in accordance with law, credit could not be denied merely because original manufacturer of inputs was not traceable.

Facts:

a)The department invoked extended period of limitation to deny credit taken by assessee on ground that original manufacturer could not be traced. The Tribunal relied upon its earlier order dated 24-1-2011 and upheld denial.

b)The Assessee argued that order (dated 24-1-2011) of Tribunal was reversed in Prayagraj Dyeing & Printing Mills (P.) Ltd v. Union of India [2013] 30 TAXMANN.COM 139/38 STT 525 (GUJ.).

The High Court held in favour of assessee as under:

1)In case of Prayagraj Dyeing & Printing Mills's case (supra) it was held that if document (based on which credit was taken) was issued even by fraud, extended period of limitation could not be invoked against a holder in due course unless he was shown to be a party to a fraud.

2)Without elaborate reasons, present appeal was allowed on same lines, as was done in case of Prayagraj Dyeing (supra). Order of Tribunal was to be reversed accordingly. – KIRTIDA SILK MILLS V. C.C.E.C. [2014] 50 TAXMANN.COM 264 (GUJARAT)

Discount to foreign buyer in lieu of advance payments was in nature of interest; liable to TDS

Pre-payment discount given by assessee to foreign buyers in absence of any mention in purchase contract that obliged assessee to give said discount, was in nature of interest and tax was deductible on it at source under section 195

Facts

a)The assessee-seller gave some discount to foreign buyers on sale in consideration of receiving advance payment for the same.

b)The Assessing Officer (AO) opined that assessee was not obliged to give said discount as per the purchase contract entered into between assessee and foreign buyer and, therefore, benefit allowed by assessee to its buyers as pre-payment discount was, in fact, in nature of interest on which TDS was deductible under section 195.

c)The Commissioner (Appeals) (‘CIT(A)’) deleted the addition made by the AO.

d)Aggrieved by the order of CIT(A), revenue filed the instant appeal before the tribunal.

The tribunal held in favour of revenue as under-

1)It was mentioned in the purchase contract that the seller would cause the issuance of a banker's guarantee for an amount equal to the provisional price plus interest in the form acceptable to buyer.

2)It was also specified in the contract that within two business days from the date buyer's bank received the guarantee in the acceptable format, buyer would pay to seller the pre-payment amount. Hence, assessee was not obliged to offer discount to the buyer as per the purchase contract.

3)As per the invoice, it was seen that pre-payment discount was allowed and buyer was asked to make payment of the balance amount against the invoiced price after adjusting the advance received by the assessee and pre-payment discount.

4)So, asking the buyer to pay lesser amount after adjusting discount or making payment of discount to the buyer was same thing because in both the cases, the buyer received the benefit.

5)Thus, the benefit allowed by the assessee to its buyers as discount was, in fact, in the nature of interest because the same was in consideration of receiving advance payment, and, therefore, TDS was deductible under section 195 and disallowance made by AO was held as justified-DEPUTY CIT V. KOTHARI FOOD & FRAGRANCES [2014] 50 TAXMANN.COM 213 (LUCKNOW - TRIB.)

Mere non-commencement of charitable activities won't lead to denial of trust's registration

Facts:

a)The assessee, a registered trust, applied for registration under section 12AA.

b)The Director of Income-tax (Exemption) (‘DIT(E)’) rejected application on the ground of non-commencement of charitable activities by assessee.

c)The reason behind non-commencement of charitable activity was shortage of funds as no admission fees was received by assessee from its life members and general members and no fund was raised from public.

d)Aggrieved by the order of DIT(E), assessee filed the instant appeal before the Tribunal.

The Tribunal held in favour of assessee as under:

1)There was no dispute about the charitable nature of the objectives of the trust as per the memorandum. 2)The adverse inference had been drawn by DIT(E) on the ground that assessee had no intension to commence charitable activity as no membership fees was received from members and no fund was raised from public for the same.

3)The non-contribution of membership fee by general members and life members could not be a ground for denial of registration to the trust as membership fees may be paid later on by members otherwise rights of membership could not devolve upon them.

4)As far as raising of funds from public is concerned, it is at the discretion of the trust that can be undertaken in due course, may be at the time of issue of section 80G registration which is consequent to section 12AA registration

5)Thus, mere non-carrying of the activities of trust at the time of registration per se could not be detrimental to registration of the trust under section 12AA when the objects were charitable and there was no adverse comment about them.

6)Thus, the order of the DIT(E) was reversed and it was held that the assessee was eligible for registration under section 12AA -SOHAM FOR KIDS EDUCATION SOCIETY CENTRE V. DIT(E) [2014] 49 taxmann.com 493 (Delhi - Trib.)

Exp. on civil and electrical work for installation of windmill was eligible for depreciation at 80%

Where foundation, civil and electrical works were necessary for installation of windmill, depreciation at rate of 80 per cent was to be allowed

Facts

a)The assessee-company purchased windmill. For the operation and maintenance of the windmill, assessee made specific civil and electrical installations.

b)It claimed depreciation at the rate of 80 per cent on said installations which was disallowed by Assessing Officer.

c)On appeal, appellate authorities allowed the assessee's claim on ground that the foundation, civil and electrical works were necessary for the installation of the windmill and was clearly part and parcel of the windmill project on which depreciation at the rate of 80 per cent was allowable.

d)Aggrieved by the order of appellate authorities, Revenue filed the instant appeal before the High Court.

The High Court held in favour of assessee as under:

1)The Legislature has provided for higher rate of depreciation at 80 per cent on renewable energy devices, including windmill and any specially designed devise, which runs on windmill.

2)Windmill is scientifically designed machinery and it has to be fitted and mounted on a civil construction, equipped with electric fittings in order to harness the wind energy to the maximum potential.

3)Thus, it can be easily imagined that windmill cannot function without appropriate installation and electrification.

4)Therefore, the approach of appellate authorities to allow depreciation at the rate of 80 per cent on such installation was perfectly justified, as civil structure and the electric fitting were part and parcel of the windmill and could not be separated from the same - CIT V. PARRY ENGINEERING & ELECTRONICS (P.) LTD.[2014] 49 taxmann.com 252 (Gujarat)

No denial of reassessment due to time constraint if it was made in consequence of finding/direction of ITAT

Where ITAT by its order excluded some income from the total taxable income of assessee for a particular assessment year, an assessment of such income in another assessment year could be made without any time-limit.

Facts:

a)The Tribunal had deleted addition made under section 68 of the Income-tax Act, 1961 (herein after referred to as ‘Act’) by the Assessing Officer (AO) on the grounds that relevant credit entries were relating to the earlier year.

b)AO initiated re-assessment proceedings for the said earlier year after a lapse of 7 years by issue of notice under section 148 and passed an order making addition.

c)The CIT(A) held that the notice under section 148 for the relevant assessment year was belatedly issued after a lapse of 7 years and, therefore, was beyond the time-limit prescribed under section 149.

d)On appeal, the Tribunal held that AO lacked jurisdiction to re-open assessment.

e)Aggrieved by the order of Tribunal, Revenue filed the instant appeal before the High Court.

The High Court held in favour of revenue as under:

1)Section 150 of the Act which reads as under, clearly states that:

“Notwithstanding anything contained in section 149, the notice under section 148 may be issued at any time for the purpose of making an assessment or reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order passed by any authority in any proceeding under this Act by way of appeal, reference or revision or by a Court in any proceeding under any other law”.

2)Similarly, as per section 153(3)(ii) of the Act, there is no time-limit for completion of assessments, reassessments and re-computations if such assessment, reassessment or re-computation is made in consequence of or to give effect to any finding or direction contained in an order under sections 250, 254, 260, 262, 263, or 264 or in an order of any Court in a proceeding otherwise than by way of appeal or reference under this Act.

3)Further, Explanation 2 to Section 153 of the Act makes it clear that even where any income is excluded from the total income of the assessee from a particular assessment year, then an assessment of such income for another assessment year shall, for the purpose of Section 150 as also of Section 153, be deemed to be one made in consequence of or to give effect to any finding or direction contained in the said order.

4)From combined reading of the above provisions, it is abundantly clear that where ITAT by its order excluded any income from the total income of the assessee from a particular assessment year, then an assessment of such income for another assessment year could be made without any time-limit.

5)Hence, it was noticeable that the appellate authorities did not refer to section 150 and Explanation 2 to section 153 and therefore, they erred in setting aside the order passed by AO- CIT V. PP ENGINEERING WORK[2014] 49 taxmann.com 321 (Delhi)

ITAT allows benefit of second proviso to Sec. 40(a)(ia) in case of payment to NR; Non-discrimination clause invoked

Rigour of disallowance of payment under Section 40(a)(ia) is relaxed in case of payment to resident if recipient pays taxes on such sum and files return of income. It would be contrary to scheme of DTAA and discriminatory if similar relaxation is not allowed under Section 40(a)(i) in case of payment to non-resident without withholding of taxes if such non-resident pays taxes on such sum and files return of income. Relaxation under second proviso to Section 40(a)(ia) is to be read into Section 40(a)(i) as well and it was required to be treated as retrospective in effect in the same manner as second proviso to Section 40(a)(i).

Facts:

a)The AO noted that certain non-resident entities were taxable in India under the provisions of the Income Tax Act (‘IT Act’) as also under the provisions of relevant DTAA as these entities had a PE in India.

b)Thus, in the opinion of the AO, the assessee was required to deduct tax at source from these payments to non-residents, in terms of section 195.

c)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by the recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them under section 139(1).

d)Accordingly, the assessee contended that non-discrimination clause of treaty was applicable on impugned payment made to non-residents.

Held:

1)Provisions of Section 40(a)(ia) and Section 201 provides thatthat no disallowance can be made in respect of payments made to a residents without deduction of tax, if related payments are taken into account by recipients incomputation of their income, taxes thereon are duly paid and related income-tax returns are duly filed by the them undersection 139(1).

2)However, section 40(a)(i) does not have an exclusion clausesimilar to second proviso to Section 40(a)(ia), so far as payments made to non-residents,without deduction of tax are concerned. Thus, such payments would be disallowable even when the non-resident recipient hastaken into account such payments in computation of his income, has paid taxeson the same and duly filed income-tax return under section 139(1).

3)So far as discrimination to the non-resident taxpayers was concerned, the right comparator would be a resident Indian taxpayer. As we were examining the issue of deduction parity, we had to examine the position of deductibility in respect of a similar payment, i.e., without deduction of tax at source, made to a resident Indian taxpayer.

4)A different treatment to the foreign enterprise per sewas enough to invoke the non-discrimination clause.

5)Therefore, it would be contrary to the scheme of the tax treaties if rigour of disallowance of a payment, on account non-deduction of tax from the related payment, was to be relaxed in the situations in which the resident recipient had taken the said amount into account in computation of income, paid taxes on the income so computed and filed return of income under section 139(1), and yet the rigour of disallowance in respect of payments made, without deduction of tax at source, to the non-residents wasnot relaxed when such non-resident recipient had taken such receipts into account in computation of income, paid taxes on the income so computed and filed return under section 139(1).

No sec. 32A relief to hotel as preparation of food items therein couldn’t be deemed as manufacture

Preparation of food articles in hotel is not manufacturing activity, thus, hotel building is not a plant entitled to investment allowance.

Facts:

a)The assessee was running a hotel. It claimed investment allowance under Section 32A on preparation of food articles in hotels on the ground that it was definitely a manufacturing activity.

b)However, the Assessing Officer was of the view that preparation of food articles did not justify that it was a manufacturing activity so as to provide relief under section 32A. On appeal, the CIT(A) also rejected the contention of the assessee. However, the Tribunal allowed the claim of the assessee. The aggrieved revenue filed the instant appeal.

The High Court held in favour of revenue as under:

1)The Apex Court in the case of CIT v. Anand Theatres [2000] 110 Taxman 338 has held that the function of building is to shelter the business of assessee. Building is more durable and the Legislature has made distinction between the 'building' and 'machinery' or 'plant'.

2)The Tribunal had committed an error in treating the hotel building as a plant and, accordingly, it was not justified in allowing the claim for investment allowance under section 32A on the ground that the preparation of food articles in a hotel be treated as manufacturing of goods. – CIT V. SB PROPERTIES & ENTERPRISES LTD. [2014] 49 taxmann.com 298 (Rajasthan)

Vibratory compactor was earth moving machinery; entitled to concessional tax rate under Karnataka Sales Tax Act

Vibratory compactor manufactured by assessee was earth moving machinery entitled to concessional tax rate under Karnataka VAT.

Facts:

a)The assessee was engaged in the business of manufacturing vibratory compactor. It claimed that the said equipment was earth mover entitled to concessional tax rate under Notification Nos. FD 117 CSL 2001(I) and FD 117 CSL 2001 (II), dated 26-7-2001

b)The Assessing Officer held that the vibratory compactor would not come within the purview of earth mover and further said that it was general category machinery falling under SL. No. 1(iii)(a) of Part M of the Second Schedule to the Act.

c)Both, the First Appellate Authority and the Tribunal confirmed the order of the Assessing Officer.

d)Aggrieved by the order of appellate authorities, assessee filed the instant appeal before the High Court:

The High Court held in favour of assessee as under:

1)The assessee had produced copy of the notification dated 31-3-1993 issued under the Karnataka Sales Tax Act. In the said notification the vibratory compactor had been classified as earth moving equipment.

2)However, it was the contention of the revenue that the said notification had been withdrawn. Withdrawing of the notification would be of no consequence, when it was the stand of the Government that vibratory compactor had been classified as earth moving machine.

3)In that view of the matter, the vibratory compactor was earth moving machinery entitled to concessional tax rate under Notification Nos. FD 117 CSL 2001 (I) and FD 117 CSL 2001 (II), dated 26-7-2001 – L & T CASE EQUIPMENTS (P.) LTD. V. COMMISSIONER OF COMMERCIAL TAXES [2014] 49 taxmann.com 563 (Karnataka)

Conduct of respondent was oppressive as it used petitioner's funds in its own Cos without informing petitioner

Where money invested by petitioner in R-1 company was utilized in other companies managed by person managing R-1 company but no information about investment was provided to petitioners, such conduct would be held to be oppressive

Facts:

a)The petitioner-foreign company made FDI investment in Respondent-1-company five years ago on assurance of growth. However, nothing happened in Respondent-1-company. It virtually remained a shell company, whereas funds invested by the petitioner were invested into Respondent-7-company, which was nothing but alter ego of RC, who was managing Respondent-1-company.

b)When petitioner asked for inspection and audit of accounts and financials of the respondent-7-company, the respondents refused to provide any clue as to what had happened to investment made by the petitioner.

c)There were many companies which were alter egos of Respondent-5, who was managing Respondent-1-company.Respondent-5 and Respondent-6 who were in control of company were also not inclined to disclose any information relating to money invested by petitioner.

d)The petitioner filed instant petition.

The Company Law Board held as under:

1)The conduct of respondent-5 and respondent-6, who were running all those companies, was oppressive and prejudicial to interest of petitioner–CPI INDIA REAL ESTATE VENTURE LTD. V. PERPETUAL INFRACON (P.) LTD. (2014) 49 TAXMANN.COM 25 (CLB - NEW DELHI)