Short deduction of tax due to application of wrong provision won't lead to sec. 40(a)(ia) disallowance

Facts:

a)The Tribunal held that the assessee had to deduct tax under section 194-I and that the provisions of section 194C were not applicable in respect of transactions entered between the assessee and the contractee.

b)On appeal, the High Court confirmed the order of the Tribunal. However, the High Court restored the matter back to the file of the Tribunal for the limited purposes of applicability of section 40(a)(ia) in respect of short deduction of tax at 2.06% instead of at 10%.

c)On remand, the revenue contended that for the short deduction of TDS there would be disallowance under section 40(a)(ia).

The Tribunal held in favour of assessee as under:

1)In case of Apollo Tyres Ltd. v. Dy. CIT [2013] 35 taxmann.com 593 (Coch.) it was held that section 40(a)(ia) did not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act.

2)There was an obvious omission to include short deduction/lesser deduction in section 40(a)(ia) of the Act. Therefore, in case of short/lesser deduction of tax the entire expenditure could not be disallowed whose genuineness was not doubted by the Assessing Officer.

3)Thus, in view of the decision of this Tribunal in Apollo Tyres (Supra) short deduction of tax could not be a reason or basis for disallowance under section 40(a)(ia). Accordingly, the orders of the lower authorities were to be set aside and the disallowance made under section 40(a)(ia) was to be deleted. - THREE STAR GRANITES (P.) LTD. V. ACIT [2014] 49 taxmann.com 578 (Cochin - Trib.)

Sum paid to NR without deduction of tax would not invite sec. 40(a)(i) disallowance if such sum was capitalized

Where assessee had not claimed payment made to non-resident for providing engineering site services as expenditure but capitalised it and claimed only depreciation thereon, no disallowance could be made under section 40(a)(i).

Facts:

a)The assessee, a non-banking financial company, made payment to non-resident for providing engineering site services but did not deduct tax at the time of payment. The Assessing Officer disallowed the entire payment made by the assessee.

b)The assessee submitted that no disallowance could be made as it had not claimed said payment as expenditure but capitalized it and only depreciation was claimed thereon.

c)On appeal, the CIT(A) upheld order of the Assessing Officer. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)The payment made to non-resident for technical services was admittedly taxable in India, therefore, the assessee was bound to deduct tax at source. The assessee could claim the same as expenditure. However, such claim of expenditure could be allowed only in case the assessee deducted the tax at the time of payment.

2)In the instant case, the deduction was not claimed as expenditure while computing the income chargeable to tax. The CIT(A) observed that irrespective of the fact whether the assessee had claimed deduction or not disallowance had to be made since tax was not deducted.

3)Both the authorities had not examined whether the amount paid to the non- resident was deducted while computing the income chargeable to tax or not. The language of section 40 clearly provides that the amount paid to non-resident (on which tax is not deducted) shall not be deducted while computing the income chargeable to tax.

4)Therefore, if the assessee had not deducted the amount (i.e., claimed it as expenditure) while computing the chargeable income, there was no necessity for further disallowance. - Muthoot Finance Ltd. v. ACIT [2014] 49 taxmann.com 580 (Cochin - Trib.)

SEBI norms and clause 35 of listing agreement don't require promoters to make disclosure of encumbered shares

Neither any regulation of SEBI nor clause 35 of the Listing Agreement casts an obligation on promoter to make disclosures of shares encumbered to listed company. SEBI was not justified in directing listed company to disclose details of shares which were 'otherwise encumbered' by promoter to Stock Exchanges.

Facts:

a)SEBI imposed penalty upon appellants under Section 23E of the Securities Contract Regulation Act and Section 15HA of the SEBI Act for allegedly violating clause 35 of the Listing Agreement and Regulations 3(d) and 4(2)(f) of SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003.

b)Issue raised in appeal was:

Whether a listed Company was required to disclose details of ‘otherwise encumbered’ shares held by the promoter under clause 35 of the Listing Agreement even though there was no obligation cast upon the promoter to make such disclosures to the listed Company?

The Securities Appellate Tribunal held as under:

1)Since neither any regulation of SEBI nor clause 35 of the Listing Agreement would casts an obligation on the promoter to make disclosure of encumbered shares to the listed Company, and

2)In the absence of such disclosure made by promoter, SEBI was not justified in directing the listed Company to disclose details of shares which were ‘otherwise encumbered’ by the promoter. Accordingly, penalty imposed by SEBI was to be set aside. – GOLDEN TOBACCO LTD. V. SECURITIES AND EXCHANGE BOARD OF INDIA [2014] 51 TAXMANN.COM 51 (SAT - MUMBAI)

Failure to issue notice in time couldn't be cured by sec. 292BB

Failure to issue a notice under section 143(2) within prescribed period cannot be cured by taking recourse to section 292BB.

Facts:

a)The Assessing Officer issued a notice under section 143(2) to assessee. Thereafter assessment proceedings were completed and an order of assessment was passed under section 143(3).

b)On appeal, the CIT(A), held that the notice under section 143(2) was not issued within the period stipulated in that provision. Hence, section 292BB would not save a situation where the notice itself had not been issued before the expiry of the period of limitation since it could only cure a defect of service within the stipulated period.

c)Further, the Tribunal held that since no notice under Section 143(2) was issued within the prescribed period, the assessment was not valid. The aggrieved revenue filed the instant appeal.

The High Court held in favour of assessee as under:

1)In the present case, the notice under Section 143(2) was issued much beyond the period of six months. Section 292BB provides a deeming fiction that once the assessee has appeared in any proceedings or cooperated in any enquiry relating to an assessment or reassessment, it shall be deemed that notice has been duly served upon assessee in time in accordance with the provisions of the Act.

2)Once the deeming fiction came into operation, the assessee was precluded from raising a challenge about the service of a notice, service within time or service in an improper manner. However, Section 292BB could not obviate the requirement of complying with a jurisdictional condition. Where the Assessing Officer failed to issue a notice under Section 143(2) within the period of six months as spelt out in the proviso to clause (ii) of section 143(2), the assumption of jurisdiction under section 143(3) would be invalid.

3)The deeming fiction in section 292BB overcomes a procedural defect in regard to the non-service of a notice on the assessee, and obviates a challenge that the notice was either not served or that it was not served in time or that it was served in an improper manner.

4)Section 292BB could not come to the aid of the revenue in a situation where the issuance of a notice itself was not within the prescribed period, in which event the question of whether it was served correctly or otherwise, would be of no relevance whatsoever. Thus, failure to issue a notice under section 143(2) within prescribed period could not be cured by taking recourse to section 292BB. – CIT V. SALARPUR COLD STORAGE (P.) LTD [2014] 50 taxmann.com 105 (Allahabad)

AO can’t disregard ITAT’s stay order to collect pending tax dues on basis of consent letter from assessee

If Tribunal grants stay of recovery of demand, the Assessing Officer cannot collect the pending amount from assessee even after obtaining a consent letter from him.

Facts:

a)The AO made a reference to Transfer Pricing Officer for determining the arm's length price of the international transactions. Thereafter an order was passed by the AO raising additional demand.

b)The assessee made an application before the ITAT, Mumbai for stay of demand. The Tribunal granted stay. Despite a specific direction by the Tribunal, the AO collected the demand by obtaining a consent letter from the assessee during the subsistence of the said order.

c)Though the case was posted from time to time, the same was adjourned at the request of the learned D.R. or for want of time, and, hence, the assessee had filed a fresh stay application for extension of the stay.

The Tribunal held as under:

1)Neither the assessee nor the Revenue had the right to flout the decision of the Tribunal and the AO, being an officer functioning under the Government of India, it was his obligation to follow the directions of the superior authority and even if there was consent he should not have collected the amount.

2)We have recently come across other cases where similar consent letters were obtained or the Department had collected tax despite the stay order passed by the ITAT. We deplore this practice and direct the Chief CIT to issue a letter to all the concerned AOs not to adopt this kind of approach of obtaining consent letters and to respect the orders passed by the Tribunal.

3)Thus, stay was granted on collection of outstanding demand for a further period of six months and AO was directed to refund the amount collected contrary to the order passed by the ITAT alongwith interest. – JOHNSON & JOHNSON LTD. V. ACIT [2014] 51 taxmann.com 1 (Mumbai - Trib.)

Sec. 115A doesn't debar assessee from entering into a new agreement to have lower tax rate on royalty

Provisions of section 115A(1)(b)(AA) do not debar assessee to enter into a new agreement after change of situation resulting in reduced rate of royalty.

Facts:

a)The assessee-company was incorporated in the United Kingdom. It had two associate companies in India, namely, ‘GKN S’ and ‘GKN D’.

b)The assessee had entered into agreements with GKN S and GKN D allowing them to use trademarks in respect of various products and services, in accordance with the terms and conditions mentioned in such agreements. Sum received by assessee from GKN D and GKN S was offered to tax as royalty at the rate of 10.56 per cent as per section 115A.

c)The revenue authorities opined that the subsequent agreements entered into in the year 2007 were nothing but extension of existing agreement between the contracting parties. Since it was extension of earlier agreement, the assessee would not get advantage of provisions of section 115A, wherein there was a provision for lower rate of taxability, i.e., 10 per cent. The aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1)As per provisions of section 115A(1)(b)(AA), the rate of tax on license fee has to be taxed at the rate of 10 % on the strength of the agreement. It was undisputed that the assessee was having earlier agreement dated 12-7-2004 with GKN S and the same had been renewed from 1-1-2007.

2)The provisions of section 115A(1)(b)(AA) do not debar the assessee to enter into new agreements after change of situation in the provisions of said section as far as the reduced rate of royalty is concerned.

3)It was undisputed that the new agreements entered into in 2007 between the assessee and GKN S and with GKN D were independent agreements. The revenue authorities could not interfere into the business decisions of the assessee.

4)By no stretch of imagination, the new agreement entered into in 2007 could be said to be the extension of old agreements entered into between the parties. Even if the assessee had managed its affaires, as far as renewal of agreement was concerned, the revenue authorities could not interfere with the same, unless it was proved beyond doubt that it was nothing but a colourable devise.

5)Even if the assessee had entered into new licence agreement with GKN S and in the same year with GKN D to take advantage of lower rate of tax of 10 per cent, the same could not be denied to the assessee on the ground that the it was nothing but extension of old agreement which was otherwise not correct.

6)The new licence fee agreement entered into by the assessee with GKN S and with GKN D was nothing but a new and separate agreement. Accordingly, licence fee had to be taxed at 10%. - GKN HOLDINGS PLC V. DEPUTY DIT [2014] 50 TAXMANN.COM 307 (PUNE - TRIB.)

Takeover option wasn't available to petitioner as he failed to exercise it within 15 days of order of CLB

Where pursuant to CLB's order petitioner exercised takeover option of respondent-company, as a relief to bring an end to acts of oppression and mismanagement, beyond 15 days from date of relevant orders of CLB and High Court, such option was no more available

Facts:

a)While disposing of oppression and mismanagement petition the Company Law Board directed petitioners to takeover the respondent-company and to communicate their decision to the respondents within 15 days from the date of the CLB’s order.

b)However, the petitioners did not exercise the option within 15 days, instead filed an appeal before the High Court. Consequently, the appeal was dismissed and a certified copy was delivered to the petitioner.

c)Thereafter, the petitioner within two days of the receipt of a copy of the High Court's order (but beyond 15 days of final order of High Court), sent a letter to the respondents exercising its option to take over the respondent-company.

d)The petitioner contended that there was no delay on his part in complying with the directions to exercise his option within 15 days as he had exercised the option with two days of receipt of copy from the High Court and was, therefore, entitled to enforcement of CLB’s order to takeover the respondent-company.

The Company Law Board held as under:

1)In view of the fact that Counsel of the petitioner was present before the CLB and before the High Court on the date of the order dismissing the appeal, the knowledge thereof on such dates to the petitioner could safely be inferred.

2)Since no appeal was preferred by the Petitioner against the order High Court, the date of receipt of certified copy of the said order would lose significance and, therefore, the petitioner should have exercised the option within 15 of final order of High Court.

3)Even though the petitioner was in knowledge of respective orders on same date, yet he failed to exercise option within 15 days from date of CLB order as well as final order of High Court, thus, takeover option would no more be available to petitioner. – DR. RAJ KACHROO V. D.S.M. HEALTHCARE (P.) LTD. [2014] 50 TAXMANN.COM 233 (CLB - NEW DELHI)

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.)