Monthly Digest of Case laws (January 2011)

Compiled by: Ajay Singh, Paras Savla, Rahul Hakani, Sujeeth Karkal and Renu Choudhari, Advocates,
KSA Legal Chambers

(Journals Referred: ACAJ / BCAJ / BLR / CITC / CTR / DTR / ITD / ITR (Trib) / ITR / SOT / TTJ /
TLR / Taxman / Taxation / Tax World, www.itatonline.org )

1. S. 2(IB): Amalgamation – Subsidiary - Tax Avoidance

Assessing Officer rejected the scheme of Amalgamation with its subsidiary holding that it was a mere
device to avoid tax. CIT(A) accepted the scheme. On revenue’s appeal the tribunal held that as the
scheme has been sanctioned by High Court and it cannot be held that there was motive to avoid tax.,
further the shares were issued to outside shareholders by assessee company in terms of scheme sanctioned
by High Court and the allotment of shares were done on the basis of valuation report submitted by an
independent valuer.
ACIT vs. TVS Motors Co. Ltd. (2011) 128 ITD 47 (Chennai)

2.S. 2(22)(e) : Deemed Dividend - Advance given for the purpose of Business
Assessee, Managing Director having received advances from the company, pursuant to resolution passed
by it to enable the assessee to purchase land which was to be developed by the company in order to
bifurcate the ownership of land from the development or construction of flats thereon so as to reduce the
incidence of stamp duty on the ultimate customers, the transaction was motivated by assessee
considerations and commercial expediency, therefore, the advances cannot be treated as deemed dividend.
ACIT vs. Harsad V. Doshi (2011) 49 DTR 181 (Trib.)(Chennai)

3.S. 4 :Charge of income tax- Income – Capital or Revenue Receipt - Subsidy for setting up
Industry
Subsidy received for setting up agro based industrial unit in backward area was determined with reference
to capital investment, is a capital receipt.
CIT vs. Siya Ram Garg (HUF) (2011) 49 DTR 126 (P&H)

4.S. 4 :Charge of income tax- Income - Capital or Revenue Receipt – Interest - Pre–commencement
Interest on deposit of margin money for opening of letter for credit for import of machinery at the stage of
setting up of industrial unit of the assessee is a capital receipt and the same is to be set off against pre-
operative expenses.
CIT vs. Arihant Threads Ltd. (2011) 49 DTR 251 (P&H)

5.S. 9 : Income deemed to accrue or arise in India - Purchase of Technical know how – Royalty -
Permanent Establishment - Business Receipt –International Taxation- Tax Deduction at Source -
(S. 195)
Purchase of technical know how by foreign company, was business receipt. As there was no permanent
establishment in India, the same was not liable to be taxed in India, though the same was treated as
‘royalty’.
Vesil SPA Italy vs. Jt. CIT (2011) 43 SOT 137 (Hyd.)

6.S. 9(1)(i) : Income deemed to accrue or arise in India - Tax Deduction at Source - Technical
Services –International Taxation- (S. 40(a)(i), 194J)

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Assessee was a dealer for Xerox India Ltd. (XIL), authorized to sell and otherwise, promote latter in
specified territories. Apart from sales, assessee was also required to render service support to customers,
i.e. purchasers of product of XIL. Assessee claimed that payments made to XIL could not be treated as
“fees for technical services”. Tribunal held that the payment in question amounted to fees for technical
services hence disallowance made by the lower authorities were justified.
Divya Business Systems (P) Ltd. vs. ACIT (2011) 43 SOT 155 (Cochin)

7.S. 9(1)(i) : Income deemed to accrue in India – No income deemed to arise even if revenue arises
due to viewers in India-International Taxation.
For income to be taxable under section 9(1)(i), the carrying of operations in India is a sine qua non. It was
held that merely because the footprint area included India and programmes were watched by Indian
viewers, it did not mean that the assessee was carrying out business operations in India. The transponder
used was in orbit and merely because its footprint was on India did not mean that the process had taken
place in India. Ishikawaima-Harima Heavy Industries 288 ITR 408 (SC) followed. It was further
observed that the payment by the telecast operators outside India to the assessee cannot be taxed on the
basis that the end consumers are in India.
Asia Satellite Telecommunication Co. Ltd. vs. DIT, (Delhi High Court) Source: www.itatonline.org

8.S. 10(23C)(vi) : Exemption – Educational Institutional.

The assumption that for exemption there should not be any surplus and if it is otherwise the institution
society exists for profit and not charity is not justified. Thus, exemption cannot be rejected merely
because there is a surplus. Vanita Vishram Trust 327 ITR 121 (Bom.), Maa Saraswati Trust 194 TM 84
(HP) and Pinegrove International Charitable Trust 327 ITR 73 (P&H) followed).
St. Lawrence Educational Society vs. CIT (Delhi High Court) Source: www.itatonline.org

9.S. 11 : Charitable Trust - Application of Income - Depreciation

Depreciation claim is nothing but application of income, hence, depreciation should be reduced from the
income for determining the percentage of funds which had to be applied for the purposes of the trust.
CIT vs. Tinny Tonts Education Society (2011) 330 ITR 21 (P&H)

10.S. 14A : Business Expenditure – Disallowance - Exempted Income - Apportionment of Expenses

- Rule 8D - Pre Asst. Year 2008-09
For pre Asst. Year 2008-09, the assessee earned tax free dividend income from investments in units,
bonds, shares, etc. The assessee did not maintain separate books of account for tax free securities but
claimed that the same had been invested from its own funds and no part of the interest paid by the
assessee on its borrowings together with the administrative expenses could be disallowed. Assessing
Officer took the view that the interest paid on borrowings and administrative expenses could be
disallowed under section 14A. On appeal, the Tribunal held that as no rule had been made prescribed for
computing the disallowance no disallowance under section 14A could be made. On appeal by the
department, the Court held that in the absence of any precise formula for proportionate disallowance, no
disallowance is called for in respect of administrative cost attributable to earning of tax free income until
Rule 8D came in to force.
CIT vs. Catholic Syriyan Bank Ltd. & Ors. (2011) 237 CTR 164 / 49 DTR 57 (Ker.) / Source:
www.itatonline.org
Editorial Note:- Godrej & Boyce Mfg Co Ltd (2010)328 ITR 81 (Bom.)
Dhanalakshmi Bank (2007) 12 SOT 625 (Coch.)

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11. S. 14A : Business Expenditure – Disallowance – Exempted Income – No expenditure incurred

for earning the exempted income
When no expenditure is incurred for earning exempted income disallowance u/s 14 A cannot be made .
ACIT Vs Pradip N. Desai , ITA No. 2488/AHD / 2008 AY 2005-06 Bench ‘A’ dt. 28/12/2010 ,
Ahmedabad Chartered Accountants Journal , Vo. 34 part 10 January 2011 ,Pg. 478

12.S. 28(i) : Business Income - Development Rights – Retirement - Value of flats to be allotted latter
Assessee, a builder having constituted a partnership firm with four others by contributing his development
rights in a plot and retired from the firm within 11 days. The Tribunal held that the firm is not genuine
and entire consideration received was taxable as business income. Value of flats to be allotted to be
treated as consideration received, though the flats are to be allotted in future.
ACIT vs. Dilip S. Hate (2011) 49 DTR 49 (Trib.)(Mum.)

13.S. 28(i) : Business Income - Capital Gains - Investment in Shares - (S. 45)
Activity of frequent buying and selling of shares over a short span of period has to be treated as adventure
in the nature of trade. The assessee had made only 37 transactions in 35 scripts. In the preceding year the
Assessing Officer has accepted the short term gains and long term gains as investment. The Tribunal held
that the principle of resjudicata cannot be applied to income tax proceedings and each assessment year is
independent. The Tribunal also held that the treatment in the books of an assessee is not conclusive.
Harsha N. Mehta (Smt.) vs. Dy. CIT (2011) 43 SOT 332 (Mum.)

14.S. 28(i) : Business Income – Computation - Cost of land contributed by partner to the firm - (S.
4)
In computing the profits and gains of the firm on the sale of property in question, the value of the plot
brought by one of the partners by way of capital contribution should be taken as per amount declared in
revised returns as valuation of land in question which was accepted by the wealth tax authorities and not
at value which was earlier shown in the books.
Hansallaya Properties vs. CIT (2011) 49 DTR 231 (Delhi)

15.S. 28(iv) : Business Income - Benefit or Perquisite - Waiver of Loan – [S. 2(24), 41(1)]
Loan received for the purpose of acquiring capital assets did not constitute a trading liability and hence
neither section 28(iv) nor section 41(1) has application where loan waived by the bank.
Iskraemeco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 (Mad.)

16.S. 28(va) : Business Income – Share Transfer Agreement – Non compete covenant – No transfer
of controlling interest
It was held that a Share Transfer Agreement is merely agreement for sale of shares and is a non compete
covenant. It does not in any manner refer to transfer of any controlling interest. Thus, the amount
assessable as business income.
ACIT vs. R.K.B.K. Fiscal Services Ltd., (Kolkata) (Trib.) Source: (www.itatonline.org)

17.S. 32 : Depreciation - Non user of Asset - Block of Assets

The assessee claimed depreciation under section 32 in respect of the assets at its Bhopal unit which was
closed for six years. The claim was on the basis that (1) despite closure of the unit there was a “passive
user” of the asset were part of the “Block of assets”, depreciation could not be disallowed. Assessing
Officer and CIT(A) rejected the claim. Tribunal upheld the claim. On appeal to High Court, the Court
held that despite non-user of assets, depreciation is allowable, if it is part of “Block of assets”.
CIT vs. Oswal Agro Mills Ltd. (Delhi High Court) Source: www.itatonline.org

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18.S. 36(1)(iii) : Business Expenditure - Interest on Borrowed Capital - to settle loan liability of
sister concern
Interest on loan obtained by assessee to settle liability of its sister concern, to retain business premises of
assessee the same is allowable.
CIT vs. Neelkanth Synthetics and Chemicals P. Ltd. (2011) 330 ITR 463 (Bom.)

19.S. 36(1)(iii) : Business Expenditure - Interest on Borrowed Capital - Interest and Penalty under
Sales Tax Act
Interest paid on funds borrowed for interest and penalty under Sales Tax Act for belated payment
allowable as business expenditure. Revenue appeal was dismissed as no substantial question of law.
CIT vs. International Fisheries Ltd. (2011) 220 Taxation 11 (Bom.)

20.S. 37(1) : Business Expenditure - Corporate Guarantee – Subsidiary - One time settlement with
Bank
Giving corporate guarantee was not only one of the objects of the assessee company but the same was
given for its subsidiary company and it was in the interest of the assessee company and hence, the
commercially expedient decision, hence, one time settlement with bank was allowable as business loss.
ACIT vs. Industries (India) Ltd. (2011) 128 ITD 98 (Chennai)

21.S. 37(1) : Business Expenditure - Keyman Insurance – Hospital - Consultancy Fees - Software
Maintenance
Keyman Insurance premium paid by the Company on the lives of Chief cardiac surgeon, chairman, and
managing director of company was qualified as deduction under section 37(1). Consultancy fees paid for
maintenance of software were to be allowed as revenue expenditure.
Escort Heart Institute & Research Center Ltd. vs. ACIT (2011) 128 ITD 108 (Delhi)

22.S. 37(1) : Business Expenditure - Capital or Revenue Expenditure -Expenditure on setting up

new sugar units - Expansion of Business
Expenses incurred by assessee, a sugar manufacturer, by way of salaries, wages, bonus, provident fund
contribution, workmen welfare expenses, power, fuel and water, manufacture expenses rent for office
building, etc. on setting up new sugar units were expenses for the purpose of manufacture of sugar in
respective factories and therefore, the same are allowable as revenue expenditure.
CIT vs. Sakhti Sugars Ltd. (2011) 237 CTR 51 (Mad.)

23.S. 37(1) : Business Expenditure - Replacement of Moulds - Revenue Expenditure

Replacement of moulds did not result in creation of new capital asset or benefit of enduring nature, mere
fact that moulds were used in production process could not be conclusive as to the nature of expenditure,
hence, expenditure on replacement of moulds was revenue expenditure.
CIT vs. Malerkotla Steels & Alloys (P.) Ltd. (2011) 237 CTR 201 / 49 DTR 1 (P&H)

24.S. 37(1) : Business Expenditure - Repair

The assessee company was engaged in printing and publication of various periodicals. It got repaired an
empty derelict hall which was converted into a recreation room and was used by assessee’s staff. The
aforesaid deduction was allowed to the assessee as the repairs did not constitute a capital expenditure and
hence were allowable under section 37(1) of the Act.
ACIT vs. MM Publication Ltd. (2011) 43 SOT 59 (Cochin)

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25.S. 40(b) :Amounts not deductible- Firm – Remuneration - Not Working Partner
Where remuneration is paid to a partner who is not a working partner, remuneration payable to him even
in accordance with the deed of partnership is not allowable under the provisions of section 40(b) of the
Act.
Reliable Surface Coatings vs. ACIT (2011) 7 ITR 183 (Trib.)(Ahd.)

26.S. 40(a)(i) :Amounts not deductible- Non Resident - Tax Deduction at Source - Technician
outside India - (S. 195)
Payment made outside India for services rendered by non residence technicians outside India no
disallowance can be made as provisions of section 195 is not applicable.
CIT vs. International Creative Foods (P.) Ltd. (2011) 49 DTR 150 (Ker.)

27.S. 45 : Capital Gains - Sale of lease hold land with incomplete building – Short Term – [S.
2(29B), 2(42B)]
Capital gain arising to the assessee on the sale of lease hold land with incomplete building is to be
bifurcated into gain arising out of sale of leasehold interest in land and sale of building. In the absence of
perversity in the finding of the Tribunal estimating the value of the building at Rs. 2.15 crores as against
the construction cost of Rs. 1.85 crore, the gain arising on the sale of land is to be treated as a long term
capital gain where as the gain of Rs. 30 lakhs arising on the sale of incomplete building is to be treated as
short term capital gain.
CIT vs. Hindustan Hotels Ltd. (2011) 237 CTR 32 / 49 DTR 17 (Bom.)

28.S. 45 : Capital Gains - Transfer of Goodwill - Sale of Entire Business

Sale of entire business, including all assets and liabilities, as a going concern, not possible to bifurcate
consideration received on account of transfer. Transfer does not give rise to capital gains.
ACIT vs. Patel Specific Family Trust (2011) 330 ITR 397 (Guj.)

29.S. 45(4) : Capital Gains – Transfer – Dissolution – Otherwise – [S. 2(47)]

Land was transferred in the name of the partners by book entries, the assessee contended that as no
registration is done, the immoveable property was not legally transferred and also contended that as there
was no dissolution, section 45(4) cannot be applied. The Tribunal held that the provision of section 45(4)
were applicable. The word “otherwise” covers the transfer other than the dissolution also.
New Gujarat Tin Printing Works vs. ITO (2011) 128 ITD 182 (Ahd.)

30.S. 50 : Capital Gains –Depreciable assets- Loss - Carry Forward and Set off of brought forward
business loss
Income assessed by the assessee in the relevant year on sale of factory building, plant and machinery
although not taxable as profits and gains of business or profession is an income in the nature of business
though assessed as capital gains under section 50 and therefore, assessee is entitled to set off of brought
forward business losses against the said capital gains.
Digital Electronics Ltd. vs. Addl. CIT (2011) 49 DTR 484 (Trib.)(Mum.)
Editorial Note:- See J. K. Chemicals Ltd. vs. ACIT, ITA No. 8206/Bom/1089 and 8618/Bom/89 Bench
‘A’ dt. 1-11-1993, Sri Padmavathi Srinivasa Cotton Ginning Factory vs. Dy. CIT (2009) 29 DTR 1
(Visakha)(Trib.)

31.S. 54 : Capital Gains – Exemption - Investment in two houses

Assessee was not entitled to exemption in respect of two independent residential houses situated at
different locations.

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Pawan Arya vs. CIT (2011) 237 CTR 210 / 49 DTR 123 (P&H)

32.S. 54F : Capital Gains – Exemption – Investment in residential house - Time Limit
Where the assessee had purchased a flat after one year of sale of original asset and constructed a new
house within three years of sale of original asset proviso (ii) to section 54F was not attracted and assessee
was entitled to exemption under section 54F in respect of new house constructed by him.
P. R. Kulkarni & Sons (HUF) vs. Addl. CIT (2011) 49 DTR 442 (Trib.)(Bang.)

33.S. 54F(1)(a) : Capital Gains – Exemption - Stamp Duty Valuation - (S. 45, 50C)
Capital gains arising from the transfer of any long term capital asset for the purpose of section 54F has to
be worked out applying section 48 without imposing section 50C into it, when sale consideration was
shown at Rs. 20,00,000/- stamp duty valuation was Rs. 36,00,000/- and the assessee invested in new
house Rs. 24,00,000/- including Rs. 20,00,000/- sale consideration, he could claim exemption under
section 54F only of Rs. 18,06,494/- and not entire Rs. 36,00,000/-.
Gauli Mahadevappa vs. ITO (2011) 49 DTR 207 (Trib.)(Bang.)
Editorial Note:- Gyan Chand Batra vs. ITO (2010) 133 TTJ 482 / 45 DTR 41 (Trib.)(Jaipur) Tribunal
has taken different view.

34.S. 54F(4) : Capital Gains – Exemption - Deposit in Savings Bank Account

Where the assessee had deposited sale proceeds in normal savings account as against scheme specified by
Central Government through notification in official Gazette as per section 54F(4), it violated provisions
of section 54F(4), hence, not eligible for exemption.
Thakorlal Harkishandas Intwala vs. ITO (2011) 43 SOT 347 (Ahd.)

35.S. 56(2)(v) : Income form Other Sources - Gifts received by minor sons - Maternal Uncle - (S.64)
Section 56(2)(v), read with Explanation speaks of relationship between the donor and donee and not
deemed assessee, maternal uncle of the assessee who made gifts of Rs. 5 Lakhs to two minor sons of the
assessee is not a “relative” of the donees with in the meaning of explanation to section 56(2)(v) and
therefore, the impugned sum is chargeable to tax in the hands of the assessee under the provisions of
section 56 read with section 64.
ACIT vs. Lucky Pamnani (2011) 49 DTR 501 /135 TTJ 607(Trib.)(Mum.)

36.S. 57(iii) :Income from other sources- Deductions - Interest – Assessing Officer can lift veil &
determine legal effect but cannot ignore legal effect on ground of “substance”
It is held by the Larger Bench that under section 57(iii), expenditure laid out or expended wholly or
exclusively for the purpose of making or earning income is deductible. It is the purpose of the expenditure
that is relevant but the purpose need not be fulfilled. R. P. Moody 115 ITR 519 (SC) followed. The
assessee must act bona fide & show nexus between the advancing of funds and his business interest. The
dominant purpose for making the investment must be to earn income & to ascertain the purpose the
Assessing Officer may lift the veil (Swapna Roy 233 CTR 10 (All) & Punjab Stainless 324 ITR 396
(Del.) followed);
It was also held that legal effect of a transaction cannot be displaced by probing into the “substance of the
transaction”. Thus, the exercise of jurisdiction cannot be stretched to hold a roving enquiry or deep probe.
CIT vs. Rockman Cycles Industries (High Court)(Larger Bench)(P&H) Source: www.itatonline.org

37.S. 68 : Cash Credits - Share Application Money -Satisfactory explanation as to the ‘nature of the
source.

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The Hon’ble High Court held that in order to provide satisfactory explanation as to the “nature and
source” of a sum found credited in his books, the initial burden is on the assessee. The assessee is
required to prove (a) Identity of the shareholder; (b) Genuineness of transaction; and (c) credit
worthiness of shareholders;
CIT vs. Oasis Hospitalities Pvt. Ltd. (Delhi High Court) www.itatonline.org

38.S. 69 : Unexplained Investments –difference in statement of value of stock furnished to bank and
entries in books of accounts addition justified
Where the stock statement of hypothecated goods furnished bank was at variance with stock recorded in
books of accounts . It was held that addition was justified as the assessee neither denied statement made
to bank nor furnished valid explanation of discrepancy .
B.T.Steels Ltd. Vs CIT , (2011) 196 Taxman 362(P & H)

39.S. 69A : Unexplained Money – Claim for redemption fine – deduction not allowed
It was held that Sec. 69A does not provide for any deduction , thus claim for redemption fine is not
admissible . Adjudication , confiscation and later redemption fine does not affect the assessment in case
of seized articles u/s 69A.
P. Sonam V CIT (IV) , Ernakulam (2011) 196 Taxman 335 (ker.)

40.S. 73 : Losses in Speculation Business - Delivery based loss on shares also Speculation Loss.
It is held that the Explanation to section 73 creates a fiction that the loss suffered by certain companies
from the business of purchase & sale of shares shall be deemed to be speculation loss. The definition of
speculative transaction in section 43(5) not applicable to Explanation to section 73. The CBDT Circular
dated 24.7.1976 cannot be treated as guide for interpretation of section 73 when the provision is very
clear and free from any ambiguity.
Paharpur Cooling Towers Ltd. vs. ACIT (Calcutta High Court) www.itatonline.org
Editorial : Refer Paharpur Cooling Towers Ltd. Vs DCIT (2003)85 ITD 745 (Kol.)

41.S. 80IA : Deductions - Industrial Undertaking in Infrastructure Development - Absorption of

loss in earlier year, section 80-IA unit loss to be set-off against section 80-IA profits
It was held that deduction under section 80-IA has to be computed after deduction of the notional brought
forward losses and depreciation of business even though they have been allowed set off against other
income in earlier years as concluded by the ITAT Special Bench judgement in ACIT vs. Gold Mine
Shares & Finance (P) Ltd 113 ITD 209 (SB)(Ahd.) against the assessee.
Hyderabad Chemical Supplies Ltd. vs. ACIT (Trib.)(Hyd.) Source: www.itatonline.org

42.S. 80IA(8) : Deductions – Industrial Undertaking - Tariff fixed by MERC for sale of power does
not reflect “market value”
It is held that under section 80-IA(8), the transfer of goods from an eligible business to a non-eligible
business is required to be taken at “market value”. But the tariff determined by MERC is based on the
concepts of ‘clear profits’ and ‘reasonable return’ and does not reflect the “market value” of the
electricity. Further, the tariff is fixed for both activities of generation and distribution of power and may
not reflect the true rates with regard to only the activity of generation. Thus, even after the fixation of
tariff by MERC, the profits from the business of generation of power has to be worked out on the basis of
the price paid to the outside party for purchase of power.
Reliance Infrastructure Ltd. vs ACIT (Trib.)(Mum.) Source : www.itatonline.org

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43.S. 80HHC : Deduction – Export - Profits of Business - Interest on Deposits -Inter-corporate

Deposits
Finding of the authorities below that interest income received by the assessee company on bank deposits
and inter-corporate deposits is a part of business profit not having been shown to be perverse, the same
cannot be excluded from the business profit while calculating the deduction under section 80HHC.
CIT vs. Sociendade De Fomento Industrial Ltd. (2011) 237 CTR 141 / 49 DTR 161 (Bom.)

44.S. 80HHC : Deduction – Export – Receipts - Freight – Insurance - Packing Charges - Sales Tax
set off
90% of receipts from freight and insurance, packing charges, sales tax set off and gross service income
was be excluded from the profits of the business in terms of explanation (baa) to section 80HHC of the
Income Tax Act.
CIT vs. Dresser Rand India P. Ltd (2011) 330 ITR 453 (Bom.)
Editorial Note:- Refer, CIT vs. Dresser Rand India Pvt. Ltd. (2010) 323 ITR 429 (Bom.). In Pfizer Ltd.
(2010) 233 CTR 521 / (2011) 330 ITR 62 (Bom.) distinguished.

45.S. 80IB : Deduction - Industrial Undertakings – Interest - Miscellaneous Income

Interest on deposits would not be allowable towards the deduction under section 80IB. Miscellaneous
income (reversal of LD charges), the matter was remanded to the Tribunal for fresh consideration.
CIT vs. Dresser Rand India P. Ltd (2011) 330 ITR 453 (Bom.)

46.S. 88E : Rebate - Securities Transaction Tax – [S. 40(a)(ib)]

Disallowance of deduction for securities transaction tax under section 40(a)(ib) could not deprive the
assessee of rebate under section 88E.
ITO vs. Chunilal T. Mehata (2011) 7 ITR 50 (Trib.)(Kol.)

47.S. 92C :Avoidance of tax- Transfer Pricing - International Taxation - Determination of ALP of
slump sale
For purpose of transfer pricing in order to determine the ALP in the absence of other identical
transactions, the valuation by a registered valuer is the most appropriate means under CUP method.
However, as the valuation report filed by the assessee is not reliable, the only option is to adopt the value
of the assets sold as per the company law or income-tax WDV. In the sale of a going concern, factors like
profitability of the branch office, goodwill, and various other commercial and technical aspects will have
a bearing on the ALP.
Inter Asia Electronics Inc vs. ADIT (ITAT) (Banglore) www.itatonline.org

48.S. 92C :Avoidance of tax- Transfer Pricing : International Taxation - +/- 5% Variation only if
more than one price determined
The benefit of +/- 5% variation as per the Proviso to section 92C(2) is available only if more than one
price is determined. It does not apply where only one price has been determined. CBDT Circular No.12
dated 23.8.2001 provides that “the AO shall not make any adjustment to the arm’s length price
determined by the taxpayer if such price is unto 5% less or unto 5% more than the price determined by
the AO”. Circular was issued considering practical difficulties. As the Circular never came into operation
thus, Circular No. 12 is otiose and cannot be relied upon.
ACIT vs. Essar Steel Ltd (ITAT)(Vizag) www.itatonline.org

49.S. 92C :Avoidance of tax- Transfer Pricing - International Taxation - Super normal profit co
must be excluded from comparable

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The assessee, engaged in providing software development services reported an OP/Cost Margin of
14.96%. The TPO worked out the average of arithmetic mean of ALP (OP/OC) of 42 comparables at
24.91% and directed that an adjustment of Rs. 10.40 crores be made. In its objections to the DRP, the
assessee claimed that the comparables included three companies which were “super-normal profit
making” and that these should be excluded. It was claimed that if the said companies were excluded, the
arithmetic mean of OP/OC of the comparables was 17.15% which was within the +/- 5% range permitted
by s.92(C)(2). The TPO rejected the contention on the ground that one company was listed and audited
and showing consistent growth at the same level and there was no abnormality and that the other
company’s information was not listed in the database. The third “abnormal” company was not dealt with
by the TPO. The DRP dismissed the objections of the assessee by a “very cursory and laconic order”. On
appeal by the assessee, HELD allowing the appeal:
(i) The TPO rejected the assessee’s contention with regard to inclusion of the three super-normal profit
companies without any cogent reason. It is undisputed that the three companies have shown super-normal
profits as compared to other comparables. Their exclusion from the list of comparable is quite correct.
After excluding the three companies the arithmetic mean of the comparables falls within the +-5% range
permitted by section 92(C)(2);
(ii) Despite the voluminous submissions and paper book filed, the DRP passed a very cursory & laconic
order without going into the details of the submissions which is quite contrary to the mandate of s. 144C.
Adobe Systems India Pvt. Ltd. vs. ACIT (Trib.)(Delhi) Source: www.itatonline.org

50.S. 115WB : Fringe Benefits - Rent for Car Parking Area – Revision - (S. 263)
In the present case it was held that the essential facilities attached to a rented building had to be treated as
part of building itself and therefore, rent or license fee paid for such facilities should be treated as forming
part of rent. It was further held that in view of the above, the rent paid for car parking area did not fall
under category of ‘running, maintenance and repair expenses of car’ and thus assessee was not liable to
pay fringe benefit tax on the said amount.
Hewlett Packard India Sales (P.) Ltd. vs. CIT (2011) 43 SOT 124 (Bang.)

51.S. 132 : Search and Seizure - Warrant of Authorisation - Common Search Warrant - Validity
Common search warrant specifying names and addresses of persons residing at different places, held to be
valid.
Embassy Classic P. Ltd & Another vs. ACIT (2011) 7 ITR 287 (Trib.)(Bang.)

52.S. 132 : Search and Seizure - Warrant of Authorisation - Joint Names - Block Assessment - (S.
158BC)
A warrant of authorization must be issued individually. If it is not issued individually, then the assessment
cannot be made in individual capacity. Warrant of authorization issued in joint names of husband and
wife. Individual assessment on wife alone not valid.
CIT vs. Vandana Verma (Smt.) 330 ITR 533 (All)

53.S. 133A : Survey – Statement – Disclosure – Retraction - Addition

Addition can not be made solely on the basis of statement recorded during survey in absence of any
corroborative evidence and supporting material in case wherein it has been retracted.
ACIT vs. Prabhu Dayal Kanojia (2011) Tax World Vol. XLV Part-1. Page 23. (January, 11)

54.S. 140 : Return - Not signed by Managing Director - Curable Defects - (S. 292B)
Return of Company not signed by Managing Director but by person authorized by Board resolution,
defects curable under section 292B.

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Hind Samachar Ltd. vs. UOI (2011) 330 ITR 266 (P&H)

55.S. 143(3) : Assessment – Addition - Adhoc Addition - Self made vouchers

Adhoc disallowance cannot be made simply holding that self made vouchers cannot be taken as correct
and proved, unless some of such vouchers are proved as bogus or fake.
ITO vs. Bajrang Trading Company (2011) Tax World Vol. XLV Part-1 Page 33 (January, 11)

56.S. 144C : Dispute Resolution Panel - Act to expectations & not have perfunctory approach
The DRP, is an authority created under a statute and conferred with the powers, which has the obligation
to act as a body living to the expectations which the law mandates. It was held that section 144C
empowers the Dispute Resolution Panel (DRP) to issue directions to the Assessing Officer and cannot be
treated as totally redundant or absolutely inefficacious remedy to the assessee. Thus, no assessee can have
any kind of apprehension that the approach to the DRP is perfunctory.
Ericsson AB vs. ADIT (Delhi High Court) Source: www.itatonline.org

57.S. 148 : Reopening of Assessment – Non-supply of ‘Reasons for Reopening’ within the limitation
period time - Reopening void
Where the notice has been issued within the said period of six years but the reasons have not been
furnished within that period is hit by the bar of limitation because the issuance of the notice and the
communication and furnishing of reasons go hand-in-hand. A notice under section 148 without the
communication of the reasons therefore is meaningless inasmuch as the Assessing Officer is bound to
furnish the reasons within a reasonable time. The expression ‘within a reasonable period of time’ as used
in GKN Driveshafts 259 ITR 19 (SC) cannot be stretched to such an extent that it extends even beyond
the six years stipulated in section 149.
Balwant Rai Wadhwa vs. ITO (Trib.) (Delhi) Source: www.itatonline.org

58.S. 153A : Search and Seizure - Special Procedure for Assessment - On Money Payment –
Company - Director
Merely on the basis of entry in seized material not supported by corroborative evidence, and
contradictions in statement of purchaser of property, additions made in the hands of company on
substantive basis and addition in the hands of Director on protective basis was deleted.
Embassy Classic P. Ltd & Another vs. ACIT (2011) 7 ITR 287 (Trib.)(Bang.)

59.S. 154 : Rectification of mistake – intimation u/s 143(1)(a) cannot be rectified after order passed
u/s 143(3)
Rectification order u/s 154 cannot be passed to rectify an intimation given u/s 143(1)(a) after final
assessment order u/s 143(3) is passed .
Tamil Nadu Magnesite Ltd. Vs CIT , Coimbatore (2011)196 Taxman 271(Mad.)

60.S. 158B(b) : Block Assessment - Search and Seizure - Computation of Undisclosed Income -
Belated filing of Return - Disclosure of Income – [S. 132(4)]
If the search under section 132 takes place after the due date of filing of normal return and no return is
filed by that time, and the assessee is not able to demonstrate that he had disclosed his income to the
department before the date of search in the some manner or the other, filing of return thereafter under
section 139(4) would be of no consequence for the applicability of Chapter XIV–B and the income of the
assessee is to be treated as undisclosed.
CIT vs. A. T. Invofin India (P) Ltd. (2011) 237 CTR 360 / 49 DTR 141 (Delhi)

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61.S. 158BC : Block Assessment - Service of Notice

In the absence of any material or evidence to prima facie show that the alleged notice under section
158BC was actually sent to the assessee, it cannot be presumed, in the absence of acknowledgement of
the said notice, that might have been served upon the assessee and therefore, the proceedings initiated by
the Assessing Officer under section 158BC as well as block assessment are null and void initio.
ACIT vs. Lakshmi Industries (2011) 135 TTJ 112 (Chennai)

62.S. 158BC : Block Assessment - Protective Assessment be framed - (S. 158 BD)
The Assessing Officer in absence of any specific power under the Act, has power to make protective
assessment in case of regular as well as block assessment under certain circumstances Lalji Haridas vs.
ITO 43 ITR 387 (SC) followed.
CIT vs. Mahindra Finlease Pvt. Ltd. (Delhi High Court) Source: www.itatonline.org

63.S. 158BD : Search and Seizure - Block Assessment - Statement Recorded

Proceedings initiated against the assessee under section 158BD on the basis of statement recorded during
search are not valid as statement is neither document nor asset; further, initiation of proceedings under
section 158BD by the Assessing Officer against the assessees without recording the requisite satisfaction
was illegal.
CIT vs. Late Raj Pal Bhatia (2011) 49 DTR 9 / 237 CTR 1 (Delhi)

64.S. 159(2) : Assessment - Dead Person - Search and Seizure

Assessment cannot be framed on a dead person, where the assessee had already died on 2nd Feb., 1990
and the search was conducted thereafter on 13th Sept., 1990, section 159(2) was not attracted and no
assessment could be framed on a dead person. Therefore addition made under section 69B was liable to
be deleted.
Late Smt. Laxmibai Karanpuria Through L/H Rajendra Karanapuria vs. ACIT (2011) 135 TTJ 123 /
49 DTR 59 (Trib.)(Ind.)

65.S. 194C : Deduction at Source - Printing Material-Payments to contractor.

Payment made for purchase of printed packing material to suppliers, no work involving skill or secrecy, it
being sale, section 194C is not attracted.
ITO vs. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 (Trib.)(Delhi)

66.S. 194C : Deduction at Source - Shipping Agent - Carriage of Goods -Technical Services –
Payments to contractors. (S. 194J)
Payment made for carriage of goods from the customer’s trailers to the vessel in the case of export and
vice versa in the case of import of goods are covered by section 194C rather than section 194J which
cannot be applied.
ACIT vs. Merchant Shipping Services (P) Ltd. (2011) 49 DTR 97 (Trib.)(Mum.)

67.S. 194D : Deduction at Source - Insurance Commission

Assessee, a general insurance company, entered in to an arrangement with one B for facultative
reinsurance. As per said arrangement, assessee was liable to pay certain percentage of premium as
reinsurance inward commission to B. Assessee was receiving only net premium on reinsurance from B.
Profit commission, if any, was shared between assessee and B in certain percentage. Assessing Officer
held that assessee was liable to deduct tax on reinsurance commission paid to B under section 194D. The
Tribunal held that provisions of section 194D were not applicable to payment of reinsurance commission
made by assessee to B.

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Tata AIG General Insurance Co. Ltd. vs. ITO (2011) 43 SOT 215 (Mum.)

68.S. 194H : Deduction at Source – Commission or brokerage.

Transaction between assessee and concessionaries, principal to principal. Payments to concessionaries for
sale of milk products being not commission, tax not deductible.
ITO vs. Mother Dairy Food Processing Ltd. (2011) 7 ITR 16 (Trib.)(Delhi)

69.S. 201 : Deduction at Source - Assessee in default - Payment to non resident – [S. 163, 195(2),
201(IA)]
The Assessing Officer asked the assessee to deduct the tax and remit the amount. The assessee
approached the Court of Appeal in London for permission to deduct the tax at source from the award
amount. Pending the stay the Court directed the assessee to remit the amount to escrow account
maintained in names of both the parties. The entire amount was remitted as by court order. Indian tax
authorities sought to proceed holding assessee in default under section 201(1)(IA). The Tribunal held that
assessee could not be held to be assessee in default in terms of section 201(1) and 201(IA), as it was a
case of impossibility of performance, and hence assessee would be released from obligation to deduct tax
at source.
National Aviation Co. of India vs. Dy. CIT (2011) 43 SOT 362 (Mum.)

70.S. 201 : Assessee in default – Limitation - Deduction at Source - Tax duly paid by payee
Maximum time limit for initiating and completing the proceedings under section 201(1) has to be at par
with the time limit available for initiating and completing the assessment / reassessment of the payee;
impugned order under section 201(1) passed by the Assessing Officer with in the period of six years from
the end of the relevant assessment year is not time barred.
Person responsible for deduction tax cannot be treated as an assessee in default in respect of tax under
section 201(1) if the payee has paid the tax directly.
ACIT vs. Merchant Shipping Services (P) Ltd. (2011) 49 DTR 97 (Trib.)(Mum.)

71.S. 220 : Recovery – Stay - Appellate Tribunal – [S. 254(1)]

Assessing Officer and CIT(A) has disallowed the expenses under section 40(a)(ia), mainly relying on the
decision of Karnataka High Court which now stands overruled by the Supreme Court and liquidity being
not favourable, the entire demand is stayed till the disposal of assessee’s appeal by the Tribunal or for a
period of six months which ever is earlier.
Softcell Technologies Ltd. vs. Additional CIT (2011) 49 DTR 129 (Trib.)(Mum.)

72.S. 249(4)(a) : Appeal - Commissioner(Appeals) - Admitted Tax – Limitation - Refund of earlier

years
Commissioner(Appeals), dismissed the appeal on the ground that the assessee has not paid the admitted
tax. The assessee contended that in the earlier years the assessee had made excess payments of tax and it
was entitled refunds, and further the bank account was also attached. The assessee made payments
afterwards. The Tribunal set aside the order of Commissioner of (Appeals) and directed him to decide on
merit.
Endeavour Industries Ltd. vs. Dy. CIT (2011) 43 SOT 322 (Hyd.)

73.S. 249(4) : Appeal - Commissioner(Appeals) - Admitted Tax

If the appeal is filed without the payment of tax on returned income but subsequently the required amount
of tax is paid, the appeal shall be admitted on payment of tax and appeal has to be decided on merit.
Bhumiraj Constructions vs. Addl. CIT (2011) 49 DTR 195/135 TTJ 357 (Trib.)(Mumbai)

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74.S. 253(6)(c) : Appellate Tribunal - Fees - Income Determined - Order under Section 154
Order passed under section 143(1), assessed income is Rs. 13,06,780/-. Appeal filed against order under
section 154. Total income determined at more than Rs. 2 lakhs fee payable shall be one percent of
assessed income subject to a maximum of Rs. 10,000/-. The Tribunal held that fee rate dependent on total
income determined.
M. M. Bagwan and Brothers vs. ACIT (2011) 7 ITR 298 (Trib.)(Bang.)

75.S. 254(1) : Appellate Tribunal - Cross Objection - Dismissal of Revenue Appeal - Adjudication
Revenue filing appeal and the assessee filing cross objection before the Tribunal. Tribunal dismissed the
revenue’s appeal and not adjudicated the assesses cross objection. The Court held that the cross objection
to be decided.
Ram Ji Dass & Co. vs. CIT (2011) 220 Taxation 90 (P&H)

76.S. 254(1) : Appellate Tribunal - Duty of Tribunal - Reasoned Order

A judicial order must be supported by sufficient reasons for coming to the conclusion. Failure to record
reason would violate the principles of natural justice and is against the basic concept of fairness and
transparency, therefore, orders passed by the CIT(A) and the Tribunal suffer from violation of principles
of natural justice can not be sustained.
Iskraremeco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 (Mad.)

77.S. 254(2) : Appellate Tribunal - Rectification of Mistake - Merger

On the facts of the case, the High Court had reversed the order passed by the Tribunal holding that since
the assessee had paid arm’s length remuneration for services of its Indian agent, no further profits could
be attributed to foreign enterprises in India under Article 7(1) of DTAA.
In such cases the application filed by the revenue under section 254 read with section 9 & 90 of the
Income-tax Act, 1961 Article 7 of DTAA between India and Singapore was rendered infructuous as the
impugned order of Tribunal had already merged with the order passed by High Court & Tribunal had no
jurisdiction to modify its earlier order. The revenue’s application was therefore dismissed.
Dy. Director of IT vs. SET Satellite (Singapore) Pte Ltd. (2011) 43 SOT 1 (Mum.)(URO)

78.S. 260A : Appeal - High Court - Power of Review

S. 35G(9) of the Central Excise Act (= s. 260A (7) of the IT Act) provides that “the provisions of Civil
Procedure Code, 1908 relating to appeals to the High Court shall as far as may be apply in the case of
appeals under this Section”. Given that only the provisions of the CPC relating to “appeals” are made
applicable and not those relating to “review”, the High Court had to consider whether the provisions of
section 114 and Order XLVII of the Civil Procedure Code which confer power on the High Court to
review its judgments apply to appeals filed under the Excise Act. The assessee and the department were
agreed that the High Court had that power. HELD accepting the claim:
(i) The High Court is a Court of record as envisaged in Article 215 of the Constitution and has inherent
powers to correct the record. As the High Court has plenary jurisdiction, it has inherent power of review
to prevent miscarriage of justice or to correct grave and palpable errors committed by it. CCE vs. Hongo
India (236) ELT 417 (SC) & D.N. Singh vs. CIT 325 ITR 349 (Pat)(FB) followed;
(ii) In dealing with matters under a special enactment, the practice and procedure of the ordinary Court
will apply if the special enactment refers to and adopts the practice and procedure to be followed by the
ordinary Court. Accordingly, all provisions of the CPC apply to appeals under the Excise Act;
(iii) Section 35G(9) does not restrict the jurisdiction of the High Court to only the provisions of the CPC
relating to appeal. Section 35G(9) is enacted out of abundant caution to provide that in respect of matters

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not dealt with by the special enactment, the provisions of the CPC shall apply. Even if section 35G(9)
were not there, the ordinary law of the court have to be applied in the absence of anything contrary in the
special law;
(iv) One of the grounds of review is an error apparent on the face of the record. Where a statute is
amended retrospectively, a judgment applying the un amended law constitutes an error apparent on the
face of record and can be reviewed.
VIP Industries Ltd. vs. CCE (Bombay High Court) Source: www.itatonline.org

79.S. 263 : Revision of orders prejudicial to revenue – Penalty - Two Views

The Assessing Officer dropped the penalty proposal holding that appeal against the quantum is pending
before the High Court. The Commissioner of Income Tax revised the order. The Tribunal held that the
view of Assessing Officer cannot be held to be erroneous in dropping penalty proceedings. The Assessing
Officer can impose penalty even after appeal is determined by High Court. Two view possible hence
revision was held to be not valid.
V. K. Natesan (2011) 128 ITD 81 / 49 DTR 233/135 TTJ 257 (Cochin)(TM)

80.S. 263 : Revision of orders prejudicial to revenue - CIT not permitted to change view & revise
under section 263 without changed circumstances
It was held that as the department had examined the fundamental nature of the transaction in the earlier
years and its nature remained unchanged, the department could not have changed its view as regards the
nature of the transaction by dubbing it as erroneous. The department is not entitled to re-open an
assessment based on a fresh inference of transactions accepted by the revenue for several preceding years
on the pretext of dubbing them as erroneous.
Associated Food Products 280 ITR 377 (MP), Sirpur Paper Mills Ltd 114 ITR 404 (AP) & CIT vs. Gopal
Purohit 228 CTR 582 (Bom.) followed.
CIT vs. Escorts Ltd. (Delhi High Court) Source: www.itatonline.org

81.S. 271(1)(c) : Penalty –Concealment- Revised Return - After Survey-Voluntary.

Revised return filed disclosing additional income as a consequence of follow-up proceedings taken by
Deputy Director of Income Tax in respect of purchasers hence revised return cannot be said to be
voluntary, hence levy of penalty was justified.
LMP Precision Engg. Co. Ltd. vs. Dy. CIT (2011) 330 ITR 93 (Guj.)

82.S. 271(1)(c) : Penalty – Concealment - Two set of books of accounts

In the present case, the assessee was maintaining two sets of books; one was meant for showing to
Income Tax Authorities and the other for himself. In the second set, he was recording sales and certain
expenses on the basis of these documentary evidence, addition had been made which had been confirmed
up to the Tribunal. Thus it was not the case of simplicitor estimation of the income by disbelieving the
books of account or other details submitted by the assessee during the course of assessment proceedings.
In the present case the department was able to lay its hands on the documentary evidence exhibiting the
conduct of assessee for avoiding tax and carrying out the business activity out of the regular books. In the
above circumstances penalty under section 271(1)(c) of the Act, which was confirmed by the
commissioner (A) was upheld.
Shyam Behari vs. ACIT (2011) 43 SOT 129 (Delhi)

83.S. 271(1)(c ) : Penalty – Concealment – Return filed after survey

The assessee disclosed the income in the Return filed after survey . The Tribunal held that what is
punishable u/s 271(1)(c ) is actual concealment of income in the Return of income and not merely an

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attempt to make concealment . If the assessee rectifies it itself and declares the correct income in valid
return of income and doesnot file return by concealing the income then such act is not punishable u/s
271(1)(c ) . Hence penalty u/s 271(1)(c ) cannot be levied .
Sadhbav Builders V ITO , ITA No. 1418/Ahd/2008 , AY 2002-03 Bench ‘D’ dt. 21/1/2011 ,
Ahmedabad Chartered Accountants Journal , Vol. 34 Part 10 January 2011, pg. 480

WEALTH TAX
84.S. 2(m) : Wealth – Tax - Net Wealth - Debt Owed - Security Deposit
Security deposit received against the lease of chargeable property, is debt owed, that deposit invested in
securities exempt from wealth tax is not relevant. Debt deductible net wealth.
Miss Denna J. Jeejeebhoy vs. WTO (2011) 330 ITR 149 (Bom.)

85.Natural Justice : Adjudication – Duty of Disclosure - Extent and Scope - Foreign Exchange
The documents which the appellants wanted were documents upon which no reliance was placed by the
authority for setting the law in to motion. The demand for supply of all documents in possession of the
authority was based on vague, indefinite and irrelevant grounds. The appellants were not sure whether
they were asking for copies of documents in the possession of the adjudicating authority or in the
possession of the authorized officer who lodged the complaint. The only object in making such demand
was to obstruct the proceedings.
Kanwar Natwar Singh vs. Director of Enforcement (2011) 330 ITR 374 (SC) / Kanwar Jagat Singh vs.
Director of Enforcement (2011) 330 ITR 374 (SC)

86.Interpretation – Precedent - Contextual Interpretation

A judgment cannot be read like a statute. Courts should not place reliance on decision without discussing
factual situation involved in the said decision and how it would apply to the facts involved in the
subsequent case. A ratio laid down by a higher forum should not be taken out context and construed like a
statute.
Iskrareco Regent Ltd. vs. CIT (2011) 237 CTR 239 / 49 DTR 185 (Mad.)
87.Appeal- Instruction of Board. No 3/2001 .F.no 279/Misc 142/2007 –ITJ /Dt 9 th February, 2011.
www.itatonline.org.
Appeal before Appellate Tribunal Rs 3,00,000.
Appeal u/s 260A before High Court Rs 10,00,000.
Appeal before Supreme Court. Rs 25,00,000.
Appeal appeal filed on or after 9 the February , 2011.
Reference to case laws Bombay High Court.
CWTv Executors of late D.T.Udeshi (1991) 189 ITR 319 (Bom).
CIT v Camco Colour Co (2002) 254 ITR 565 (Bom)
CIT v Pithwa Engg works (2005) 276 ITR 519 (Bom)
CIT v ZOEB Topiwala ( 2006) 284 ITR 379 (Bom)
CIT v Madhukar K.Inamdar (HUF)(2009) 318 ITR 149(Bom).

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