Tiny pen drive enough to pin you down – ITAT accepts pen drive as admissible evidence in IT proceedings

Pen drive and print outs taken from it constituted admissible evidence in income-tax proceedings and formed a basis for investigation and additions

In the instant case the assessee was arrested by Punjab Police and pen drive was recovered from him containing details of his dealings, which was forwarded by police to IT Department with the printouts. The AO reopened the assessment and cited the pen drive and printouts in reasons recorded. On appeal, the CIT(A) upheld the additions made by AO. Aggrieved-assessee appealed to the ITAT and contended that that the pen drive was not an admissible evidence for reopening assessment and that various provisions of Cr. P.C., IPC, Indian evidence Act and Cyber Laws had been violated by Punjab Police during search.

The Tribunal held in favour of revenue as under:

1) Assessee’s objections had no effect on recordings of reasons by AO for forming a belief about escapement. It is trite law that technical rules of Evidence Act and Cr. P. C. were not applicable to these proceedings;

2) From the record it had emerged that many of the entries mentioned in the pen drive belonged to various business concerns of the assessee in which he was associated with in the capacity of director or partner;

3) They were explained by the assessee though on a prejudicial basis, but the fact remained that the entries had correlation with assessee’s activities. Thus, the contents of the pen drive would become admissible evidence in Income Tax proceedings and would form a basis for investigations and additions.

4) Consequently, pen drive and printouts thereof constituted admissible evidences in those proceedings. The reasons for reopening were recorded on the basis of those contents;

5) The reasons recorded for escapement of income and the material available on record with AO had a live link with each other. Thus, the reasons for reopening the assessments were properly recorded by AO - Chetan Gupta v. ACIT [2013] 34 taxmann.com 306 (Delhi - Trib.)

Tax treatment of sum received after termination of employment – OECD’s draft guidance

The OECD Committee on Fiscal Affairs, through a sub-group, has undertaken to clarify how variety of payments, such as non-competition payments, notice pay, severance payment, etc., that may be made following the termination of an employment should be treated for tax treaty purposes. Accordingly, it issued a draft proposal for additions and alterations to the Commentary on the OECD Model Tax Convention. A brief synopsis of suggestions given by OECD Committee on tax treatment of termination payments is provided as follows:

1. Remuneration for previous work - Any remuneration paid after the termination of employment for work done before the employment is terminated (e.g. a salary or bonus for the last period of work or commission for sales made during that period) will be considered to have been derived from the State in which the relevant employment activities were exercised.

2. Payment in lieu of notice of termination - The payment received ‘in lieu’ of notice of termination should be considered to be derived from the State where employee would have worked during the period of notice, which will be the State where the employment activities were performed at the time of the termination.

3. Severance payment - Severance payment should be considered to be remuneration derived from the State where the employment was exercised when the employment was terminated.

4. Payment of damages for unlawful dismissal - The tax treatment of such payment will depend on what the damage award seeks to compensate. It can be categorised into following:

a) Remuneration: Sum paid for serving an insufficient period of notice or because a severance payment was required by law should be treated as remuneration for these damages.

b) Capital Gains or Other income: Punitive damages awarded on grounds such as discriminatory treatment or injury to one’s reputation would typically fall under Article 21 (Other Income) or Article 13 (Capital Gains).

Differentiating between whisky and non-whisky alcoholic beverages is undesirable for comparability under TNMM

Product similarity was to be seen for applying CUP method and not for TNMM. If assessee sold non-whisky alcoholic beverages (Vodka, Gin, Brandy, Rum, etc) to non-AEs and whisky to AEs, net profit margin on sale by assessee of non-whisky alcoholic beverages couldn’t be rejected as internal TNMM for calculating ALP on assessee's sale of whisky to AEs simply based on distinction made between whisky & non-whisky as two different products

The Tribunal held as under:

1) The profitability derived from uncontrolled party engaged in similar business activity under similar circumstances was the measure of arm's length result. The focus under the TNMM was on transactions rather than on operating income of the enterprise as a whole;

2) If there was similar nature of transactions and functions between controlled transactions with the related party and uncontrolled transactions with unrelated party, then internal comparability would result into more appropriate result for computing  ALP, as it would require least amount of adjustments;

3) The product similarity was to be seen while applying CUP method and not under the TNMM because under the CUP, the focus had to be on the price of the product sold or transferred;

4) In assessee's case, both the transactions with the A.Es and unrelated parties related to alcoholic beverages, which were in similar business line. Making intra-distinction between types of alcoholic beverages like "whisky" and "other than whisky", was wholly undesirable while carrying out comparability analysis under the TNMM;

5) Under the TNMM, functional comparability of transactions was to be analyzed at net profit margin level. If such a high degree of similarity was to be seen in TNMM, then it would become impractical to apply TNMM in any case;

6) Rejection of internal TNMM simply on the basis of distinction between whisky and non–whisky as two different products was wholly undesirable and, therefore, adjustment made by TPO was to be deleted - Diageo India (P.) Ltd. v. DY.CIT [2013] 34 taxmann.com 284 (Mumbai - Trib.)

Resultant Co. can file appeal after demerger; abundant caution appeal by demerged Co. dismissed to avoid duplicity

Appeals filed by demerged company under the apprehension that the original appeals filed by the resulting company might not be held as maintainable, were not permissible. Such duplicate appeals might lead to a serious problems  if they remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error.

The Tribunal held as under:

1) Demerger implies transfer of all the assets and liabilities of the undertaking or division by a 'demerged company' to a 'resulting company'. In consequence of assets being taken over by a ‘resulting co’ it would be responsible and would have the rights to be a party to the litigation to protect its interest;

2) A resulting company on one hand acquired the assets and on the other hand it was responsible for the liabilities, including tax liability;

3) As per sub-section (vi) of section 2(19AA), the transfer of the undertaking was on a going concern basis, meaning thereby, that as a result of demerger the effected undertaking would loose it’s independent legal identity which merged with the resultant company. Its entity thereafter vested in the resulting company. As a natural corollary the litigation couldn’t be pursued against a non-existing legal body;

4) As a result of demerger an undertaking or a unit of demerged company was transferred to a resulting company. Therefore, after the transfer, the demerged  company was not to be held responsible for any legal action but the transferee- company was legally answerable and accountable thereafter;

5) Appeals filed by the demerged company under the apprehension that the original appeals filed by the transferee-company (resulting company) might not be held as maintainable, were nothing but the duplicate appeal, which was not permissible in the eyes of law;

6) Such duplicate appeals might lead to a serious problems if these remained un-noticed, because mistakenly two judgments could be delivered and that might lead to a serious error. Duplicity is void ab initio hence appeals were required to be dismissed - Cairn Energy Gujarat BV v. ADIT [2013] 34 taxmann.com 281 (Ahmedabad - Trib.)

ITAT rejects recall application filed by CA in ‘personal’ capacity; directs ICAI to act suitably for his misconduct

CA appearing as Authorised representative (‘AR’) for client had no locus standi to file any application before ITAT in his individual capacity without the client’s consent, after disposal of client’s appeal. CA’s conduct of filing such application after the date of Tribunal’s order disposing it off in his client’s favour was contemptuous, abuse of process of law and scandalized the system of delivery of justice

The Tribunal held as under:

1) Once the appeal was disposed off, the power conferred upon the professionals or the AR by virtue of the Power of Attorney by the assessee, came to an end. They didn’t have any locus standi to file any application before the Tribunal in his individual capacity because the Tribunal was not created to redress the grievances of the professionals;

2) Its function was to adjudicate the disputes between the assessee and the Department. The appeal was allowed in favour of the assessee and the assessee had no grievance against the order passed by the Tribunal. Instant application was filed  by the CA with an ulterior motive for the reasons best known to him, disputing the facts recorded in the order sheet;

3) After disposal of the appeal, an application could be filed on behalf of the assessee under section 254(2) of the Act for seeking rectification in the order passed under section 254(1) of the Income Tax Act. But there was no provision under the Act in which an application could be filed by any Advocate or CA or AR in his individual capacity for seeking rectification in the proceedings of the hearing, without the consent of the assessee;

4) Moreover, to dispute the proceedings of the court, without any cogent material, was also an attempt to scandalize the court and also to create hindrance in the proper judicial functioning of the court, which couldn’t be permitted under any circumstances. If it was allowed the judicial system would collapse;

5) Since the facts recorded in the order sheet had not been controverted by filing an affidavit, the judicial proceedings were correct and the contentions raised in the application were highly misconceived, wrong and contemptuous. Therefore, the instant application was moved with an intention to browbeat and scandalize the court. Since the action of CA was grossly abuse of process of law, application was dismissed with cost of Rs 5,000 to be recovered from him;

6) This tough stand was being taken only to maintain the dignity, decorum of the institution and justice delivery system so that it might not be misused by any professional to settle their personal score. If they had any grievance against any judicial forum they could approach the higher forum instead of scandalizing the concerned court or judicial body;

7) Reference made to the President of ICAI with a request to take necessary action as per law against the CA for his professional misconduct and also to take corrective measures and necessary steps to educate its members, to behave with the judicial authorities befitting to their status - Omkar Nagreeya Sahkari Bank Ltd v. DyCIT [2013] 34 taxmann.com 283 (Lucknow - Trib.)

Admissions made during survey are not conclusive unless supported by convincing evidences

Addition on the basis of seized material was unjustified if assessee was able to show that the admissions made during survey were incorrect

In the instant case, during search and seizure operation on assessee-firm, the survey party worked out the certain value of excess stock by preparing a provisional trading account. The partners of assessee-firm, not being able to explain the excess stock, surrendered the same and agreed to pay tax on the value of excess stock. The excess cash found during survey was declared by the partners as income of firm other than regular income. The return filed after survey didn’t disclose the excess stock and excess cash found during survey. Consequently, the AO made addition for excess stock under section 69 and on account of excess cash under section 69A. The CIT(A), substantially reduced the addition made by the AO. Aggrieved by the order of CIT(A), revenue filed the instant appeal.

The Tribunal held in favour of assessee as under:

1) It is a well-settled law that admissions are not conclusive proof of the matter. They may be shown to be untrue or having been made under mistake of fact or law. Circumstances have to be seen under which same are made;

2) Admissions could be withdrawn unless it was conclusive. The Supreme Court in the case of Pullangode Rubber Produce Co. Ltd. v. State of Kerala [1973] 91 ITR 18, had held that the assessee was to be given opportunity to show that admission was incorrect or didn’t show correct state of facts. The Punjab & Haryana High Court in the case of Kishan Lal Shiv Chand Rai v. CIT [1973] 88 ITR 293, had held that it was an established principle of law that a party was entitled to show and prove that admission made by it, was, in fact, not correct and true;

3) The sole basis of making addition, i.e., provisional trading account was not found to have correct figures of purchase and sales. Whatever items had been declared by the assessee on account of excess stock were correctly considered by the CIT(A). Since the figures of the sales and purchases were based on factual figures, it was a case of factual mistake committed by the Survey party as well as by the AO, which had been rightly corrected by the CIT (A);

4) Thus, the assessee on the basis of seized material had been able to show that the admission made at the time of survey, surrendering the additional income on account of excess stock was not correct and did not show correct state of facts. The CIT(A) correctly deleted the addition as no addition could be made against the assessee on the basis of mere admission. Therefore, the departmental appeal was to be dismissed – ACIT V. MAYA TRADING CO. [2013] 34 taxmann.com 144 (Agra - Trib.)

ITAT confirms TP adjustment for AMP expenditure; denies de-classification of an exp belonging to AMP category

If assessee had classified certain expenses in his accounts under the head "advertisement" and others under the head "Business Promotion", expenses under the former head would be treated as part of AMP expenses for TP adjustments in accordance with the SB ruling in LG Electronics. Assessee couldn’t claim that certain expenses classified by him as advertisement to be treated as business promotion expenses before the Tribunal

In the instant case, the assessee was importing electronic products from its associate enterprises. Thereafter, it marketed the said products in India through its retail chains and branded shops. Certain AMP expenses were incurred by the assessee. The TPO was of the view that assessee had promoted the aforesaid brand, since the assessee had been using the logo "Panasonic" in all correspondence, letterheads, visiting cards of its personnel, product catalogue, etc. It made TP adjustments in respect of AMP expenses, which was sustained by the DRP.

On appeal, the Tribunal held as under:

1) It had been held by the Special Bench in the case of LG Electronics that the AMP expenditures, incurred more than those in case of comparables, were transactions exigible to proceedings under Chapter X of the Act, being a case of brand building;

2) It further concluded that such expenses, even if paid to Indian entities, were covered by the definition of "transaction" within the meaning of section 92F(v) of the Act. Therefore, assessee's plea that AMP expenditure which had not been paid to overseas AEs won’t come within the purview of international transaction had no merits;

3) There was a force in the assessee's plea that as per Special Bench's decision, the expenses which were directly related to the sales won’t come within the meaning of "brand building";

4) The assessee itself had categorized the expenditure into two sub-heads, i.e., under the advertisement head comprising of expenses which had been incurred for "brand building". The other head was of business promotion expenses. Admittedly, there was no dispute about the category and nature thereof;

5) Hence, following the observations of the Special Bench (supra), the advertisement expenses had been incurred for brand building, whereas the business promotion expenses deserved to be treated as directly connected with the sales undertaken by the assessee;

6) Though the assessee had pleaded that even some of the advertisement expenses were business promotion expenses, yet, in view of the fact that since it itself had included the same under the head "advertisement", there was no reason to change the head of expenses from advertisement to business promotion. Hence, this latter plea of the assessee was to be declined. Thus, assessee’s appeal was to be partly allowed - Panasonic Sales & Services India (P.) Ltd. v. ACIT [2013] 34 taxmann.com 276 (Chennai - Trib.)

Right to collect toll is an intangible asset within the purview of sec. 32(1)(ii) and is eligible for depreciation

Where assessee in terms of agreement with Government of Madhya Pradesh was required to develop, construct and maintain a road on Build, operate and transfer (‘BOT’) basis at its own cost for a specified period, it was eligible for depreciation on amount capitalized under head 'License to collect Toll'

In the instant case, the assessee was awarded a project for development, operation and maintenance of a road in the State of Madhya Pradesh on BOT basis. It was required to develop, construct and maintain the road at its own cost for a specified period. On expiry of the specified period, the infrastructural facility was to be transferred to the State Government free of charge. In consideration of such expenditure, the assessee was bestowed with a right to collect toll during the specified period. The costs incurred on development and construction of infrastructural facility was capitalized by assessee under the head 'License to collect Toll' and depreciation thereon was claimed by it. During assessment, the AO disallowed the depreciation claim of assessee. The CIT(A), however, allowed its claim by holding that the right to collect toll was a valuable right, having commercial value and it was an intangible asset covered by section 32(1)(ii).

The Tribunal held in favour of assessee as under:

1) The right to collect toll was a result of the costs incurred by the assessee on development, construction and maintenance of the infrastructure facility. Such a right had been adjudicated by the Tribunal in the various judicial precedents to be in the nature of 'intangible asset' falling within the purview of section 32(1)(ii) and found to be eligible for claim of depreciation.

2) The plea of the revenue, that the impugned right was not of the nature referred to in section 32(1)(ii), for the reason that the agreement with the State Government only allowed the assessee to recover the costs incurred for constructing the road facility, whereas section 32(1)(ii) required that the assets mentioned therein to be acquired by the assessee after spending money, was factually and legally misplaced;

3) It was incorrect to say that impugned right acquired by the assessee was without incurring any cost. In fact, it was quite evident that the assessee had got the right to collect toll for the specified period only after incurring expenditure through its own resources on development, construction and maintenance of the infrastructure facility;

4) Section 32(1)(ii) permits allowance of depreciation on assets specified therein being 'intangible assets' which are wholly or partly owned by the assessee and used for the purposes of its business. The aforesaid condition was fully satisfied by the assessee. Thus, the assessee was eligible for depreciation inasmuch as right to collect toll was an intangible asset falling within the purview of section 32(1)(ii) – ACIT v. Ashoka Infraways (P.) Ltd. [2013] 33 taxmann.com 499 (Pune - Trib.)

ITAT disallows sec. 54F exemption to the extent sum invested in construction before transfer of original asset

Investment made by assessee in new residential property was not entitled to deduction under section 54F to extent same was made before the sale of existing property

In the instant case, the assessee had filed its return for the relevant assessment year and had claimed deduction under section 54F in respect of amount invested in construction of a residential house property. During assessment, AO was of the view that the assessee was not entitled to deduction, as construction of house was substantially completed before the sale of capital asset. Therefore, the moot question that arose for consideration of the Tribunal was as under:

Whether the cost of construction incurred by the assessee after the sale of capital asset was entitled to deduction under section 54F, even if, the construction was commenced before the sale of capital asset and was completed within two years from the sale of capital asset?

The Tribunal held as under:

1) As per the ratio laid down by Karnataka High Court in the case of CIT v. J.R. Subrahmanya Bhatt [1986] 28 Taxman 578, the assessee was entitled to deduction under section 54F of the Act, though the assessee has commenced construction before the sale but completed the construction within two years after the sale. The commencement of construction prior to the sale of capital asset was immaterial and the assessee was entitled to deduction under section 54F of the Act;

2) In the case of Chandru L. Raheja v. ITO [1988] 27 ITD 551 (Bom.), it was held that when the assessee had already purchased land, started construction of a building then only that part of the investment in new house that was made out of the sale proceeds received after the transfer of the old house would qualify for exemption under section  54 of the Act;

3) The investment in residential house which had taken place after the sale of existing capital asset was to be considered only for deduction under section 54F;

4) Thus, whatever investment was made by the assessee in construction of new property within the period stipulated under section 54F, after the sale of existing property, would be entitled to deduction, but, the assessee was not entitled to deduction under sec. 54F in respect of the investment made in new property to the extent of investment made before the sale of existing property. Thus, the appeal of the assessee was partly allowed - Smt. Nimmagadda Sridevi v. Dy.CIT [2013] 33 taxmann.com 306 (Hyderabad - Trib.)

Sunset clause doesn’t need a road map to end tax exemption; Parliament has legislative powers to withdraw it

Amendments by Finance Act, 2011 to withdraw exemption from MAT & DDT to SEZ developers were not unconstitutional. The road map was not a condition precedent for the Parliament to introduce sunset clause.  The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment.

In the instant case, the petitioners were SEZ developers. They had borrowed massive loans from various financial institutions and made investments in land, buildings, infrastructure facilities, etc., and commenced their projects on the basis that income accrued or arising to them as SEZ developers would be exempted from MAT and DDT. The Union Finance Minister moved the Union Budget for 2011-2012 on the floor of Parliament and the Finance Bill, 2011 was introduced, in terms of which, a proviso was inserted to Section 115 JB (6) and 115-O (6), to withdraw exemption from MAT and DDT. Being aggrieved by the insertion of the above provisos, the petitioners filed the instant writ petition.

The High Court dismissed the petitions by holding as under:

1) It was a settled position of law that every tax exemption and incentive would have a sunset clause. Every fiscal legislation, providing for tax exemption must have a life span fixed in the enactment;

2) There could be no permanent tax exemption or incentive in fiscal legislation. Realizing this lapse on the part of the Government, the impugned provisos were introduced restricting the exemption only for a particular period;

3) The impugned amendments were shown in the Finance Bill and were placed before the Parliament in the month of March, 2011 for the years 2011-2012;

4) The proposed amendments specified that the exemption from MAT would come to an end from 1st April, 2012 and exemption from tax on distribution of dividends would come to an end from 1st June 2011. Thus, the impugned amendments were prospective in nature;

5) The road map was not a condition precedent for the Parliament to introduce sunset clause. The Parliament has the sovereign legislative power to withdraw the tax exemption by way of legislative amendment. Thus, the instant writ petitions were  dismissed - Mindtree Ltd. v. Union of India [2013] 34 taxmann.com 250 (Karnataka)