DT RTP

PAPER 7: DIRECT TAX LAWS
PART III : QUESTIONS AND ANSWERS

QUESTIONS
Basic Concepts
1. Discuss, with the aid of case laws, whether the following subsidy receipts are capital or
revenue in nature -
(a) Power subsidy received by Gangotri Ltd., a cement manufacturing company, from the
State Government, year after year, on the basis of actual power consumption;
(b) One-time subsidy, equivalent to 75% of sales tax paid, received by Yamunotri Ltd.
from the State Government under the scheme of industrial promotion for expansion of
its capacities, modernisation and improving its marketing capabilities.
Income from house property
2. Alaknanda HUF claimed, in its return of income, the benefit of self occupation of a house
property under section 23(2). The Assessing Officer, however, did not accept the said
claim and denied the benefit of self occupation of house property to the HUF contending
that such benefit is available only to the owner who can reside in his own residence i.e.,
only to an individual assessee, who is a natural person, and not to an imaginary
assessable entity being HUF or a firm, etc. Discuss the correctness of contention of the
Assessing Officer.
Profits and gains of business or profession
3. Jhelum Ltd., a company engaged in the business of manufacture of industrial
equipments, furnishes the following particulars pertaining to P.Y. 2013-14. Compute the
deduction allowable under section 32 and section 32AC for A.Y.2014-15, while
computing its income under the head Profits and gains of business or profession.
Also, compute the written down value of plant and machinery as on 1.4.2014.

Particulars
` in
crores
1. Written down value of plant and machinery (15% block) as on 1.4.2013 30.00
2. Sold plant and machinery on 3.6.2013 (15% block) 5.00
3. Purchase of second hand machinery (15% block) on 8.6.2013 for
business purpose (the machinery was put to use immediately)
20.00
4. Purchased new computers (60% block) on 20.10.2013 for office use 0.50
5. Acquired and installed new plant and machinery (15% block) on
5.8.2013 (` 44 crore) and on 7.12.2013 (` 62 crore)
106.00
6. New air conditioners purchased and installed in office premises on
23.9.2013
0.20
The Institute of Chartered Accountants of India
FINAL EXAMINATION: MAY, 2014 68
Profits and gains of business or profession, Capital Gains & Income from other sources
4. Mr. Ravi, a General Manager with Beas Ltd., sold a building to his friend Mr. Satluj, who
is engaged in the business of wholesale trade in food grains, for ` 65 lakh on 3.2.2014,
when the stamp duty value was ` 180 lakh. The agreement was, however, entered into
on 28.5.2013 when the stamp duty value was ` 110 lakh. Mr. Ravi had received a down
payment of ` 22 lakh by cheque from Mr. Satluj on the date of agreement. Discuss the
tax implications in the hands of Mr. Ravi and Mr. Satluj, assuming that Mr. Ravi had
purchased the building for ` 52 lakh on 4
th
April, 2012.
Would your answer be different if Mr. Ravi was a property dealer and he sold the building
in the course of his business?
5. Ms. Godavari purchased a land at a cost of ` 20 lakhs in the financial year 1990-91 and
held the same as her capital asset till 31st March, 2011. She started her real estate
business on 1st April, 2011 and converted the said land into stock-in-trade of her
business on the said date, when the fair market value of the land was ` 210 lakhs.
She constructed 8 flats of equal size, quality and dimension. Cost of construction of
each flat is ` 22 lakhs. Construction was completed in February, 2014. She sold six
flats at ` 55 lakhs per flat in March, 2014. The remaining two flats were held in stock
as on 31st March, 2014.
She invested ` 35 lakhs in bonds issued by National Highways Authority of India on
31
st
March, 2014.
Compute the amount of chargeable capital gain and business income in the hands of
Ms. Godavari arising from the above transactions for Assessment Year 2014-15
indicating clearly the reasons for treatment for each item.
Cost Inflation Indices: F.Y.1990-91: 182; F.Y.2011-12: 785; F.Y. 2013-14: 939.
Income from other sources
6. Discuss the tax implications under section 56(2) in respect of each of the following
transactions -
(i) Mr. Anaimudi received a painting by Raja Ravi Varma worth ` 65,000 from his
nephew on his 25th wedding anniversary.
(ii) Dodabettas son transferred shares of Pir Panjal Ltd. to Dodabetta HUF without any
consideration. The fair market value of the shares is ` 3 lakh.
(iii) Aravalli (P) Ltd. purchased 8,000 equity shares of Satpuras (P) Ltd. at ` 72 per
share from Ms. Yamuna. The fair market value of the share on the date of
transaction is ` 90.
(iv) Vindyas (P) Ltd. issued 30,000 equity shares of ` 10 each at a premium of ` 5. The
fair market value of each share on the date of issue is ` 12.
PAPER 7 : DIRECT TAX LAWS 69

(v) Mr. Sahyadris land was acquired by the Government in November 2010. He
received interest of ` 3,30,000 on enhanced compensation in April, 2013, out of
which ` 60,000 related to the year 2010-11, `1,30,000 related to the year 2011-12,
` 1,40,000 related to the year 2012-13.
Deductions from Gross Total Income
7. Mr. Himalaya, Mr. Karakoram and Mr. Girnar, new retail investors, have made the
following investments in equity shares/units of equity oriented fund of Rajiv Gandhi
Equity Savings Scheme for the P.Y.2013-14:

Particulars
Mr. Himalaya Mr. Karakoram Mr. Girnar
` ` `
(i) Investment in listed equity shares 15,000 62,000 23,000
(ii) Investment in units of equity-
oriented fund
30,000 - 25,000
The following are the particulars of their other investments/payments made during the
P.Y.2013-14 -
Particulars `
(1) Deposit in Public Provident Fund (PPF) by Mr. Himalaya 80,000
(2) Life insurance premium paid by Mr. Girnar, the details of which are
as follows -

Date of
issue of
policy
Person insured Actual
capital
sum
assured
(`)
Insurance
premium
paid during
2013-14
(`)
(i) 14/5/2011 Self 1,00,000 25,000
(ii) 11/6/2012 Spouse 1,25,000 15,000
(iii) 31/7/2013 Handicapped
Son (section 80U
disability)

2,00,000

40,000

(3) Payment of medical insurance premium by the following
persons to insure their health:
Payer Amount
in `
Mode of payment
Mr. Himalaya (aged 55 years) 20,000 Account payee cheque
Mr. Karakoram (aged 52 years) 15,000 Cash
Mr. Girnar (aged 48 years) 10,000 Crossed cheque

(4) Mr. Karakoram paid interest on loan taken for the purchase of house
in which he currently resides. He is claiming benefit of self-
occupation under section 23(2) in respect of this house. He does not
own any other house.
1,90,000
Repayment of principal amount of loan taken for purchase of the said
house
1,50,000
(The housing loan of ` 23 lakhs was sanctioned by HDFC on
3.4.2013 and disbursed in full on 10.4.2013, being the date of
purchase of house property, the cost of which was ` 28 lakhs).

(5) Contribution by Mr. Himalaya by cheque to National Childrens Fund
during the year.
30,000
(6) Mr. Karakoram makes the following donations during the P.Y.2013-
14 -

Donation to BJP by crossed cheque 50,000
Donation to Electoral trust by cash 50,000
Compute their total income for A.Y.2014-15, from the above particulars and the details of
their income given below
Particulars
Mr. Himalaya Mr. Karakoram Mr. Girnar
` ` `
(i) Salary (Computed) 9,25,000 10,45,000 11,15,000
(ii) Interest income (on fixed
deposits)
75,000 85,000 95,000
What would be the tax consequence if Mr. Himalaya and Mr. Girnar sold their entire
investment in units of equity oriented fund in May 2014?
Assessment of firms
8. M/s. Nilgris & Co., a partnership firm comprising of four working partners, constructed a
hospital with 100 beds for patients in Pathamadai, Tirunelveli district, Tamil Nadu. The
hospital has started functioning from 1.4.2009. The total profit as per the Profit & Loss
Account for year ended 31
st
March, 2014 is ` 30 lakhs. The other information are given
below:
(i) Depreciation charged to Profit & Loss Account is ` 20 lakhs. Depreciation allowable
under the Income-tax Act, 1961 is ` 30 lakhs.
(ii) Salary to working partners charged to Profit & Loss Account is ` 35 lakhs.
Compute tax payable by M/s. Nilgris & Co. for Assessment Year 2014-15.


Assessment of companies
9. Chenab Limited, engaged in the business of manufacturing, shows a net profit of ` 200
lakhs for the year ended 31
st
March, 2014 after debiting and crediting the following items
to its Statement of Profit & Loss:
(a) Depreciation provided on straight line basis debited to the Statement of Profit &
Loss was ` 20 lakhs.
(b) ` 6 lakhs on salary for its research assistants and ` 4 lakhs spent on purchase of
materials for in-house research and development facility approved by the prescribed
authority.
(c) Legal expenses in connection with issue of Bonus Shares ` 2 lakhs, and issue of
Rights shares ` 2 lakhs.
(d) The opening and closing stocks of the company were undervalued by 10%.
[Opening stock ` 30 lakhs; Closing Stock ` 40 lakhs].
(e) Secret commission paid to secure business for the company ` 8 lakhs.
(f) Payment of ` 15 lakhs to an employee in connection with his voluntary retirement in
accordance with a scheme of voluntary retirement.
(g) The company adopts a policy of providing 5% of the Sundry Debtors in the
beginning of the year as provision for doubtful debts. Sundry Debtors outstanding
as on 01.04.2013 is ` 600 lakhs.
(h) No tax has been deducted from a sum of ` 12 lakhs credited to a contractor, who is
a resident firm for some of the works outsourced. However, the contractor has
considered the same in the return of income filed by him on 30
th
July, 2014 and has
paid the taxes due on such income.
(i) Cash donation given to a political party ` 8 lakhs.
Additional information:
(i) Normal depreciation allowable is ` 25 lakhs which includes depreciation on new
plant and machinery costing ` 30 lakhs acquired and installed in January, 2014.
(ii) Addition to fixed assets given in (i) above during the year includes ` 25 lakhs on
account of machinery acquired for its in-house scientific research and development
facility approved by the prescribed authority.
(iii) Bad debts actually written off during the year by adjusting provision for bad debts
account was ` 15 lakhs.
Compute income-tax payable by Chenab Limited for Assessment Year 2014-15 indicating
reasons for treatment of each item. Ignore Minimum Alternate Tax.
10. Hussain Sagar Ltd., an Indian company, receives the following dividend income during
the P.Y. 2013-14 -
(1) from shares held in Geneva Inc., a Swiss company, in which it holds 23% of
nominal value of equity share capital ` 72,000;
(2) from shares held in Michigan Inc., a US company, in which it holds 28% of nominal
value of equity share capital ` 2,10,000.
(3) from shares held in Ontario Inc., a Canadian company, in which it holds 53% of the
nominal value of equity share capital - ` 1,92,000
(4) from shares held in Indian subsidiaries, on which dividend distribution tax has been
paid by such subsidiaries ` 58,000.
Hussain Sagar Ltd. has paid remuneration of ` 21,000 for realising dividend, the break
up of which is as follows
(1) ` 7,000 (Geneva Inc.); (2) ` 8,000 (Michigan Inc.); (3) ` 6,000 (Indian subsidiaries)
The business income of Hussin Sagar Ltd. computed under the provisions of the Act is
` 53 lakh. Compute the total income and tax liability of Hussain Sagar Ltd., ignoring
MAT. Assuming that Hussain Sagar Ltd. has distributed dividend of ` 3,80,000 in March,
2014, compute the additional income-tax payable by it under section 115-O.
11. Dal Ltd., a domestic company, purchases its own unlisted shares on 17
th
August, 2013.
The consideration for buyback amounted to ` 18 lakh, which was paid on the same day.
Dal Ltd. had received ` 11 lakh on issue of these shares one year back. Compute the
additional income-tax payable by Dal Ltd. Further, determine the interest, if any, payable if
such tax is paid to the credit of the Central Government on 7th November, 2013. Would
there be any tax implication in the hands of the shareholders? Discuss.
Assessment Procedure
12. The Finance Act, 2013 has expanded the scope of reasons for directing special audit of
accounts under section 142(2A)- Elucidate.
13. Titicaca Inc. incorporated in Peru, South America and Pushkar Limited incorporated in
India are associated enterprises. During the course of assessment, for the A.Y. 2014-15,
the Assessing Officer proposes to enhance the income of Pushkar Limited by `70 lakhs
due to variation in determination of the arms length price of its product bought from
Titicaca Inc. and sent a draft assessment order to Pushkar Limited. Pushkar Limited filed
his objection to the Assessing Officer and the Dispute Resolution Panel (DRP) and
sought directions. The DRP, however, further enhanced the income by `18 lakhs on the
basis of the materials available on a different issue which was not raised by Pushkar
Limited. Is the action of the DRP valid? Discuss.
Appeals and Revision
14. Discuss, with the aid of recent case laws, whether the Appellate Tribunal has, under section
254(2), the power to review or re-appreciate the correctness of its earlier decision. Also,
discuss whether the Tribunal has the power to recall an order in entirety, to rectify a mistake
apparent from record.

Deduction, Collection and Recovery of tax
15. Mrs. Narmada, a senior citizen, has invested her savings of `1,20,000 on 29
th
March,
2013 in a three-year bank fixed deposit carrying interest@9% p.a, the interest being
payable annually. Since her income is below taxable limit, she has not obtained a
Permanent Accountant Number. The Bank Manager contends that Mrs. Narmada has to
produce her Permanent Account Number, and if she fails to do so, tax would be
deductible at the higher rate prescribed under the Income-tax Act, 1961 i.e., @ 20%,
from interest credited to her account for the year ended 31
st
March, 2014. Is the
contention of the bank manager correct? Discuss.
Penalties
16. Mahanadi Bank, which is a private bank, has not filed its annual information return (AIR)
in relation to the specified financial transactions for the financial year 2013-14. A notice
was issued by the prescribed income-tax authority on 1
st
November, 2014 requiring the
bank to furnish the return by 30th December, 2014. The bank, however, furnished the
AIR only on 20th January, 2015. What would be the quantum of penalty leviable as per
section 271FA?
Transfer Pricing
17. Godavari Ltd., an Indian company, exports dry fruits to Karyotis Inc for an amount of ` 51
lacs. Karyotis Inc is located in a Notified Jurisdictional Area (NJA).
Godavari Ltd. charges ` 52 lacs and ` 53 lacs for sale of similar goods to Danube Inc
and Mississippi Inc, respectively, which are not located in a NJA and both of them are not
associated enterprises of Godavari Ltd.
If the permissible variation notified by Central Government for such class of international
transactions is 3% of the transaction price, state the tax implications under section 94A in
respect of the above transaction entered into by Godavari Ltd. with Karyotis Inc.
18. Discuss whether transfer pricing provisions under the Income-tax Act, 1961 are attracted
in respect of the following transactions
(i) Provision of scientific research services by Nile Inc., a Kenyan company, to its
Indian subsidiary, Brahmaputra Ltd.
(ii) Lease of equipment by Kaveri Ltd., an Indian company, from Thames Inc., a British
company. Thames Inc. is a specified foreign company as defined in section
115BBD in relation to Kaveri Ltd.
(iii) Sale of integrated circuit masks by Indus Ltd. to Amazon Inc., a US company, which
guarantees 25% of the borrowings of Indus Ltd., an Indian company.
(iv) Mr. Krishna, a resident Indian, holds 30% equity share capital in Yamuna Ltd, a
domestic company. Yamuna Ltd. hires vehicles owned by Mr. Krishnas daughter
and pays rent of ` 3 lakh.
(v) Ganga Ltd., a domestic company, has two units Chambal & Damodar. The Chambal
unit, which commenced business two years back, is engaged in the business of
developing an irrigation project. The Damodar unit is carrying on the business of
trading in water pumps. The Damodar unit transfers water pumps to the value of ` 5
lakh to the Chambal unit for ` 3 lakh.
Wealth-tax
19. State, with reasons, whether the following constitute assets chargeable to wealth tax on
the valuation date 31.3.2014:
(i) A house property owned by Krishna was transferred without consideration to Miss
Kaveri on 10-4-2013. Subsequently, Miss Kaveri got married to Krishnas son on 21-
3-2014. The value of the house on 31-3-2014 is ` 59 lacs.
(ii) The cash in hand on 31.3.2014 with the cashier of Chambal Pvt. Ltd. was
` 1,25,000. The balance as per cash book on that day was ` 75,000.
(iii) Office building at Kolkata purchased by a builder in the financial year 2010-11 for
resale.
(iv) A farm house situated at 28 kilometers from the local limits of Jaipur Municipal
Corporation and also has a guest house at a distance of 50 kilometers from the
local limits of Bangalore Municipal Corporation.
(v) Lands owned by Tapti Ltd., none of which have been classified as an agricultural
land in the records of the Government:
Land Aerial distance from the local
limits of a municipality or
cantonment board (with a
population of not less than
10,000)
Population according to the
last preceding census of
which the relevant figures
have been published before
the first day of the previous
year.
I 2 kms 10,200
II 3 kms 88,000
III 4 kms 1,00,000
IV 5 kms 3,00,000
V 7 kms 10,00,000
VI 8 kms 10,05,000
VII 9 kms 12,00,000
20. Mr. Gangadharan has a house property in Delhi, which was lying vacant for last 2 years.
He constructed the property in 1989 at a cost of ` 42,00,000. He has let out the same at
a monthly rent of ` 35,000 for a period of three years with effect from 1st January, 2014.
The quarterly corporation tax is ` 15,000. He took a premium of ` 1,50,000 from the
tenant and also security deposit of ` 2,00,000. The house was constructed on freehold

land measuring 6,000 sq. ft. It has two floors each measuring 1,200 sq. ft. Compute the
value of the house property for wealth tax purpose as at valuation date 31.3.2014.
SUGGESTED ANSWERS/HINTS
1. (a) Power subsidy received year after year on the basis of actual power
consumption
The Andhra Pradesh High Court, in CIT v. Rassi Cement Ltd. (2013) 351 ITR 169,
observed the decision of the Supreme Court in Sahney Steel & Press Works Ltd. v
CIT (1997) 228 ITR 253, where incentives (including power subsidy) granted year
after year were treated as supplementary trade receipts. It was observed that the
power subsidy granted after commencement of production, based on actual power
consumption, has nothing to do with the investment subsidy given for establishment
of industries or expanding industries in the backward areas.
The power subsidy, given as a part of an incentive scheme after commencement of
production, is linked to production and therefore, has to be treated as a revenue
receipt, since such assistance is given for the purpose of carrying on of the
business of the assessee.
Accordingly, the High Court held that the power subsidy received by the assessee
from the State Government on the basis of actual power consumption has to be
treated as a trading receipt and not as a capital receipt.
Applying the rationale of the above ruling to the case on hand, power subsidy
received by Gangotri Ltd. from the State Government, year after year, on the basis
of actual power consumption is a revenue receipt and hence, chargeable to tax.
(b) One-time subsidy [received as a percentage of sales tax paid] for capacity
expansion, modernisation etc.
In CIT v. Rasoi Ltd. (2011) 335 ITR 438 (Cal.), the subsidy received by the company
was a one-time receipt, equivalent to 90% of the amount of sales tax paid. In that
case, the company received subsidy by way of financial assistance, in the period of
crisis, for promotion of the industries mentioned in the subsidy scheme. The
industries had manufacturing units in West Bengal, which were in need of financial
assistance for expansion of their capacities, modernization and improving their
marketing capabilities.
The Calcutta High Court, applying the rationale of Supreme Court in CIT v. Ponni
Sugars & Chemicals Ltd. (2008) 306 ITR 392, observed that if the object of the
subsidy is to enable the assessee to run the business more profitably, the receipt
would be a revenue receipt. On the other hand, if the object of the assistance is to
enable the assessee to set up a new unit or to expand an existing unit, the receipt
would be a capital receipt. Therefore, the object for which subsidy is given
determines the nature of the subsidy and not the form or the mechanism through
which the subsidy is given.
In Rasoi Ltd.s case, the subsidy was for expansion of its capacities, modernization
and improvement of its marketing capabilities. Therefore, merely because the
subsidy was equivalent to 90% of the sales tax paid, it cannot be construed that the
same was in the form of refund of sales tax paid. Therefore, the Calcutta High Court
held that the subsidy received has to be treated as a capital receipt and not as a
revenue receipt.
Applying the rationale of the above ruling, the one-time subsidy, equivalent to 75%
of sales tax paid, received by Yamunotri from the State Government under the
scheme of industrial promotion for expansion of its capacities, modernization and
improving its marketing capabilities, is a capital receipt.
2. The issue to be considered is whether a HUF can claim the annual value of house
property in which its members reside as Nil under section 23(2). This issue came up
before the Full Bench of the Gujarat High Court in CIT v. Hariprasad Bhojnagarwala
(2012) 342 ITR 69.
The Gujarat High Court observed that a firm, which is a fictional entity, cannot physically
reside in a house property and therefore, a firm cannot claim the benefit of this provision,
which is available to an individual owner who can actually occupy the house. However,
the HUF is a group of individuals related to each other i.e., a family comprising of a group
of natural persons. The said family can reside in the house, which belongs to the HUF.
Since a HUF cannot consist of artificial persons, it cannot be said to be a fictional entity.
Also, it was observed that since singular includes plural, the word "owner" would include
"owners" and the words "his own" used in section 23(2) would include "their own".
Therefore, the Gujarat High Court held that the HUF is entitled to claim benefit of self-
occupation of house property under section 23(2).
Applying the rationale of the above ruling, Alaknanda HUF is entitled to claim the annual
value of the house property in which its members reside as Nil under section 23(2).
Therefore, the contention of the Assessing Officer is incorrect.
3. Computation of depreciation allowance under section 32 for the A.Y. 2014-15
Particulars
Plant & Machinery
15% 60%
(` in crores)
WDV as on 01.04.2013 30.00 -
Add: Plant and Machinery acquired during the year
- Second hand machinery 20.00
- New plant and machinery 106.00
- Air conditioner installed in office __0.20 126.20

Computers acquired during the year _____- 0.50
156.20 0.50
Less: Asset sold during the year _5.00 Nil
Written down value before charging depreciation 151.20 0.50
Less: Depreciation for the P.Y.2013-14 (See Note 1 below) _33.03 0.15
WDV as on 1.4.2014 118.17 0.35

Note 1 : Computation of depreciation for the P.Y.2013-14
Normal depreciation [Under section 32(1)(ii)]
Depreciation@30% on computers put to use for less than
180 days (50% of 60% ` 0.50 crore)
- 0.15
Depreciation on plant and machinery (15% block) 18.03
(` 62 crore 7.5%) + [(` 151.20 crore - ` 62 crore) 15%]
Additional depreciation [Under section 32(1)(iia)]
- New plant and machinery installed on 5.8.2013
(` 44 crore 20%)

8.80

- on 7.12.2013 (` 62 crore 10%) 6.20 15.00 Nil
Total depreciation 33.03 0.15
Computation of deduction under section 32AC for the A.Y.2014-15
Particulars (` in crore)
15% of ` 106 crore, being aggregate investment in new plant and
machinery acquired and installed during the P.Y.2013-14
15.90
Note For the A.Y.2014-15, the company would be entitled for investment allowance
under section 32AC since the investment in new plant and machinery acquired and
installed during the P.Y.2013-14 is ` 106 crores (i.e., more than ` 100 crores). The
deduction for investment allowance under section 32AC would be in addition to the
depreciation allowable under section 32 for that year. However, the investment allowance
would not be reduced to arrive at the written down value of plant and machinery.
It may be noted that investment in second hand plant and machinery and air-conditioners
and computers installed in office would neither be eligible for investment allowance under
section 32AC nor additional depreciation under section 32(1)(iia).
4. (a) Tax implications on sale of a building representing a capital asset in the
hands of Mr. Ravi, a salaried employee
(i) Tax implications in the hands of Mr. Ravi for A.Y.2014-15
The building represents a capital asset in the hands of Mr. Ravi, a salaried
employee. On sale of the building, the provisions of section 50C are attracted
and ` 128 lakh, being the difference between the stamp duty value on the
date of registration (i.e., ` 180 lakh) and the purchase price (i.e., ` 52 lakh)
would be chargeable as short-term capital gains in the hands of Mr. Ravi.
It may be noted that under section 50C, there is no option to adopt the stamp
duty value on the date of agreement, even if the date of agreement is different
from the date of registration and part of the consideration has been received on
or before the date of agreement otherwise than by way of cash.
(ii) Tax implications in the hands of Mr. Satluj for A.Y.2014-15
The building purchased would be a capital asset in the hands of Mr. Satluj,
who is engaged in the business of wholesale trade in food grains. The
provisions of section 56(2)(vii) would be attracted in the hands of Mr. Satluj
who has received immovable property, being a capital asset, for inadequate
consideration. For the purpose of section 56(2)(vii), Mr.Satluj can take the
stamp duty value on the date of agreement instead of the date of registration
since he has paid part of the consideration by a mode other than cash on the
date of agreement.
Therefore, ` 45 lakh, being the difference between the stamp duty value of
the property on the date of agreement (i.e., ` 110 lakh) and the actual
consideration (i.e., ` 65 lakh) would be taxable as per section 56(2)(vii)
under the head Income from other sources in the hands of Mr. Satluj.
(b) Tax implications if Mr. Ravi is a property dealer
(i) Tax implications in the hands of Mr. Ravi for A.Y.2014-15
If Mr. Ravi is a property dealer who has sold the building in the course of his
business, the provisions of section 43CA would be attracted, since the
building represents his stock-in-trade and he has transferred the same for a
consideration less than the stamp duty value. For the purpose of section
43CA, Mr.Ravi can take the stamp duty value on the date of agreement
instead of the date of registration since he has received part of the
consideration by a mode other than cash on the date of agreement.
Therefore, ` 58 lakh, being the difference between the stamp duty value on
the date of agreement (i.e., ` 110 lakh) and the purchase price (i.e., ` 52
lakh), would be chargeable as business income in the hands of Mr. Ravi.
(ii) Tax implications in the hands of Mr. Satluj for A.Y.2014-15
There would be no difference in the taxability in the hands of Mr. Satluj,
whether Mr. Ravi is a property dealer or a salaried employee.
Therefore, the provisions of section 56(2)(vii) would be attracted in the hands
of Mr. Satluj who has received immovable property, being a capital asset,
for inadequate consideration. Consequently, ` 45 lakh, being the difference
between the stamp duty value of the property on the date of agreement
(i.e., ` 110 lakh) and the actual consideration (i.e., ` 65 lakh) would be
taxable as per section 56(2)(vii) under the head Income from other
sources in the hands of Mr. Satluj.

5. Computation of capital gains and business income of Ms. Godavari for A.Y.2014-15
Particulars
`
Capital Gains
Fair market value of land on the date of conversion deemed as the full
value of consideration for the purposes of section 45(2)
2,10,00,000
Less: Indexed cost of acquisition [` 20,00,000 785/182]
86,26,374
1,23,73,626

Proportionate capital gains arising during A.Y.2014-15 [` 1,23,73,626 ]
92,80,220
Less: Exemption under section 54EC 35,00,000
Capital gains chargeable to tax for A.Y.2014-15 57,80,220

Business Income
Sale price of flats [6 ` 55 lakhs]
3,30,00,000
Less: Cost of flats
Fair market value of land on the date of conversion [` 210 lacs ]
1,57,50,000
Cost of construction of flats [6 ` 22 lakhs]
1,32,00,000
Business income chargeable to tax for A.Y.2014-15 40,50,000
Notes:
(1) The conversion of a capital asset into stock-in-trade is treated as a transfer under
section 2(47). It would be treated as a transfer in the year in which the capital asset
is converted into stock-in-trade.
(2) However, as per section 45(2), the capital gains arising from the transfer by way of
conversion of capital assets into stock-in-trade will be chargeable to tax only in the
year in which the stock-in-trade is sold.
(3) The indexation benefit for computing indexed cost of acquisition would, however, be
available only up to the year of conversion of capital asset to stock-in-trade and not
up to the year of sale of stock-in-trade.
(4) For the purpose of computing capital gains in such cases, the fair market value of
the capital asset on the date on which it was converted into stock-in-trade shall be
deemed to be the full value of consideration received or accruing as a result of the
transfer of the capital asset.
In this case, since only 75% of the stock-in-trade (6 flats out of 8 flats) is sold in the
P.Y.2013-14, only proportionate capital gains (i.e., 75%) would be chargeable in the
A.Y.2014-15.
(5) On sale of such stock-in-trade (i.e., flats, in this case), business income would arise.
The business income chargeable to tax would be the price at which the flats are
sold as reduced by the fair market value on the date of conversion of the capital
asset (i.e., land) into stock-in-trade and the cost of construction of flats.
(6) In case of conversion of capital asset into stock-in-trade and subsequent sale of
stock-in-trade, the period of 6 months, for the purpose of exemption under section
54EC, is to be reckoned from the date of sale of stock-in-trade [CBDT Circular
No.791 dated 2.6.2000]. In this case, since the investment in bonds of NHAI has
been made within 6 months of sale of flats, the same qualifies for exemption under
section 54EC.
6. Tax implications under section 56(2)
(i) Since paintings are included in the definition of property, therefore, when
paintings are received without consideration, the same is taxable under section
56(2)(vii), as the aggregate fair market value of paintings exceed ` 50,000.
Therefore, ` 65,000, being the value of painting gifted by his nephew, would be
taxable under section 56(2)(vii) in the hands of Mr. Anaimudi, since nephew is not
included in the definition of relative thereunder.
(ii) Any property received without consideration by a HUF from its relative is not
taxable under section 56(2)(vii).
Since Dodabettas son is a member of Dodabetta HUF, he is a relative of the
HUF. Therefore, if Dodabetta HUF receives any property (shares, in this case)
from its member, i.e., Dodabettas son, without consideration, then, the fair market
value of such shares will not be chargeable to tax in the hands of the HUF, since
such receipt from a relative is excluded from the scope of section 56(2)(vii).
(iii) The difference between the aggregate fair market value of shares of a closely
held company and the consideration paid for purchase of such shares is deemed
as income in the hands of the purchasing company under section 56(2)(viia), if the
difference exceeds ` 50,000.
Accordingly, in this case, the difference of ` 1,44,000 [i.e.,( ` 90 ` 72) 8,000]
is taxable under section 56(2)(viia) in the hands of Aravalli (P) Ltd.
(iv) The provisions of section 56(2)(viib) are attracted in this case since the shares of
a closely held company are issued at a premium (i.e., the issue price of ` 15 per
share exceeds the face value of ` 10 per share) and the issue price exceeds the
fair market value of such shares.
The consideration received by the company in excess of the fair market value of
the shares would be taxable under section 56(2)(viib).
Therefore, ` 90,000 {i.e., (` 15 ` 12) x 30,000 shares} shall be the income
chargeable under section 56(2)(viib) in the hands of Vindyas (P) Ltd.


(v) As per section 145A(b), interest received on enhanced compensation shall be
deemed to be the income of the previous year in which it is received, irrespective of
the method of accounting followed by the assessee. Therefore, in this case, interest
on enhanced compensation received by Mr. Sahyadri in April, 2013 shall be deemed
to be the income of P.Y.2013-14, i.e., the year of receipt, irrespective of the method of
accounting followed by him. Such interest is taxable under section 56(2)(viii).
(` 60,000 + ` 1,30,000 + ` 1,40,000) ` 3,30,000
Less: Deduction under section 57(iv)@50% of ` 3,30,000 ` 1,65,000
` 1,65,000
7. Computation of total income for A.Y.2014-15
Particulars Mr. Himalaya Mr. Karakoram Mr. Girnar
` ` `
Salary 9,25,000 10,45,000 11,15,000
Income from house property [See Note 4] (1,50,000)
Income from other sources (Interest) 75,000 85,000 95,000
(A) Gross total income 10,00,000 9,80,000 12,10,000
Less: Deductions under Chapter VIA
Under section 80C
Deposit in PPF 80,000
LIC premium paid [See Note 1] 62,500
Principal repayment of housing loan
(restricted to maximum `1,00,000) [See
Note 4]
1,00,000
Under section 80CCG
Investment in listed equity shares/ units
of equity oriented fund of Rajiv Gandhi
Equity Savings Scheme [See Note 2]

22,500

25,000

Nil
Under section 80D
Medical insurance premium [See Note 3] 15,000 Nil 10,000
Under section 80EE
Interest on housing loan [See Note 4] 40,000
Under section 80G
Contribution to National Childrens Fund
[See Note 5]
30,000
Under section 80GGC [See Note 6]
Donation to BJP by crossed cheque 50,000
Cash donation to Electoral Trust Nil
(B) Total deduction under Chapter VIA 1,47,500 2,15,000 72,500
(C) Total Income (A) (B) 8,52,500 7,65,000 11,37,500
Notes:
(1) Deduction u/s 80C in respect of life insurance premium paid by Mr. Girnar
Date of
issue of
policy
Person
insured
Actual
capital
sum
assured
Insurance
premium
paid during
2013-14
Restricted
to % of
sum
assured
Deductio
n u/s 80C
14/5/2011 Self 1,00,000 25,000 20% 20,000
11/6/2012 Spouse 1,25,000 15,000 10% 12,500
31/7/2013 Handicapped
Son (section
80U disability)

2,00,000

40,000

15%

30,000
Total 62,500

(2) Deduction under section 80CCG in respect of investment in Rajiv Gandhi Equity
Savings Scheme
Particulars Mr.
Himalaya
Mr. Karakoram
` `
(i) Investment in listed equity shares 15,000 62,000
(ii) Investment in units of equity-oriented fund 30,000 _____-
Total investment 45,000 62,000
50% of the above 22,500 31,000
Deduction under section 80CCG (restricted
to a maximum of `25,000)
22,500 25,000

Mr. Girnar is not eligible for deduction under section 80CCG since his gross total
income exceeds `12 lakh.
(3) Medical Insurance Premium
(i) Medical insurance premium of ` 20,000 paid by account payee cheque by Mr.
Himalaya is allowed as a deduction under section 80D, subject to a maximum of
` 15,000.
(ii) Medical insurance premium paid by cash is not allowable as deduction. Hence,
Mr. Karakoram is not eligible for deduction under section 80D in respect of
medical insurance premium of ` 15,000 paid in cash.
(iii) Mr. Girnar is eligible for deduction of ` 10,000 under section 80D in respect of
medical insurance premium paid by crossed cheque.

(4) Deduction in respect of interest and principal repayment of housing loan
Mr. Karakoram is eligible for a maximum deduction of ` 1,50,000 under section
24 in respect of interest on housing loan taken in respect of a self-occupied
property, for which he is claiming benefit of Nil annual value. Therefore,
` 1,50,000 would represent his loss from house property.
Mr. Karakoram is eligible for deduction of ` 40,000 under section 80EE, in
respect of the balance interest on housing loan (` 1,90,000 ` 1,50,000), since
the following conditions are satisfied
The loan is sanctioned by HDFC, a financial institution, during the period
between 1.4.2013 and 31.3.2014;
i. The loan amount sanctioned is less than ` 25 lakh;
ii. The value of the house property is less than ` 40 lakh;
iii. He does not own any other house property.
Further, he is eligible for deduction in respect of principal repayment of housing
loan subject to a maximum of `1 lakh under section 80C.
(5) Contribution to National Childrens Fund qualifies for 100% deduction under
section 80G with effect from A.Y.2014-15. Therefore, Mr. Himalaya is entitled to
100% deduction of the sum of ` 30,000 contributed by him by way of cheque to
National Childrens Fund.
(6) Mr. Karakoram is eligible for deduction under section 80GGC in respect of
donation to a political party made otherwise than by way of cash. However, cash
donation to electoral trust would not qualify for deduction under section 80GGC
with effect from A.Y.2014-15.
Note In case Mr. Himalaya sells all the units of equity oriented fund in May 2014, the
amount of ` 15,000 (i.e., 50% of ` 30,000), being deduction allowed to him under section
80CCG in A.Y.2014-15, would be subject to tax in the A.Y.2015-16, since the condition of
the minimum lock-in period of three years from the date of acquisition, has been violated
in this case. However, in the case of Mr. Girnar, since deduction under section 80CCG
was not allowed during the A.Y.2014-15 on account of his gross total income exceeding
` 12 lakh, no amount relating to that year can be subject to tax in the A.Y.2015-16, being
the year of violation of condition, even though the units are sold within three years.
8. Computation of tax payable by M/s Nilgris & Co. for the A.Y 2014-15
Particulars `
Net Profit as per Profit & Loss Account 30,00,000
Add: Depreciation charged to profit and loss account 20,00,000
Salary to Working partners (considered separately) __35,00,000
85,00,000
Less: Depreciation allowable under the Income-tax Act, 1961 __30,00,000
Book Profit 55,00,000
Less : Remuneration to partners deductible (See Note 1) 33,90,000
Business income/Gross Total Income 21,10,000
Less: Deduction under section 80-IB(11C) (See Note 2) 21,10,000
Total Income Nil

Tax Payable Nil
The provisions of Chapter XII-BA on Alternate Minimum Tax shall apply to M/s. Nilgris &
Co., since the firm has claimed deduction under section 80-IB.
Computation of Alternate Minimum Tax (AMT)
Particulars `
Total Income as per the Income-tax Act, 1961 Nil
Add: Deduction under section 80-IB 21,10,000
Adjusted Total Income 21,10,000
AMT = 18.5% 21,10,000 = 3,90,350
Since the regular income-tax payable as per the provisions of the Act is less than the
AMT, the adjusted total income of ` 21,10,000 would be deemed to be the total income
of M/s. Nilgris & Co. and it would be liable to pay tax@18.5% thereof. The tax payable by
M/s. Nilgris & Co. for the A.Y.2014-15 would, therefore, be ` 3,90,350 plus education
cess@2% and secondary and higher education cess@1%, totaling ` 4,02,061.
M/s. Nilgris & Co. would be eligible for credit of such AMT of ` 4,02,061 paid to be set-off in
the year in which tax on total income computed under the regular provisions of the Act
exceeds the AMT. Such credit can be carried forward for succeeding 10 assessment years.
Notes:
1. Computation of maximum admissible remuneration to working partners under
section 40(b)(v)
Particulars `
On first ` 3,00,000 of book profit @90% or ` 1,50,000, whichever is higher 2,70,000
On balance of book profit i.e. ` 52,00,000 at 60% 31,20,000
33,90,000
The deduction in respect of salary paid to working partners would be restricted to
` 33,90,000, being the maximum permissible limit allowable as per section 40(b)(v).


2. Deduction under section 80-IB(11C)
As per section 80-IB(11C), in case of an undertaking deriving profits from the business
of operating and maintaining a hospital located anywhere in India, other than in an
excluded area, 100% of profits and gains would be allowed as deduction for a period
of 5 consecutive assessment years, subject to fulfilment of certain conditions as
under:
1. The hospital is constructed and has started or starts functioning at any time
during the period beginning 1
st
April 2008 and ending on 31
st
March 2013.
2. The hospital has at least 100 beds for patients.
3. The hospital has been constructed in accordance with the regulations and bye
laws of the local authority.
4. The assessee furnishes report of audit in prescribed form and particulars, duly
signed and verified by an accountant, along with the return of income.
In this case, Nilgris & Co. has fulfilled the conditions mentioned in (1) & (2) above.
Assuming that it has fulfilled conditions (3) & (4) also,100% of its profits are eligible for
deduction in A.Y.2014-15, being the 5
th
consecutive assessment year. Consequently,
its total income for the A.Y.2014-15 is Nil.
9. Computation of total income of Chenab Ltd. for the A.Y.2014-15
Particulars
` `
Net profit as per profit and loss account 2,00,00,000
Add : Depreciation on SLM basis debited to profit and loss
account
20,00,000
Salary and purchase of materials for in-house
research and development, considered separately
under section 35(2AB) [See Note 1]
10,00,000
Legal expenses for issue of rights shares [See Note 2] 2,00,000

Under valuation of stock [` 40 lakhs - ` 30 lakhs]
10/90 [See Note 3]
1,11,111
Secret commission [See Note 4] 8,00,000
Payment in connection with voluntary retirement
[See Note 5]
12,00,000
Provision for doubtful debts [See Note 6] 30,00,000
Amount paid to contractor without deduction of tax
at source [See Note 7]
12,00,000
Donation given to political party [See Note 8] 8,00,000
1,03,11,111
3,03,11,111
Less: Deduction for in-house scientific research under
section 35(2AB) [See Note 1]
70,00,000
Bad debts actually written off [See Note 6] 15,00,000
Depreciation as per section 32 [See Note 9] 23,62,500 1,08,62,500
Business Income / Gross Total Income 1,94,48,611
Less: Deduction under Chapter VI-A
Under section 80GGB [See Note 8] Nil
Total Income 1,94,48,611
Tax on total income as computed under the Income-tax Act, 1961
Particulars `
Tax@30% on total income of ` 1,94,48,611
58,34,583
Add: Surcharge@5% (since total income exceeds ` 1 crore but does not
exceed ` 10 crore)

2,91,729
61,26,312
Add: Education cess @ 2% 1,22,526
Secondary and higher education cess@1% 61,263
Tax on total income 63,10,101
Notes:
1. Both revenue and capital expenditure (other than expenditure on land and
building) on in-house scientific research approved by the prescribed authority is
eligible for weighted deduction@200% under section 35(2AB) in case of, inter alia,
a company engaged in manufacture or production of an article or thing.
In this case, the revenue expenditure on scientific research is `10 lakhs (salary
and purchase of materials) and capital expenditure (i.e. machinery) on scientific
research is ` 25 lakhs. The total expenditure of ` 35 lakhs qualifies for weighted
deduction@200% under section 35(2AB), since the research and development
facility is approved by the prescribed authority. Hence, the eligible deduction
under section 35(2AB) is ` 70 lakhs, being 200% of ` 35 lakhs.
2. There is no fresh inflow of funds or increase in capital employed on account of
issue of bonus shares and there is only reallocation of the companys fund.
Consequently, since there is no increase in the capital base of the company, legal
expenses in connection with issue of bonus shares is a revenue expenditure and is
hence, allowable as deduction. It was so held by the Supreme Court, in CIT v.
General Insurance Corpn. (2006) 286 ITR 232.
However, ` 2 lakhs, being legal expenses in relation to issue of rights shares is
directly related to expansion of the capital base of the company and is, hence, a
capital expenditure. Therefore, the same is not allowable as deduction. It was so
held by the Supreme Court in Brooke Bond India Ltd. v. CIT (1997) 225 ITR 798.

3. The under valuation of both opening and closing stocks will have an impact on the
profits for the year. The under-valuation in the amount of opening stock has to be
deducted and under-valuation in the amount of closing stock has to be added
back. In this case, since the under-valuation in the amount of closing stock
exceeds the under-valuation in the amount of opening stock, the net difference in
valuation of stock has, accordingly, been added back.
4. As per Explanation to section 37(1), any expenditure incurred by an assessee for
any purpose which is an offence or which is prohibited by law, shall not be deemed
to have been incurred for the purpose of business and no deduction or allowance
shall be made in respect of such expenditure. Therefore, payment of secret
commission, if it is established as a payment for any purpose which is an offence
or which is prohibited by law, cannot be allowed as deduction. It was so held by
the Orissa High Court in Tarini Tarpauline Productions v. CIT (2002) 254 ITR 495.
Even in cases where it cannot be so established, it would be disallowed under
section 40(a)(ia) for non-deduction of tax at source under section 194H.
5. As per section 35DDA, where in any previous year, any expenditure is incurred by
way of payment of any sum to an employee in connection with voluntary
retirement, one-fifth of the amount so paid shall be deducted in computing profits
and gains of business for that previous year, and the balance shall be deducted in
equal installments in the immediately succeeding four previous years. Therefore,
out of `15,00,000, an amount of ` 3,00,000 is deductible in assessment year
2014-15 and the balance shall be disallowed in this assessment year. Therefore,
`12,00,000 has to be added back.
6. The deduction under section 36(1)(viia) for provision for doubtful debts is allowable
only in case of banks and certain financial institutions specified thereunder. It is
not allowable in case of other assessees. Therefore, the sum of `30 lakhs debited
in its profit and loss account towards provision for doubtful debts is not an
allowable deduction for Chenab Ltd., since it is a manufacturing company.
However, the amount actually written off as bad debts in the books of account can
be claimed as deduction under section 36(1)(vii) in the case of all assessees.
Hence, `15 lakhs, being the bad debts actually written off can be claimed as
deduction under section 36(1)(vii).
7. Disallowance under section 40(a)(ia) would be attracted in the P.Y.2013-14 in
respect of payment to contractor without deduction of tax at source. In case the tax
has been paid by the contractor (being a resident firm), the date on which it has
furnished its return of income i.e., 31
st
July, 2014, would be deemed as the date of
deduction and payment of taxes by Chenab Ltd.
Consequently, the payment would be disallowed under section 40(a)(ia) in the year in
which the said expenditure is incurred. Such expenditure will be allowed as deduction in
the subsequent year in which the return of income is furnished by the resident payee,
since tax is deemed to have been deducted and paid by Chenab Ltd. in that year.
8. Donation given to political party is not an allowable expenditure while computing
business income. The same is also not allowable as deduction under section
80GGB from the gross total income, since it is paid in cash.
9. Depreciation allowable under the Income-tax Act, 1961 has to be calculated after
considering the following -
No deduction under any other provision of the Act shall be allowable in respect of
expenditure which has been claimed as weighted deduction under section
35(2AB). Therefore, depreciation is not allowable in respect of `25 lakhs incurred
on fixed assets, in respect of which weighted deduction@200% under section
35(2AB) has been claimed. Since the figure of `25 lakhs representing normal
depreciation, includes depreciation on such fixed assets, the same has to be
reduced from the said figure. Since the fixed assets were acquired only in January
2014, the depreciation would have been restricted to 7.5% (i.e., 50% of the normal
rate of 15% applicable to plant and machinery). Therefore, 7.5% of `25 lakhs (cost
of machinery) has to be reduced from the normal depreciation of `25 lakhs.
Further, additional depreciation under section 32 is not allowable in respect of
such machinery, the whole of the actual cost of which has been allowed as
deduction, whether by way of depreciation or otherwise. Accordingly, additional
depreciation is not allowable in respect of new plant and machinery costing `25
lakhs which has been acquired for the purpose of in-house research and
development, and is eligible for deduction under section 35(2AB). Therefore,
additional depreciation is allowable only in respect of `5 lakhs (`30 lakhs `25
lakhs), being new machinery acquired other than for the purpose of in-house
research and development. The additional depreciation is also restricted to 10%
(i.e. 50% of 20%), since the new machinery is put to use for less than 180 days in
the year.
Normal depreciation 25,00,000
Less: Depreciation@7.5% on `25 lakhs, being asset acquired for
scientific research eligible for deduction u/s 35(2AB)
1,87,500
23,12,500
Add: Additional depreciation on new plant and machinery@10% on
`5 lakhs
50,000
Depreciation allowable under section 32 23,62,500
10. Computation of total income of Hussain Sagar Ltd. for A.Y. 2014-15
Particulars `
Profits and gains of business or profession 53,00,000
Income from other sources (See Note below) 4,67,000
Total income 57,67,000

Note Dividend income taxable under Income from other sources
Particulars `
From Geneva Inc., a Swiss company, net dividend (i.e., ` 72,000
` 7,000) is taxable at normal rates
65,000
From Michigan Inc., a US company gross dividend is taxable@15%
under section 115BBD [no deduction is allowable in respect of any
expenditure as per section 115BBD(2)]
2,10,000
From Ontario Inc., a Canadian company gross dividend is
taxable@15% under section 115BBD [no deduction is allowable in
respect of any expenditure as per section 115BBD(2)]
1,92,000
From shares in Indian subsidiaries ` 58,000 exempt under section 10(34)
since dividend distribution tax has been paid under section 115-O [As per
section 14A, no deduction is allowable in respect of expenditure incurred to
earn exempt income]

Nil
4,67,000

Computation of tax liability of Hussain Sagar Ltd. for the A.Y.2014-15
Particulars `
Tax@15% under section 115BBD on ` 4,02,000 (gross dividend) 60,300
Tax@30% on balance income of ` 53,65,000 16,09,500
16,69,800
Add: Education cess@2% and Secondary and higher education
cess@1%

__50,094
Tax liability 17,19,894

Computation of additional income-tax payable by Hussain Sagar Ltd.
under section 115-O
Particulars `
Amount distributed by way of dividend 3,80,000
Less: Dividend received from Indian subsidiaries, on which
DDT payable under section 115-O has been paid

58,000

Dividend received from foreign subsidiary, Ontario
Inc., on which tax is payable under section 115BBD

1,92,000

2,50,000
1,30,000

Additional income-tax@15% 19,500
Add: Surcharge@10% __1,950
21,450
Add: Education cess@2% and Secondary and higher education cess@1% __ 644
Additional income-tax payable under section 115-O _22,094
11. New Chapter XII-DA, comprising of sections 115QA, 115QB and 115QC, has been
inserted with effect from 1
st
June, 2013, to levy additional income-tax on buyback of
unlisted shares by domestic companies. As per section 115QA, the distributed income
would be subject to additional income-tax@20% (plus surcharge@10% and education
cess@2% and secondary and higher education cess@1%) in the hands of the domestic
company. Distributed income is the consideration paid by the company for buyback of its
own unlisted shares which is in excess of the sum received by the company at the time of
issue of such shares.
Accordingly, Dal Ltd is liable to pay ` 1,58,620 as additional income-tax, which is
the amount calculated @22.66% (20% plus surcharge@10% plus cess@3%) on ` 7
lakh, being its distributed income (i.e., ` 18 lakh ` 11 lakh).
The additional income-tax was payable on or before 31
st
August, 2013. However, the
same was paid only on 7
th
November, 2013.
Interest under section 115QB is attracted@1% for every month or part of the month on
the amount of tax not paid or short paid for the period beginning from the date
immediately after the last date on which such tax was payable and ending with the date
on which the tax is actually paid.
In this case, the period for which interest@1% per month or part of a month is leviable is
calculated as under -

Period
No. of months /
part of month
1
st
September - 30
th
September (whole of first month) 1
1
st
October 31st October, 2013 (whole of second month) 1
1
st
November 7
th
November, 2013 (part of third month) 1
Total number of months 3
Interest under section 115QB is payable @1% per month for 3 months on the
amount of additional tax payable i.e., ` 1,58,620. Therefore, interest payable under
section 115QB is ` 4,759.
The income arising to the shareholders in respect of such buyback of unlisted
shares by Dal Ltd. would be exempt under section 10(34A) in their hands.
12. Under section 142(2A), if at any stage of the proceeding, the Assessing Officer having
regard to the nature and complexity of the accounts of the assessee and the interests
of the revenue, is of the opinion that it is necessary so to do, he may, with the approval of

the Chief Commissioner or Commissioner, direct the assessee to get his accounts
audited by an accountant and to furnish a report of such audit.
Since the courts have made a very narrow interpretation of the expression nature and
complexity of the accounts, section 142(2A) has been amended by the Finance Act,
2013, with effect from 1
st
June, 2013, to expressly include within its scope, the following
reasons, on the basis of which the Assessing Officer may direct special audit of accounts
of an assessee
(1) volume of the accounts,
(2) doubts about the correctness of the accounts,
(3) multiplicity of transactions in the accounts, and
(4) specialized nature of business activity of the assessee.
Accordingly, section 142(2A) now provides that if at any stage of the proceedings before
him, the Assessing Officer, having regard to the nature and complexity of the accounts,
volume of the accounts, doubts about the correctness of the accounts, multiplicity of
transactions in the accounts or specialized nature of business activity of the assessee,
and the interests of the revenue, is of the opinion that it is necessary so to do, he may,
with the previous approval of the Chief Commissioner or the Commissioner, direct the
assessee to get his accounts audited by an accountant and to furnish a report of such
audit.
13. As per section 144C(8), the Dispute Resolution Panel (DRP) may confirm, reduce or
enhance the variations proposed in the draft order of the Assessing Officer.
The issue under consideration is whether the power of the DRP is restricted only to the
issues raised in the draft assessment order or whether it also has the power to enhance
the variation proposed in the order consequent to any new issue which comes to its
notice during the course of proceedings before it, even though such issue was not raised
by the eligible assessee.
In order to clarify the true legislative intent, an Explanation has been inserted in section
144C(8) retrospectively with effect from 1
st
April, 2009 to provide that the power of the
DRP to enhance the variation as mentioned in section 144C(8) shall include and shall be
deemed to have always included the power to consider any matter arising out of the
assessment proceedings relating to the draft order. The DRP has this power to consider
any issue irrespective of whether such matter was raised by the eligible assessee or not.
In view of the above provision, the action of DRP in further enhancing the income of
Pushkar Ltd. by ` 18 lakhs on the basis of materials available on a different issue, which
was not raised by Pushkar Ltd., is valid.
14. Section 254(2) specifically empowers the Appellate Tribunal to amend any order passed
by it, either suo motu or on an application made by the assessee or Assessing Officer,
with a view to rectifying any mistake apparent from record, at any time within 4 years
from the date of passing the order sought to be amended.
The powers of the Tribunal under section 254(2) relating to rectification of its order are
very limited. Such powers are confined to rectifying any mistake apparent from the
record. The mistake has to be such that for which no elaborate reasons or inquiry is
necessary. Accordingly, the re-appreciation of evidence placed before the Tribunal
during the course of the appeal hearing is not permitted. It cannot re-adjudicate the
issue afresh under the garb of rectification. This issue came up for consideration
before the Punjab & Haryana High Court in the case of CIT vs. Vardhman Spinning
(1997) 226 ITR 296, wherein it was observed that the jurisdiction to review or modify
orders passed by the authorities under the Act cannot be inferred on the basis of a
supposed inherent right.
The Delhi High Court, in Lachman Dass Bhatia Hingwala (P) Ltd. v. ACIT (2011) 330 ITR
243 (Delhi)(FB), observed that the justification of an order passed by the Tribunal
recalling its own order is required to be tested on the basis of the law laid down by the
Apex Court in Honda Siel Power Products Ltd. v. CIT (2007) 295 ITR 466, dealing with
the Tribunals power under section 254(2) to recall its order where prejudice has resulted
to a party due to an apparent omission, mistake or error committed by the Tribunal while
passing the order. Such recalling of order for correcting an apparent mistake committed
by the Tribunal has nothing to do with the doctrine or concept of inherent power of
review. It is a well settled provision of law that the Tribunal has no inherent power to
review its own judgment or order on merits or reappreciate the correctness of its earlier
decision on merits. However, the power to recall has to be distinguished from the power
to review. While the Tribunal does not have the inherent power to review its order
on merits, it can recall its order for the purpose of correcting a mistake apparent
from the record.
When prejudice results from an order attributable to the Tribunals mistake, error or
omission, then it is the duty of the Tribunal to set it right. The Delhi High Court observed
that the Tribunal, while exercising the power of rectification under section 254(2), can
recall its order in entirety if it is satisfied that prejudice has resulted to the party which is
attributable to the Tribunals mistake, error or omission and the error committed is
apparent.
Thus, while the Tribunal does not have the power to review or reappreciate the
correctness of its earlier decision on merits under section 254(2), it, however, has the
power to recall an order in entirety to rectify a mistake apparent from record.
15. Section 206AA, with a view to strengthening the PAN mechanism, requires every person
whose receipts are subject to deduction of tax at source, to mandatorily furnish his or her
PAN to the deductor, failing which the deductor shall deduct tax at the rate of 20% or the
rate prescribed in the Act or the rate in force, whichever is higher.

Tax is deductible@10% under section 194A in case the interest on fixed deposits
credited or paid or likely to be credited or paid to an assessee by a bank during any
financial year exceeds `10,000. In this case, the interest on fixed deposits is `10,800
(i.e., 9% of `1,20,000) and hence, TDS provisions under section 194A are attracted.
The issue under consideration is whether, in the case of Ms. Narmada, a senior citizen,
who has not obtained a PAN due to the reason that her income is below the taxable limit,
the provisions of section 206AA would be attracted for non-furnishing of PAN and
consequently, tax would be deductible@20%
In this context, it may be noted that section 139A requires every person whose total income
exceeds the basic exemption limit to apply for allotment of a PAN. As a logical corollary, a
person whose total income is less than the basic exemption limit is not required to apply for
allotment of a PAN. Therefore, the requirement in section 206AA to deduct tax at a higher
rate for non-furnishing of PAN is contrary to what is contemplated under section 139A.
Therefore, in view of the specific provision contained in section 139A, section 206AA
would not be attracted in respect of non-furnishing of PAN by persons whose total
income is less than the taxable limit. It was so held by the Karnataka High Court in Smt.
A. Kowsalya Bai v.UOI (2012) 346 ITR 0156. The banks, therefore, cannot insist such
persons to furnish PAN.
The contention of the bank manager in this case is, therefore, not correct.
16. Section 271FA provides that if a person who is required to furnish an annual information
return, as required under section 285BA(1), fails to furnish such return within the time
prescribed under section 285BA(2) [i.e., 31
st
August immediately following the financial year
in which the transaction is registered or recorded], the prescribed income-tax authority [i.e.,
Director of Income-tax (Central Information Branch)] may direct that such person shall pay, by
way of penalty, a sum of `100 for every day during which such failure continues.
Further, where such person fails to furnish the annual information return within the period
specified in the notice issued under section 285BA(5), he shall pay, by way of penalty, a sum
of ` 500 for every day during which the failure continues, beginning from the day immediately
following the day on which the time specified in such notice for furnishing the return expires.
The penal provisions under section 271FA w.e.f. 1
st
April, 2014 , in a case where notice
under section 285BA(5) has been served, but the Annual Information Return (AIR) has
not been furnished within the time specified therein, are summarized below -
Non-
compliance
of section
Penalty under
section 271FA
Period
285BA(1) ` 100 per day of
continuing default
From 1
st
September immediately following the
financial year in which the transaction is registered
or recorded till the date of expiry of the time
specified in the notice under section 285BA(5).
continuing default
From the date immediately following the date on
which the time specified in notice under section
285BA(5) for furnishing the AIR expires.
The penalty leviable under section 271FA in the case of Mahanadi Bank is calculated as
under -
(1) (2) (3) (4)
Non-
compliance
of section
Penalty under
section 271FA
Period Quantum of penalty under
section 271FA
(2) (3) (`)
continuing default
1.9.2014 to
30.12.2014

121 days ` 100

12,100
continuing default
31.12.2014 to
20.1.2015

21 days ` 500

10,500
22,600
17. As per section 94A, in case an assessee enters into any transaction where one of the
parties thereto is located in the Notified Jurisdictional Area (NJA) then the parties to the
transaction shall be treated as associated enterprises and the transaction shall be
deemed to be an international transaction. The transfer pricing provisions would,
therefore, be attracted in such a case. However, the benefit of permissible variation
between the transfer price and the arms length price, as notified by the Central
Government, shall not be available in such a case.
Since Karyotis Inc. is located in a NJA, the transaction of export of dry fruits by the Indian
company, Godavari Ltd., would be deemed to be an international transaction and
Karyotis Inc. and Godavari Ltd. would be deemed to be associated enterprises.
Therefore, the provisions of transfer pricing would be attracted in this case.
The prices of ` 52 lakhs and ` 53 lakhs charged for sale of similar goods to Danube Inc.
and Mississippi Inc., respectively, being independent entities located in a non-NJA
country, can be taken into consideration for determining the arms length price (ALP)
under Comparable Uncontrolled Price (CUP) Method.
Since more than one price is determined by the CUP Method, the ALP would be the
arithmetical mean of such prices.
Therefore, ALP = ` 52,50,000 i.e., [(` 52,00,000 + ` 53,00,000)/2]
Transfer Price = ` 51,00,000
Since the ALP is more than the transfer price, the ALP of ` 52,50,000 would be
considered for computing the income from the international transaction between
Godavari Ltd. and Karyotis Inc. The benefit of permissible variation @ 3% of transfer

price in respect of such class of international transactions is not available in respect of
this transaction, since one of the parties thereto is located in a NJA.
18. (i) The scope of the term international transaction has been amplified by the Finance
Act, 2012 by insertion of Explanation to section 92B. According to the said
Explanation, international transaction includes, inter alia, provision of scientific
research services. Nile Inc. and Brahmaputra Ltd. are deemed to be associated
enterprises, since Nile Inc., being a holding company of Brahmaputra Ltd., fulfils the
condition of holding shares carrying not less than 26% of the voting power in
Brahmaputra Ltd. Since the provision of scientific research services by Nile Inc., a
Kenyan company to Brahmaputra Ltd., an Indian company, is an international
transaction between associated enterprises, transfer pricing provisions are
attracted in this case.
(ii) Lease of tangible property falls within the scope of international transaction.
Tangible property includes equipment. Thames Inc. is a specified foreign company
in relation to Kaveri Ltd. Therefore, the condition of Kaveri Ltd. holding shares
carrying not less than 26% of the voting power in Thames Inc is satisfied. Hence,
Thames Inc. and Kaveri Ltd. are associated enterprises. Therefore, lease of
equipment by Kaveri Ltd., an Indian company, from Thames Inc., a British company,
is an international transaction between associated enterprises, and consequently,
the provisions of transfer pricing are attracted in this case.
(iii) The scope of the term intangible property has been amplified to include, inter alia,
integrated circuit masks and masters, which is a data processing intangible.
Transfer of intangible property falls within the scope of the term international
transaction. Since Amazon Inc. guarantees not less than 10% of the borrowings of
Indus Ltd., Amazon Inc. and Indus Ltd. are associated enterprises. Therefore, since
transfer of integrated circuit masks by Indus Ltd. to Amazon Inc. is an international
transaction between associated enterprises, the provisions of transfer pricing are
attracted in this case.
(iv) This transaction falls within the meaning of specified domestic transaction under
section 92BA, since the rental payment has been made to a related person referred
to in section 40A(2)(b) i.e., relative (i.e., daughter) of Mr. Krishna, who has
substantial interest in the business of Yamuna Ltd., since he is the beneficial owner
of shares carrying not less than 20% voting power. However, such a transaction
would be treated as a specified domestic transaction to attract transfer pricing
provisions only if the aggregate of such transactions as specified in section 92BA
during the year by Yamuna Ltd. exceeds a sum of ` 5 crore.
(v) The Chambal Unit is eligible for deduction@100% of the profits derived from its
eligible business (i.e., the business of developing an infrastructure facility, being an
irrigation project) under section 80-IA. However, the Damodar Unit is not engaged
in any eligible business. Since the Damodar Unit has transferred water pumps to
the Chambal Unit at a price lower than the fair market value, it is an inter-Unit
transfer of goods between eligible business and other business, where the
consideration for transfer does not correspond with the market value of goods.
Therefore, this transaction would fall within the meaning of specified domestic
transaction to attract transfer pricing provisions, if the aggregate value of
transactions specified in section 92BA during the year exceed ` 5 crore.
19. (i) The house property owned by Mr. Krishna was transferred, without consideration,
on 10.4.2013 to Ms. Kaveri, who subsequently got married to Mr. Krishnas son on
21.3.2014. The asset in question was transferred to Ms. Kaveri prior to her marriage
with the son of the transferor and therefore, she cannot be treated as the sons wife
on the date when it was transferred. Therefore, the property so transferred to her by
Mr. Krishna cannot be included in the net wealth of Mr. Krishna by invoking
provisions of section 4(1)(a). It shall be included in the net wealth of Ms. Kaveri,
who can opt to claim exemption under section 5(vi) in respect of the same.
(ii) The cash recorded in the books of account of a company on the valuation date does
not constitute an asset under section 2(ea). However, cash held in excess of what
has been recorded in the books shall be treated as an asset. Accordingly, the cash
in hand of ` 50,000 (` 1,25,000 ` 75,000) shall be treated as an asset on the
valuation date 31.3.2014.
(iii) Though building or land appurtenant thereto is an asset under section 2(ea), any
house for residential or commercial purposes which forms part of stock-in-
trade is specifically excluded from the scope of building. Hence, office building
purchased for resale by a builder is not an asset under section 2(ea).
(iv) A farm house situated within 25 kms from the local limits of a municipal corporation
is chargeable to wealth-tax. In this case, the farm house is situated beyond 25 kms
from the local limits of Jaipur Municipal Corporation and therefore, it is not
chargeable to wealth-tax, provided it does not fall within 25 kms from the local limits
of any other municipality, or a cantonment board.
A guest house, regardless of the distance, is always chargeable to wealth-tax.
Hence, the guest house is liable to wealth-tax.
(v) The definition of urban land under section 2(ea) includes the following -
(a) Land situated in any area which is comprised within the jurisdiction of a
municipality or a cantonment board and which has a population of not less
than 10,000.
(b) Land situated in any area, within the distance, measured aerially, in relation to
the range of population according to the last preceding census as shown
hereunder


Shortest aerial distance
from the local limits of a
municipality or
cantonment board
referred to in item (a)
Population according to the last
preceding census of which the
relevant figures have been
published before the first day of the
previous year.
(1) 2 kilometers > 10,000 1,00,000
(2) 6 kilometers > 1,00,000 10,00,000
(3) 8 kilometers > 10,00,000
Accordingly, based on the above definition, the categorization of the lands given
below as urban land has to be determined as under -
I 2 kms 10,200 Yes, it is an urban land since population > 10,000.
II 3 kms 88,000 No, it is not an urban land, since population is
not > 1,00,000.
III 4 kms 1,00,000 No, it is not an urban land, since population is
not > 1,00,000.
IV 5 kms 3,00,000 Yes, it is an urban land since population >
1,00,000.
V 7 kms 10,00,000 No, it is not an urban land, since population is not
> 10,00,000.
VI 8 kms 10,05,000 Yes, it is an urban land since population
>10,00,000.
VII 9 kms 12,00,000 No, it is not an urban land, since distance > 8 kms.
Therefore, the lands I, IV and VI fall within the definition of urban land under
section 2(ea) and are hence, assets chargeable to wealth-tax.
20. Computation of value of the house property as on valuation date 31.03.2014
Particulars ` `
Computation of Actual Rent & Annual Rent
Actual Rent (` 35,000 x 3) 1,05,000
Add: Adjustment for premium received from tenant
(` 1,50,000/3) x 3/12
12,500
15% p.a. of Security Deposit i.e. 15% x ` 2,00,000 x
3/12
7,500
Actual Rent for 3 months 1,25,000
Annual Rent (` 1,25,000 x 12/3) 5,00,000

Computation of Net Maintainable Rent (NMR) ` `
Gross Maintainable Rent, being the annual rent 5,00,000
Less: Corporation Tax (` 15,000 x 4) 60,000
15% of Gross Maintainable Rent 75,000 1,35,000
Net Maintainable Rent (NMR) 3,65,000
Capitalised value of NMR
Capitalised value (` 3,65,000 x 12.5) 45,62,500
Cost of acquisition 42,00,000
Capitalised value is the higher of the above 45,62,500
Add: Premium
(i) Aggregate Area 6,000 Sq.Ft.
(ii) Specified Area (60%) 3,600 Sq.Ft.
(iii) Built up area 1,200 Sq.Ft.
(iv) Unbuilt Area 4,800 Sq.Ft.
(v) Excess of unbuilt area over specified area 1,200 Sq.Ft.
% of excess area on aggregate area
(1,200/6,000) 100 20%
(vi) Premium to be added when (v) is 20%
(40% of capitalized value i.e., 40% of
` 45,62,500)
18,25,000
Value of house property for wealth-tax purpose 63,87,500


ANNEXURE

Part I : Statutory Update Direct Tax Laws
Significant Notifications and Circulars
issued between 1
st
May, 2013 and 31
st
October, 2013
I NOTIFICATIONS
1. Notification No. 39/2013 dated 31.05.2013
Time and mode of, payment of tax deducted at source under section 194-IA to the
credit of Central Government, furnishing challan-cum-statement and TDS
Certificate [Rules 30, 31A & 31]
New section 194-IA has been inserted by Finance Act, 2013, requiring every transferee
responsible for paying any sum as consideration for transfer of immovable property (land,
other than agricultural land, or building or part of building) to deduct tax, at the rate 1% of
such sum, at the time of credit of such sum to the account of the resident transferor or at
the time of payment of such sum to a resident transferor, whichever is earlier.
Accordingly, the time and mode of, payment of tax deducted at source under section
194-IA, furnishing Challan-cum-statement and TDS Certificate have been provided, by
amending Rules 30, 31A & 31, respectively -
(i) Such sum deducted under section 194-IA shall be paid to the credit of the Central
Government within a period of seven days from the end of the month in which the
deduction is made and shall be accompanied by a challan-cum-statement in Form
No.26QB [Rule 30].
(ii) The amount so deducted has to be deposited to the credit of the Central
Government by electronic remittance within the above mentioned time limit, into
RBI, SBI or any authorized bank [Rule 30].
(iii) Every person responsible for deduction of tax under section 194-IA shall also
furnish to the DGIT (Systems) or any person authorized by him, a challan-cum-
statement in Form No.26QB electronically within seven days from the end of the
month in which the deduction is made [Rule 31A].
(iv) Every person responsible for deduction of tax under section 194-IA shall furnish the
TDS certificate in Form No.16B to the payee within 15 days from the due date for
furnishing the challan-cum-statement in Form No.26QB under Rule 31A, after
generating and downloading the same from the web portal specified by the DGIT
(Systems) or the person authorized by him [Rule 31].
Notification of Cost Inflation Index for F.Y.2013-14
Clause (v) of Explanation to section 48 defines Cost Inflation Index, in relation to a
previous year, to mean such Index as the Central Government may, by notification in the
A-2 FINAL EXAMINATION: MAY, 2014
Official Gazette, specify in this behalf, having regard to 75% of average rise in the
Consumer Price Index for urban non-manual employees.
Accordingly, the Central Government has, in exercise of the powers conferred by clause
(v) of Explanation to section 48, specified the Cost Inflation Index for the financial year
2013-14 as 939.
S. No. Financial
Year
Cost Inflation
Index
S. No. Financial
Year
Cost Inflation
Index
1. 1981-82 100 18. 1998-99 351
2. 1982-83 109 19. 1999-2000 389
3. 1983-84 116 20. 2000-01 406
4. 1984-85 125 21. 2001-02 426
5. 1985-86 133 22. 2002-03 447
6. 1986-87 140 23. 2003-04 463
7. 1987-88 150 24. 2004-05 480
8. 1988-89 161 25. 2005-06 497
9. 1989-90 172 26. 2006-07 519
10. 1990-91 182 27. 2007-08 551
11. 1991-92 199 28. 2008-09 582
12. 1992-93 223 29. 2009-10 632
13. 1993-94 244 30. 2010-11 711
14. 1994-95 259 31. 2011-12 785
15. 1995-96 281 32. 2012-13 852
16. 1996-97 305 33. 2013-14 939
17. 1997-98 331
Transfer Pricing Rules made applicable to Specified Domestic Transactions as well
With effect from A.Y 2013-14, the transfer pricing provisions have been extended to Specified
Domestic Transactions. Accordingly, the transfer pricing rules prescribed for international
transactions have been suitably amended to make the same applicable for specified domestic
transactions, as well.
Rule
No.
Particulars Amendment
10A Meaning of
expressions used in
computation of
Arms length price
Definition of associated enterprise and
enterprise included
Associated Enterprise shall -
(i) have the same meaning as assigned to it in section
92A; and
ANNEXURE TO RTP PAPER 7: DIRECT TAX LAWS A-3
(ii) in relation to a specified domestic transaction

entered into by an assessee, include --
(A) the persons referred to in section 40A(2)(b)
in respect of a transaction referred to in
section 40A(2)(a);
(B) other units or undertakings or businesses of
such assessee in respect of a transaction
referred to in section 80A or section 80-IA(8);
(C) any other person referred to in section 80-
IA(10) in respect of a transaction referred to
therein;
(D) other units, undertakings, enterprises or
business of such assessee, or other person
referred to in section 80-IA(10) or in respect of
a transaction referred to in section 10AA or the
transactions referred to in Chapter VI-A to
which the provisions of section 80-IA(8) or
section 80-IA(10) are applicable;
Enterprise shall have the same meaning as assigned
to it in clause (iii) of section 92F and shall, for the
purposes of a specified domestic transaction, include a
unit, or an enterprise, or an undertaking or a business of
a person who undertakes such transaction.
10AB Other methods of
determination of
ALP
This Rule provides that for the purpose of section
92C(1)(f), the other method for determination of the arms
length price in relation to an international transaction
shall be any method which takes into account the price
which has been charged or paid or would have been
charged or paid, for the same or similar uncontrolled
transaction, with or between non-associated enterprises,
under similar circumstances, considering all the relevant
facts.
This Rule has now been made applicable to specified
domestic transactions as well.
10B Determination of
ALP under section
92C
The methods for determination of arms length price
specified in this Rule for the purpose of section 92C(2) in
relation to an international transaction shall also be made
applicable in respect of specified domestic transactions.
10C Most appropriate
method
Sub-rule (1) provides that, for the purposes of section
92C(1), the most appropriate method shall be the method
which is best suited to the facts and circumstances of
each particular international transaction, and which
provides the most reliable measure of an arms length
price in relation to an international transaction.
Sub-rule (2) specifies the factors to be taken into account
in selecting the most appropriate method.
This Rule is now made applicable in respect of a
specified domestic transaction as well.
10D Information and
documents to be
kept and maintained
under section 92D
Sub-rule (1) requires every person who has entered into
an international transaction to maintain the requisite
information and documents as detailed thereunder. As
per sub-rule (2), maintenance of information and
documents shall not apply where the aggregate value of
international transactions does not exceed 1 crore
rupees. However, sub-rule (1) shall be applicable for
every specified domestic transaction irrespective of its
value.
10E Report from an
accountant to be
furnished under
section 92E
This rule provides for submission of audit report from a
chartered accountant by every person who has entered
into an international transaction. This provision would
now apply to a person entered into a specified domestic
transaction as well.
4. Notification No.57 / 2013 dated 01.08.2013
Documents and information, to be furnished by the assessee for claiming treaty
benefits, prescribed
For claiming treaty benefits, sections 90(4) and 90A(4) provide that a certificate issued by the
Government of a foreign country would constitute proof of tax residency, without any further
conditions regarding furnishing of prescribed particulars therein.
Further, sections 90(5) and 90A(5) require an assessee to provide such other documents
and information, as may be prescribed, for claiming the treaty benefits, in addition to such
certificate issued by the foreign Government.
Accordingly, the assessee shall provide the following information in Form No. 10F:
(i) Status (individual, company, firm etc.) of the assessee;
(ii) Nationality (in case of an individual) or country or specified territory of incorporation or
registration (in case of others);
(iii) Assessee's tax identification number in the country or specified territory of residence
and in case there is no such number, then, a unique number on the basis of which the
person is identified by the Government of the country or the specified territory of which
the assessee claims to be a resident;
(iv) Period for which the residential status, as mentioned in the certificate referred to in
section 90(4) or section 90A(4), is applicable; and
(v) Address of the assessee in the country or specified territory outside India, during the
period for which the certificate, as mentioned in (iv) above, is applicable.
However, the assessee may not be required to provide the information or any part thereof, if
the information or the part thereof, as the case may be, is already contained in the TRC
referred to in section 90(4) or section 90A(4).
The assessee shall keep and maintain such documents as are necessary to substantiate the
information provided. An income-tax authority may require the assessee to provide the said
documents in relation to a claim by the said assessee of any relief under an agreement
referred to in section 90(1) or section 90A(1), as the case may be.
5. Notification No. 64/2013, dated 19.08.2013
Notification of foreign company for claiming exemption under section 10(48)
Income received by a foreign company in India in Indian currency from sale of crude oil, any
other goods or rendering of services, as may be notified by the Central Government in this
behalf, to any person in India is exempt under section 10(48). For this purpose, the foreign
company, as well as the arrangement or agreement, should be notified by the Central
Government having regard to the national interest. The foreign company should not be
engaged in any other activity in India, except receipt of income under such arrangement or
agreement.
Accordingly, vide this notification, the Central Government, having regard to the national
interest, has notified for the purposes of the said clause, the National Iranian Oil Company, as
the foreign company and the Memorandum of Understanding entered between the
Government of India in the Ministry of Petroleum and Natural Gas and the Central Bank of
Iran on the 20th January, 2013, as the agreement subject to the condition that the said
foreign company shall not engage in any activity in India , other than the receipt of income
under the agreement aforesaid.
The Notification is deemed to be effective from 20
th
January, 2013.
Furnishing of information by the person responsible for making any payment
chargeable to tax to a non-corporate non-resident or to a foreign company
The CBDT has, vide this notification, inserted new Rule 37BB relating to furnishing of
information by the person responsible for making any payment, including any interest or
salary or any other sum chargeable to tax, to a non-corporate non-resident or to a foreign
company.
Sub-rule (1) requires such person to furnish the following:
(i) the information in Part A of Form No.15CA, if the amount of payment does not
exceed ` 50,000 and the aggregate of such payments made during the financial
year does not exceed ` 2,50,000;
(ii) the information in Part B of Form No.15CA for payments other than the payments
referred in clause (i), after obtaining-
(a) a certificate in Form No.15CB from an accountant as defined in the
Explanation below section 288(2); or
(b) a certificate from the Assessing Officer under section 197; or
(c) an order from the Assessing Officer under section 195(2) or section 195(3).
Sub-rule (2) requires the information in Form No. 15CA to be furnished by the person
electronically to the website designated by the Income-tax Department and the
submission of the signed printout of the said form to the authorised dealer under section
10(1) of the Foreign Exchange Management Act, 1999, prior to remitting the payment.
Sub-rule (3) provides that an income-tax authority may require the authorised dealer to
furnish the signed printout for the purposes of any proceedings under the Act.
Further, in respect of the payments of the nature described in the Specified list given in
the said Notification (like Indian investment abroad in equity, debt securities, subsidiaries
and associates, branches and wholly-owned subsidiaries, real estate, remittance towards
business travel, personal gifts and donations, donations to charitable and religious
institutions abroad etc.) no information is required to be furnished under sub-rule (1).
7. Notification No. 73/2013, dated 18.09.2013
Notification of Safe Harbour Rules
Section 92CB(1) provides that the determination of arms length price under section 92C
or section 92CA shall be subject to safe harbour rules. Safe harbour means
circumstances in which the income tax authorities shall accept the transfer price declared
by the assessee.
Section 92CB(2) empowers the CBDT to prescribe such safe harbour rules or
circumstances under which the transfer price declared by the assessee shall be accepted
by the Income-tax Authorities.
Accordingly, in exercise of the powers conferred by section 92CB read with section 295
of the Incometax Act, 1961, the CBDT has, vide this notification, prescribed safe harbour
rules. These rules are explained hereunder:
1. Safe Harbour [Rule 10TD read with Rule 10TA, Rule 10TB and Rule 10TC]
Where an eligible assessee has entered into an eligible international transaction
and the option exercised by the said assessee is not held to be invalid under Rule
10TE, the transfer price declared by the assessee in respect of such transaction
shall be accepted by the income-tax authorities, if it is in accordance with the
circumstances mentioned below:

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8. Notification No.79/2013 dated 07.10.2013
Reverse Mortgage Scheme amended to include within its scope, disbursement to
an annuity sourcing institution for periodic payments by way of annuity to the
Reverse Mortgagor
The Central Government had notified the Reverse Mortgage Scheme, 2008 in exercise of
the powers conferred by clause (xvi) of section 47 of the Income-tax Act, 1961. Reverse
Mortgage means mortgage of a capital asset by an eligible person against a loan
obtained by him from an approved lending institution. Such kind of a transaction is not
regarded as transfer under section 47(xvi) and amounts received by the Reverse
Mortgagor as loan, either in lump-sum or in installment, are exempt under section 10(43).
The Central Government has, vide this notification, amended the Reverse Mortgage
Scheme, 2008, to include within its scope, disbursement of loan by an approved lending
institution, in part or in full, to the annuity sourcing institution, for the purposes of periodic
payments by way of annuity to the reverse mortgagor. This would be an additional mode
of disbursement i.e., in addition to direct disbursements by the approved lending
institution to the Reverse Mortgagor by way of periodic payments or lump sum payment
in one or more tranches.
An annuity sourcing institution has been defined to mean Life Insurance Corporation of India
or any other insurer registered with the Insurance Regulatory and Development Authority.
Maximum Period of Reverse Mortgage Loan
Mode of disbursement Maximum period of loan
(a) Where the loan is disbursed directly to
the Reverse Mortgagor
20 years from the date of signing the
agreement by the reverse mortgagor
and the approved lending institution.
(b) Where the loan is disbursed, in part or
in full, to the annuity sourcing
institution for the purposes of periodic
payments by way of annuity to the
Reverse mortgagor
The residual life time of the borrower.
II. CIRCULARS
1. Circular No.06/2013 dated 29.6.2013
Clarifications on Functional Profile of Development Centres engaged in contract
R&D Services with insignificant risk Conditions relevant to identify such
Development Centres
There exists divergent views amongst the field officers and taxpayers regarding the
functional profile of development centres engaged in contract R & D services for the
purposes of determining arm's length price/transfer pricing. In some cases, while
taxpayers insist that they are contract R & D service providers with insignificant risk, the
TPOs treat them as full or significant risk-bearing entities and make transfer pricing
adjustments accordingly.
The CBDT has, vide this Circular, addressed this issue by classifying the Research and
Development Centres set up by foreign companies into three broad categories based on
functions, assets and risk assumed by the centre established in India. While the three
categories are not water-tight compartments, it is possible to distinguish them based on
functions, assets and risk, as shown hereunder -
Categories of R&D Centres Nature of functions performed and level of
risks assumed by the corresponding
category of the Development Centre
(1) Centres which are
entrepreneurial in nature
Performs significantly important functions and
assumes substantial risks
(2) Centres which are based on
cost-sharing arrangements
Performs functions which are of relatively lesser
significance and assumes moderate risks.
(3) Centres which undertake
contract research and
development
Performs functions which are of low
significance and assumes minimal risks
The assessees, largely, tend to claim that the Development Centre in India is a contract R&D
service provider with insignificant risk, and consequently, adopt the Transactional Net Margin
Method (TNMM) as the most appropriate method.
The CBDT, after due consideration, has laid down the following guidelines for identifying
the Development Centre as a contract R & D service provider with insignificant risk
Foreign Principal Indian
Development
Centre
Remark
(1) Performs most of the
economically significant
functions involved in
research or product
development cycle either
through its own employees
or through its associated
enterprises.
Carries out the
work assigned to
it by the foreign
principal.
Economically significant
functions would include
critical functions such as
conceptualization and
design of the product and
providing the strategic
direction and framework.
(2) Provides funds/ capital and
other economically
significant assets including
intangibles for research or
product development.
Provides remuneration to
the Indian Development
Centre for the work carried
out by the latter.
Does not assume
or has no
economically
significant
realized risks
If a contract shows that the
foreign principal is obligated
to control the risk but the
conduct shows that the
Indian Development Centre
is doing so, then the
contractual terms are not
the final determinant of
actual activities.
(3) Has not only the capability to

control or supervise but also
actually controls or
supervises research or
product development
through its strategic
decisions to perform core
functions as well as monitor
activities on regular basis.
Works under the
direct supervision
of the foreign
principal or its
associated
enterprise

(4) Has ownership right on the
outcome of the research
Has no ownership
right (legal or
economic) on the
outcome of the
research
This fact should be evident
from the contract as well as
from the conduct of the
parties.
In the case of a foreign principal being located in a country/territory widely perceived as a
low or no tax jurisdiction, it will be presumed that the foreign principal is not controlling
the risk. However, the Indian Development Centre may rebut this presumption to the
satisfaction of the revenue authorities. Low tax jurisdiction shall mean any country or
territory notified in this behalf under section 94A of the Act or any other country or
territory that may be notified for the purpose of Chapter X of the Act;
The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall have
regard to the guidelines above and shall take a decision based on the totality of the facts
and circumstances of the case. In doing so, the Assessing Officer or the Transfer Pricing
Officer, as the case may be, shall be guided by the conduct of the parties and not merely
by the terms of the contract.
The Assessing Officer or the Transfer Pricing Officer, as the case may be, shall bear in
mind the provisions of section 92C of the Income-tax Act, 1961 and Rule 10A to Rule
10C of the Income-tax Rules, 1962. He has to apply the guidelines laid down in the
Circular and select the 'most appropriate method'.
2. Circular No.05/2013 dated 29.06.2013
Withdrawal of Circular No.2/2013, dated 26-3-2013 on application of Profit Split
Method for computation of Arm's Length Price
The Circular No. 2/2013 listed the factors to be taken into account for selection and
application of the profit split method as the most appropriate method for computation of
arms length price.
Since the Circular appeared to give the impression that there was a hierarchy among the
six methods listed in section 92C and that Profit Split Method (PSM) was the preferred
method in the case involving unique intangible or in multiple interrelated international
transactions, the CBDT has, consequently, withdrawn the said Circular (i.e., Circular No.
2/2013 dated 26th March 2013), with immediate effect.
Part II : Judicial Update Direct Tax Laws
Significant Legal Decisions
Basic Concepts
1. Can waiver of loan or advance taken for the purpose of relocation of office
premises be treated as a revenue receipt liable to tax?
CIT v. Softworks Computers P. Ltd. (2013) 354 ITR 16 (Bom.)
Facts of the case:
In the present case, the assessee-company worked as a dedicated software
development centre for Speedwing British Airways (Speedwing BA). It provided
transaction processing facilities and airline control system services to Speedwing BA.
The assessee-company was located in the same premises as that of Speedwing BA. As
a matter of arrangement, it was decided that the assessee-company should relocate itself
to an independent location, for which purpose, Speedwing BA provided an advance of
one lakh pounds to the assessee-company. Later, Amadeus Global Travel stepped into
the shoes of Speedwing BA and assumed its rights and liabilities. Consequently, a new
agreement was signed between the assessee-company and Amadeus Global Travel
which, inter alia, relieved the assessee-company of its liability to repay the advance of
one lakh pounds.
Assessees view vs. Assessing Officers view:
The assessee-company claimed that such waiver, being capital in nature, was not
taxable and hence, did not include the same while computing its taxable income. The
Assessing Officer, however, opined that such waiver of loan was a revenue receipt, and
so he added the same to the income of the assessee-company.
High Courts decision:
On appeal, the Bombay High Court held that since the advance taken by the assessee-
company was utilized by it for the purpose of relocating its office premises i.e., for acquisition
of a capital asset, namely, a new office, the waiver of the same cannot be said to be waiver or
remission of trading liability to attract taxability under the Act. Waiver of such advance, being
capital in nature, is not taxable under the Act.
Incomes which do not form part of total income
2. In a case where the application for registration of a charitable trust is not disposed
of within the period of 6 months as required under section 12AA(2), can the trust
be deemed to have been registered as per provisions of section 12AA?
CIT v. KarimangalamOnriya Pengal Semipu Amaipu Ltd. (2013) 354 ITR 483 (Mad)

High Courts Observations:
On this issue, the Madras High Court observed that as per the provisions of section 12AA(2),
every order granting or refusing registration under section 12AA(1)(b), shall be passed by the
registering authority before the expiry of six months from the end of the month in which the
application was received under section 12A(1)(a) or section 12A(1)(aa).
The Madras High Court observed the decision of the Orissa High Court, in Srikhetra, A.C.
Bhakti-Vedanta Swami Charitable Trust v. ACIT (2006) (II) OLR 75, wherein it was held that
the period of six months as provided under section 12AA(2) is not mandatory. In that case,
the Orissa High Court observed that in order to ascertain whether a provision is mandatory or
not, the expression 'shall' is not always decisive. The nature of the statutory provision,
whether mandatory or directory, has to be ascertained not only from the wording of the
statute, but also from the nature and design of the statute and the purpose sought to be
achieved. Further, since the consequence for non-adherence of the time limit of six months is
not spelt out in the statute, it cannot be said that passing the order within such time limit is
mandatory in nature. The Orissa High Court also opined that in the absence of any clear
statutory intent to the contrary, when public duty is to be performed by the public authorities,
the time-limit which is granted by the statute is normally directory and not mandatory. Hence,
though the word shall has been used in section 12AA(2), the period of six months provided
thereunder is not mandatory but directory in nature.
Accordingly, in the present case, the Madras High Court held that the time frame
mentioned in section 12AA(2) is only directory in nature and non-consideration of the
registration application within the said time frame of six months would not amount to
deemed registration.
Note - Similar ruling was pronounced by the Madras High Court in the case of CIT v.
Sheela Christian Charitable Trust (2013) 354 ITR 478, holding that there is no automatic
or deemed registration if the application filed under section 12AA was not disposed of
within the stipulated period of six months.
3. Where a charitable trust applied for issuance of registration under section 12A
within a short time span (nine months, in this case) after its formation, can
registration be denied by the concerned authority on the ground that no charitable
activity has been commenced by the trust?
DIT (Exemptions) v. Meenakshi Amma Endowment Trust (2013) 354 ITR 219 (Kar.)
Facts of the case:
In the present case, the assessee, being a trust, made an application under section 12A
for issuance of registration within nine months of its formation. The registration authority
issued a show cause notice to the assessee-trust to furnish its audited accounts as also
material indicating the actual activities undertaken by the trust. In response to the said
notice, the assessee-trust furnished the details, wherein it indicated that it has not yet
commenced any charitable activity. The concerned registration authority, not being
satisfied with the reply, refused to grant registration to the trust on the ground that it has
not commenced any charitable activity.
Issue:
The issue under consideration is whether registration under section 12AA can be denied
on the ground of non-commencement of charitable activity, where an application for
registration has been made within a short-time span after the formation of the trust.
High Courts observations:
On this issue, the Karnataka High Court opined that an application under section 12A for
registration of the trust can be sought even within a week of its formation. The activities
carried on by the trust are to be seen in case the registration is sought much later after
formation of the trust.
The High Court further observed that, in this case, the corpus fund included contribution
made by the trustees only, which indicated that the trustees were contributing the funds
by themselves in a humble way and were intending to commence charitable activities.
Also, it was not the Revenues contention that the assessee-trust had collected lots of
donations for the activities of the trust, by the time its application came up for
consideration before them. When the application for registration was made, the trust,
therefore, did not have sufficient funds for commencement of its activities.
The High Court observed that, with the money available with the trust, it cannot be
expected to carry out activity of charity immediately. Consequently, in such a case, it
cannot be concluded that the trust has not intended to do any activity of charity. In such a
situation, the objects of the trust as mentioned in the trust deed have to be taken into
consideration by the authorities for satisfying themselves about the genuineness of the
trust and not the activities carried on by it. Later on, if it is found from the subsequent
returns filed by the trust, that it is not carrying on any charitable activity, it would be open to
the concerned authorities to withdraw the registration granted or cancel the registration as
per the provisions of section 12AA(3).
Profits and Gains of Business or Profession
4. Is Circular No. 5/2012 dated 01.08.2012 disallowing the expenditure incurred on
freebies provided by pharmaceutical companies to medical practitioners, in line
with Explanation to section 37(1), which disallows expenditure which is prohibited
by law?
Confederation of Indian Pharmaceutical Industry (SSI) v. CBDT (2013) 353 ITR 388
(H.P.)
On this issue, the Himachal Pradesh High Court observed that as per Indian Medical
Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002, every medical
practitioner and his or her professional associate is prohibited from accepting any gift,
travel facility, hospitality, cash or monetary grant from any pharmaceutical and allied
health sector industries. This is a salutary regulation in the interest of the patients and
the public, considering the increase in complaints against the medical practitioners
prescribing branded medicines instead of generic medicines, solely in lieu of gifts and
other freebies granted to them by some particular pharmaceutical industries.
The CBDT, considering the fact that the claim of any expense incurred in providing
freebies to medical practitioners is in violation of the provisions of Indian Medical Council
(Professional Conduct, Etiquette and Ethics) Regulations, 2002, has, vide Circular
No.5/2012 dated 1.8.2012, clarified that the expenditure so incurred shall be inadmissible
under section 37(1). The disallowance shall be made in the hands of such
pharmaceutical or allied health sector industry or other assessee which has provided
aforesaid freebies and claimed it as a deductible expense in its accounts against income.
The High Court opined that the contention of the assessee that the above mentioned
Circular goes beyond section 37(1) was not acceptable. As per Explanation to section
37(1), it is clear that any expenditure incurred by an assessee for any purpose which is
prohibited by law shall not be deemed to have been incurred for the purpose of business
or profession. The sum and substance of the circular is also the same. Therefore, the
circular is totally in line with the Explanation to section 37(1).
However, if the assessee satisfies the assessing authority that the expenditure incurred is not
in violation of the regulations framed by the Medical Council then it may legitimately claim a
deduction, but it is for the assessee to satisfy the Assessing Officer that the expense is not in
violation of the Medical Council Regulations.
5. Where goods have been confiscated by custom authorities in a foreign country due
to certain statutory violation, can the same be treated as a loss of stock-in-trade,
and claimed as deduction?
CIT v. T. C. Reddy (2013) 356 ITR 516 (Andhra)
Facts of the case:
The assessee is a proprietor of a pharmaceutical company. During the course of his
business, he exported bulk drugs to Mexico through California, USA. The goods were
cleared by the Indian customs authorities and reached California, USA. However, during
the transit from California to Mexico, the goods were seized by the US custom authorities
for some statutory violation.
The assessee claimed the same as bad debt or alternatively, as loss of stock-in-trade
before the Assessing Officer. However, the Assessing Officer did not allow such
deduction.
Tribunals observations:
On an examination of the facts, the Tribunal found that the goods represented the stock-
in-trade of the assessee and the same were cleared for export by the Indian customs
authorities. The goods were, however, confiscated by the custom authorities in USA on
account of some statutory violation. The Tribunal relied upon the decision of the Supreme
Court in Dr. T.A. Quereshi v. CIT (2006) 287 ITR 547, holding that since stock-in-trade
was seized and confiscated, the same has to be allowed as a business loss. Following
the view taken by the Supreme Court in that case, the Tribunal opined that the
confiscation of pharmaceutical drugs exported by the assessee must be treated as loss
of stock-in-trade and would, hence be deductible.
The High Court concurred with the view of the Tribunal treating the loss arising on
confiscation of pharmaceutical drugs as a business loss, based on the Supreme Courts
decision in Dr. Quereshis case.
Note - In Dr. T. A. Quereshi v. CIT (2006) 287 ITR 547 (SC), the assessee was
manufacturing and selling heroin. When a raid was conducted on his premises, the
equipments as well as the heroin was seized. The assessee then claimed deduction of
the value of heroin seized from his income. The department, however, denied the
deduction. The Supreme Court held that Explanation to section 37 had no relevance as it
was not a case of business expenditure but was one of business loss. Business loss is
allowable on ordinary commercial principles in computing the profits. Once it was found
that the heroin seized formed part of the stock-in-trade of the assessee, it followed that
the seizure and confiscation of such stock-in-trade had to be allowed as a business loss.
6. Can the amount of employees contribution towards provident fund, deducted and
credited to the employees PF account by the employer-assessee after the due date
under the EPF & Miscellaneous Provisions Act, 1952, but before the due date of filing
return of income under the Income-tax Act, 1961, be allowed as deduction while
computing business income of the employer-assessee?
CIT v. Kichha Sugar Co. Ltd. (2013) 356 ITR 351 (Uttarakhand)
On this issue, the Uttarakhand High Court observed that the due date referred to in
section 36(1)(va) must be read in conjunction with the due date referred to in the first
proviso to section 43B. A combined reading of both the sections would make it clear that
the due date referred to in section 36(1)(va) is the due date as mentioned in section 43B
i.e., the due date of filing of return of income. Therefore, any amount of employees
contribution paid by the employer-assessee to the provident fund authorities after the due
date under the Employees Provident Fund & Miscellaneous Provisions Act, 1952 (EPF &
MP Act) but before the due date of filing the return for the previous year, shall be
allowable as deduction in the hands of the employer-assessee.
The High Court opined that the Assessing Officer had committed an error in disallowing
the said payment on account of delay in depositing the same to the credit of the account
of the employee maintained with the provident fund authorities, taking a view that the due
date mentioned in section 36(1)(va) is the due date fixed by the provident fund authorities
under the EPF & MP Act, without considering the provisions of section 43B. The High
Court concurred with the opinion of the previous appellate authority/ies that the amount
paid was no longer in the hands of the employer and thus, cannot be taken as income in
the hands of the employer-assessee.
Therefore, the employees' contribution to provident fund, deducted from the salaries of the
employees of the assessee, shall be allowed as deduction from the income of the employer-
assessee, if the same is deposited by the employer-assessee with the provident fund
authority on or before the due date of filing the return for the previous year.
Note - As per provisions of section 2(24)(x), any sum received by the assessee from his
employees as a contribution towards, inter alia, any provident fund, shall be included in
the income of the assessee.
Section 36(1)(va) provides for deduction, while computing income under the head Profit
and gains of business or profession, of any sum received by the assessee from any of its
employees to which provisions of section 2(24)(x) apply, provided the same is credited by
the assessee to the employees account in the relevant fund on or before the due date.
Explanation to section 36(1)(va) clarifies that the due date referred to therein is the date
by which the assessee is required as an employer to credit an employee's contribution to
the employee's account in the relevant fund ( i.e., Provident Fund, in this case) under any
Act (i.e., EPF & MP Act, in this case).
Section 43B provides for certain deductions only on actual payment. The first proviso to
section 43B permits such payments to be made on or before the due date of filing of
return under section 139(1), for the purpose of admissibility of deduction. The payments
covered under section 43B include, inter alia, any sum payable by the assessee as an
employer by way of contribution to any provident fund.
Thus, whereas section 43B permits payment of employers contribution to PF on or
before the due date of filing of return to qualify for deduction, section 36(1)(va) provides a
time limit upto the due date specified under the EPF & MP Act for credit of employees
contribution to the employees PF account, for claiming deduction under that section.
In this case, the High Court has concluded that the extended time limit upto the due date
of filing of return under section 43B is also available for credit of employees contribution
to his PF Account, even though Explanation to section 36(1)(va) requires such payment
to be made on or before the due date under the EPF & MP Act to qualify for deduction.
1

1
Recently, the Gujarat High Court, in CIT v. Gujarat State Road Transport Corporation (Tax Appeal No.637
of 2013), held that employees contribution to provident fund, deposited by an employer after the due date
under the EPF & MP Act but before the due date of filing of return for the relevant assessment year, is not
allowable as deduction under section 36(1)(va).
7. Whether conversion of sales tax liability into a loan pursuant to a Government order
would entitle the assessee to deduction in the year of conversion, being the year in
which the Government order is issued, inspite of the fact that the said order was
communicated to the assessee only in the next year?
CIT v. Minda Wirelinks Pvt. Ltd. (2013) 357 ITR 668 (Delhi)
Facts of the case:
In the present case, the sales tax liability of the assessee-company was converted into a loan
on March 24, 2003, a date which falls within the relevant assessment year (i.e., A.Y.2003-04)
in which the Government order was issued. However, the Assessing Officer disallowed the
expenditure under section 43B on the ground that the assessee-company was not
communicated about the Government order within the relevant assessment year.
The High Court observed that the sales tax liability which pertains to A.Y. 2003-04 was
converted into a loan on March 24, 2003, a date which falls within the relevant assessment
year and hence, the assessee cannot be denied the benefit of deduction under section 43B,
in the year in question. Further, the Circular issued by the CBDT also permits and allows
sales tax liability, which is converted into a loan, to be deducted in the year in which the
liability is so converted and the Government order is issued.
Hence, the High Court held that sales tax liability shall be allowed in the year in which it was
converted into a loan on the basis of the Government order issued, irrespective of the fact
that the Government order was not communicated to assessee within the relevant
assessment year.
Note Conversion of sales tax liability into a loan pursuant to a Government Order is
allowable as deduction under section 43B in the year of conversion, as per Circular No.674
dated 29
th
December, 1993. However, in respect of sums referred to in clauses (d) and (e) of
section 43B, namely, sums payable by the assessee as interest on any loan or borrowing
from any public financial institution or a State Financial Corporation or a State Industrial
Investment Corporation as well as sums payable as interest on any loan or advances from a
scheduled bank, Explanations 3C & 3D thereunder clarify that conversion of such interest into
a loan or borrowing or advance shall not be deemed as actual payment for the purpose of
deduction under section 43B. CBDT Circular No.7/2006 dated 17.7.2006 clarifies that the
converted interest, by whatever name called, will be eligible for deduction in the assessment
of the previous year in which such interest is actually paid. In other words, the nomenclature
of the sum of converted interest will make no difference as the sum of converted interest
when actually paid will represent payment of interest and not repayment of principal.
Thus, whereas sales tax liability converted into loan would be deemed as actual payment in
the year of conversion, interest on loan or borrowing or advance converted into a loan /
borrowing / advance, would be deemed as actual payment not in the year of conversion but
only in the year in which the converted interest, by whatever name called, is actually paid.
8. Can deduction for interest on borrowed funds be disallowed on the ground that such
funds have been diverted as advances to directors, where there has been a consistent
increase in the amount of advances given to directors, without corresponding return
and without any increase in the performance of the company?
A. Murali and Co. P. Ltd.v. ACIT (2013) 357 ITR 580 (Mad.)
Facts of the case:
In the present case, the assessee is engaged in the business of export of beedi leaves, food
grains and transport contracts. For the relevant assessment year, the assessee's claim for
deduction of interest on borrowed capital was disallowed by the Assessing Officer on the
ground that the assessee had not utilised the borrowed funds for business purpose, but had
diverted the same for advancing loans to the directors, which was evident from the increase
in the amount of loans from Rs. 3.23 crores to Rs. 3.91 crores.
Assessees contention:
The assessee contended that the borrowed funds were used only for the purpose of
business, particularly for the purchase of masoor dal from Sri Saravana Agency. The
assessee claimed that the funds were borrowed in the earlier year and nothing was borrowed
during the relevant assessment year. Thus, the money advanced to the
directors/shareholders during the year was only out of the assessee's own funds and there
was no nexus between the borrowed funds and the advance made to the directors.
The assesee also placed reliance on the decision in case of CIT v. Kandagiri Spinning Mills
Ltd. [2008] 298 ITR 306 (Mad), and contended that since the amounts advanced to the
directors were out of commercial expediency and in any event, the amounts advanced were
not out of the borrowed funds, the claim for deduction of interest was sustainable.
The Madras High Court, however, stated that the Kandagiri Spinning Mills Ltd.s case is
distinguishable as the decision was based on the factual findings therein in that case by the
CIT (Appeals) as well as the Tribunal.
The Madras High Court, however, noted that, in Kandagiri Spinning Mills Ltd.s case, the
decision in the case of K. Somasundaram and Brothers v. CIT [1999] 238 ITR 939 (Mad) was
referred to, wherein a similar issue had arisen. In that case, the Court had pointed out that the
capital amount so borrowed should not only be invested in the business, but that the amount
borrowed should continue to remain in the business and so long as the amount borrowed is
used in the business, the interest paid on such borrowing can be deducted in the computation
of income from the business.
However, in the present case, it is evident from the observations of the Tribunal, that the
assessee had not showed any such nexus between the borrowed funds and its utilization for
the purposes of business.

The High Court further observed that except for stating that the assessee had made
borrowals in the immediate preceding accounting year, no materials were placed before the
court or before any other authority to show that the borrowed funds were not diverted for any
purpose other than business. The mere contention that the borrowed funds were utilised for
the purchase of masoor dal from Sri Saravana Agency per se could not be taken as a good
ground to accept the plea of the assessee, considering the fact that the advances given to the
directors had consistently increased from Rs. 3.23 crores to Rs. 3.91 crores without
corresponding return and with no better performance in the business of the assessee. Hence,
the High Court held that the amount of interest on borrowed capital was not deductible.
9. What is the nature of expenditure incurred on glow-sign boards displayed at dealer
outlets - capital or revenue?
CIT v. Orient Ceramics and Industries Ltd. (2013) 358 ITR 49 (Delhi)
On this issue, the Delhi High Court noted the following observations of the Punjab and
Haryana High Court in CIT v. Liberty Group Marketing Division [2009] 315 ITR 125, while
holding that such expenditure was revenue in nature -
(i) The expenditure incurred by the assessee on glow sign boards does not bring into
existence an asset or advantage for the enduring benefit of the business, which is
attributable to the capital.
(ii) The glow sign board is not an asset of permanent nature. It has a short life.
(iii) The materials used in the glow sign boards decay with the effect of weather. Therefore,
it requires frequent replacement. Consequently, the assessee has to incur expenditure
on glow sign boards regularly in almost each year.
(iv) The assessee incurred expenditure on the glow sign boards with the object of facilitating
the business operation and not with the object of acquiring asset of enduring nature.
The Delhi High Court concurred with the above observations of the P & H High Court and
held that such expenditure on glow sign boards displayed at dealer outlets was revenue in
nature.
10. What is the eligible rate of depreciation in respect of computer accessories and
peripherals under the Income-tax Act, 1961?
CIT v. BSES Yamuna Powers Ltd (2013) 358 ITR 47 (Delhi)
Assessees contention vs. Departments contention:
The assessee claimed depreciation on computer accessories and peripherals at the rate of
60%, being the eligible rate of depreciation on computers including computer software.
However, the Revenue contended that computer accessories and peripherals cannot be
treated at par with computers and computer software, and hence were eligible for
depreciation at the general rate applicable to plant and machinery, i.e., 15%.
The High Court observed that computer accessories and peripherals such as printers,
scanners and server etc. form an integral part of the computer system and they cannot be
used without the computer. Consequently, the High Court held that since they are part of the
computer system, they would be eligible for depreciation at the higher rate of 60% applicable
to computers including computer software.
Note - The Delhi High Court, in CIT v. Orient Ceramics and Industries Ltd. [2013] 358 ITR
0049, following its own judgment in the above case, held that depreciation on UPS is
allowable @ 60%, being the eligible rate of depreciation on computers including computer
software, and not at the general rate of 15% applicable to plant and machinery.
Capital Gains
11. Where the stamp duty value under section 50C has been adopted as the full value
of consideration, can the reinvestment made in acquiring a residential property,
which is in excess of the actual net sale consideration, be considered for the
purpose of computation of exemption under section 54F, irrespective of the source
of funds for such reinvestment?
Gouli Mahadevappa v. ITO (2013) 356 ITR 90 (Kar.)
Facts of the case:
In the present case, the assessee sold a plot of land for Rs.20 lakhs and reinvested the
sale consideration of Rs.20 lakhs together with agricultural income of Rs.4 lakhs, in
construction of a residential house. The assessee claimed capital gains exemption under
section 54F, taking into consideration the entire investment of Rs.24 lakhs. The
Assessing Officer, applying the provisions of section 50C, deemed the stamp duty value
of Rs.36 lakhs as the full value of consideration since the consideration received or
accruing as a result of transfer of capital asset (i.e. Rs.20 lakhs) was less than the value
adopted by the stamp valuation authority (i.e., Rs.36 lakhs). The same was not disputed
by the assessee before the Assessing Officer.
Assessing Officers contention vis-a-vis assessees contention:
The Assessing Officer allowed exemption under section 54F, taking into consideration
investment in construction of residential house, to the extent of actual net consideration of
Rs.20 lakhs. He did not consider the balance amount of Rs.4 lakhs, invested in the
construction of residential house, out of agricultural income, for computation of exemption
under section 54F, even though the sale consideration adopted for the purpose of
computation of capital gains i.e., stamp duty value of Rs.36 lakhs, was more than the
amount of Rs.24 lakhs invested in the new house.
The assessee contended that the entire investment of Rs.24 lakhs made in construction of
the residential house should be considered for computation of exemption under section
54F, irrespective of the source of funds for such reinvestment. Further, the assessee also
contended before the High Court that the registration value adopted under section 50C was
excessive and disproportionate to the market value of the property.
On the issue of applicability of section 50C, the Karnataka High Court observed that
section 50C(2) allows an opportunity to the assessee to contend, before the Assessing
Officer, the correctness of the registration value fixed by the State Government. Had he
done so, the assessing authority would have invoked the power of appointing a Valuation
Officer for assessing the fair market value of the property. The High Court held that
when the assessee had not disputed the registration value at that point of time, it is not
permissible for the assessee to now contend, at this stage, that the registration value
does not correspond to the market value. Hence, the value of Rs.36 lakhs adopted under
section 50C has to be deemed as the full value of consideration.
On the issue of exemption under section 54F, the High Court held that when capital gain
is assessed on notional basis as per the provisions of section 50C, and the higher value
i.e., the stamp duty value of Rs.36 lakhs under section 50C has been adopted as the full
value of consideration, the entire amount of Rs.24 lakhs reinvested in the residential
house within the prescribed period should be considered for the purpose of exemption
under section 54F, irrespective of the source of funds for such reinvestment.
12. Where transfer of shares in a company has been effected, fulfilling all the
requirements for claim of exemption under section 10(38), can such exemption be
denied on the ground that the transaction is a colorable device, since the
underlying asset transferred is, in effect, land, which is a short-term capital asset,
on sale of which capital gains tax liability would have been attracted?
Bhoruka Engineering Inds. Ltd. v. DCIT (2013) 356 ITR 25 (Kar.)
Facts of the case:
Bhoruka Steel Ltd. (BSL), a group company of the assessee, was incorporated in the year
1969. It had a mini steel plant at Bangalore. It commenced commercial production in 1972
and set up a refractory plant at Bangalore. BSL was declared as a sick industrial company
in 1996 and IDBI was appointed as the Operating Agency. The rehabilitation scheme
formulated envisaged sale of the surplus assets of BSL, which included 30 acres of land.
A decision was taken in the meeting held on 29
th
July, 2002, to offer the land first to the
promoters/sister companies jointly or severally with the reserve price of Rs.25 lakhs per
acre on the condition that the dues of the secured creditors and the others as per the
rehabilitation scheme were cleared by 31
st
December, 2002. Bhoruka Financial Services
Ltd. (BFSL), a public limited company and a group company engaged in financial services,
offered to purchase the 30 acres of land at a price of Rs.25 lakhs per acre. The
Committee approved the sale of 15 acres of land to BFSL at Rs.3.75 crores. Accordingly,
the land measuring 15 acres was sold to BFSL in June 2004 through registered sale
deeds for Rs.3.75 crores, the then prevailing market price which was accepted for the
purpose of section 50C also.
The assessee-company is a limited company whose shares are quoted in the stock
exchange. The assessee is holding shares in BFSL since October, 1984. The assessee,
together with other promoter shareholders, held 98.73% shares in BFSL, the remaining
being held by the public shareholders. In the financial year 2005-06, the assessee-
company sold its shares to DLF Commercial Developers Ltd. (DLFCDL) for a net
consideration of Rs.20.29 crores. The other promoters also sold their shares to DLFCDL
and the total net consideration, including that of the assessee, was Rs.89.28 crores. The
assessee claimed the capital gain arising on sale of such shares as exempt under
section 10(38), since the shares, being a long-term capital asset, were sold in a
recognized stock exchange and securities transaction tax has been paid on such sale.
Revenues contention:
The Revenue contended that the substance of the above transaction was the transfer of
land, which would attract short-term capital gains tax in the hands of BFSL. BSL had sold
its immovable property to its associate concern, BFSL, for a nominal value of Rs.3.75
crores. BFSL, never before doing any business other than financial services, purchases
the land for Rs.3.75 crores and immediately thereafter, the assessee-company and its
entire group, holding 98.73% of shares in BFSL, sell their entire shareholding of BFSL to
DLFCDL for a consideration of Rs.89.28 crores, without attracting corresponding tax
liability. This is made possible by getting away from Bangalore Stock Exchange and
going to Magadh Stock Exchange to carry out the sale transaction and by paying
securities transaction tax for claiming exemption from long-term capital gains arising on
sale of shares under section 10(38). The shares of BFSL were listed in Bangalore Stock
Exchange, but hardly got traded. The last quoted value of the share was Rs.5 in the year
1985. The promoters of BFSL sought permission from SEBI to exempt them from making
public announcement in respect of sale of equity shares to DLFCDL.
Further, the promoters of BFSL had disposed of all the other assets held by BFSL except
land, before the shares were sold to DLFCDL. BFSL was, in effect, reduced to a shell
company, which was used to transfer a real asset and the promoters took the fruits of the
transaction. The intention of the promoters was to transfer the underlying asset, being
land to DLFCDL. The Revenue contended that DLFCDL could not have bought the
shares of BFSL at a substantial rate of Rs.4,490 per share. Since the area where the
land was situated had high commercial value, DLFCDL had purchased the shares of
BFSL keeping in mind the value of the underlying asset, being the land. The land had, in
effect, been transferred to DLFCDL by way of the above circuitous transaction.
Appellate authorities views:
The Commissioner (Appeals) concurred with the view of the assessing authority and held
that the corporate veil had to be pierced and the substance of the transaction (i.e. sale of
a short-term capital asset, being land, giving rise to taxable short-term capital gains), has
to be considered. The Tribunal was of the view that the transaction in question was a
colorable device to avoid payment of short-term capital gains tax. This view was further
substantiated by applying the rationale of case of Vodafone International Holdings B. V.
v. Union of India reported in (2012) 341 ITR 1 (SC).
The Karnataka High Court observed that in Vodafone case, it was also mentioned that
Tax planning may be legitimate provided it is within the framework of law' and 'colorable
devices cannot be a part of tax planning and it is wrong to encourage or entrain the belief
that it is honorable to avoid the payment of tax by resorting to dubious methods'.
Therefore, in that case, it was inferred that tax planning within the framework of law is
legal. However, tax evasion through the use of colorable devices and by resorting to
dubious methods and subterfuges is not allowed.
The High Court further observed that the assessee is entitled to manage its affairs within
the four corners of law so as to attract minimum tax liability or no tax liability. However,
the same should be real and genuine and not a sham or make-believe. He may
legitimately claim the advantage of any express terms or of any omissions that he can
find in his favour in taxing statutes in absence of any specific tax avoidance provision.
Further, the intention of the legislature in a taxation statute is to be gathered from the
language of the provisions particularly where the language is plain and unambiguous. In
a taxing Act, it is not possible to assume any intention or governing purpose of the
statute more than what is stated in the plain language.
If the transaction in question is sham or colorable and entered into with the sole intention
of evading payment of tax, then such a transaction would not have any legitimacy. For
determining whether a transaction is a valid transaction or a sham, each case should be
seen on a standalone basis.
The Karnataka High Court observed that, in this case, the assessee-company was
holding shares in BFSL from 1
st
October, 1984. Therefore, the shares represent a long-
term capital asset. The transaction had taken place subsequent to 28
th
September, 2004.
Hence, the second condition for claim of exemption is fulfilled. The transaction had taken
place through the Magadh Stock Exchange and securities transaction tax has been paid
on such sale. Where all the three conditions have been fulfilled, the assessee is entitled
to exemption under section 10(38) in respect of long-term capital gains arising from such
transfer. Merely because capital gains tax liability would have been attracted had a
registered sale deed been executed by BFSL for selling land to DLFCDL, it cannot be
concluded that the shareholders of BFSL transferring their shares after complying with
the legal requirements would not be entitled to the benefit of exemption.
The High Court further noted that the companies involved in the transaction were existing
companies. Thus, neither of the companies came into existence as a part of the scheme
for purchase of immovable property or transfer of shares for the purpose of evading
payment of tax. The event of transfer of shares happened in ordinary course of business
and is legal. The transaction is, therefore, real, valuable consideration is paid, all legal
formalities are complied with, and what is transferred is shares and not immovable
property. Hence, it is a valid legal transaction and cannot be termed as a colorable
device or sham transaction or an unreal transaction.
13. Where a building, comprising of several floors, has been developed and re-
constructed, would exemption under section 54/54F be available in respect of the
cost of construction of -
(i) the new residential house (i.e., all independent floors handed over to the
assessee); or
(ii) a single residential unit (i.e., only one independent floor)?
CIT v. Gita Duggal (2013) 357 ITR 153 (Delhi)
Facts of the case:
In the present case, the assessee was the owner of property comprising the basement,
ground floor, first floor and second floor. In the year 2006, she entered into a collaboration
agreement with a builder for developing the property. According to the terms of the
agreement, the builder was to demolish the existing structure on the plot of land and develop,
construct, and/or put up a building consisting of basement, ground floor, first floor, second
floor and third floor with terrace at its own costs and expenses. The assessee handed over to
the builder, the physical possession of the entire property, along with 22.5% undivided
interest over the land. The handing over of the entire property was, however, only for the
limited purpose of development. The builder was to get the third floor plus the undivided
interest in the land to the extent of 22.5% for his exclusive enjoyment. In addition to the cost
of construction incurred by the builder on development of the property, a further amount of
Rs.4 crores was payable by the builder to the assessee as consideration against the rights of
the assessee.
Assessees contention vis--vis Assessing Officers contention:
The assessee, in her return of income, showed only Rs. 4 crore as sales consideration. The
Assessing Officer, however, took the view that the sale consideration for the transfer should
include not only the amount of Rs. 4 crores received by the assessee in cash, but also the
cost of construction amounting to Rs. 3.44 crore incurred by the developer in respect of the
other floors, which were handed over to the assessee.
The assessee contended that if the cost of construction incurred by the builder is to be added
to the sale price, then, the same should also correspondingly be considered as re-investment
in the residential house for exemption under section 54.
However, the Assessing Officer rejected the claim for exemption under section 54 on the
ground that the floors obtained by the assessee contained separate residential units having
separate entrances and cannot qualify as a single residential unit. He contended that
deduction under section 54F was allowable, and that too only in respect of cost of
construction incurred in respect of one unit i.e., one floor.
Appellate authorities views:
The Commissioner (Appeals), on the basis of the judgment in CIT v. D. Ananda Basappa
[2009] 309 ITR 0329 (Kar.), took a contrary view. The Tribunal concurred with the view of the
Commissioner (Appeals), observing that the words "a residential house" appearing in section
54/54F of the Act cannot be construed to mean a single residential house since under section
13(2) of the General Clauses Act, singular includes plural.
The High Court observed that sections 54 and 54F use the expression residential house
and not residential unit and it is the Assessing Officer who has introduced a new concept of
residential unit into these sections. Sections 54 and 54F require the assessee to acquire a
"residential house" and so long as the assessee acquires a building, which may be
constructed, for the sake of convenience, in such a manner as to consist of several units
which can, if the need arises, be conveniently and independently used as an independent
residence, the requirement of the section should be taken to have been satisfied. There is
nothing in these sections which requires the residential house to be constructed in a particular
manner. The only requirement is that it should be for residential use and not for commercial
use. The physical structuring of the new building, whether lateral or vertical, should not come
in the way of considering the building as a residential house.
The High Court held that the fact that the residential house consists of several independent
units cannot be permitted to act as an impediment to the allowance of the deduction under
section 54 or section 54F. It is neither expressly nor by necessary implication prohibited.
Therefore, the assessee is entitled to exemption of capital gains in respect of investment in
the residential house, comprising of independent residential units handed over to the
assessee.
Set-off and carry forward of losses / Assessment of firms
14. Can the loss suffered by an erstwhile partnership firm, which was dissolved, be
carried forward for set-off by the individual partner who took over the business of
the firm as a sole proprietor, considering the succession as a succession by
inheritance?
Pramod Mittal v. CIT (2013) 356 ITR 456 (Delhi)
Facts of the case:
In the present case, the assessee was previously a partner in a firm. As per the
dissolution deed of the partnership firm, with effect from 18
th
September, 2004, he took
over the entire business of the partnership firm in his individual capacity including fixed
assets, current assets and liabilities and the other partner was paid his dues. He then ran
the business as a sole proprietor with effect from that date. The assessee, relying upon
section 78(2) and the decisions of the Supreme Court in CIT v. Madhukant M. Mehta
(2001) 247 ITR 805 (SC) and Saroj Aggarwal v. CIT (1985) 156 ITR 497 (SC), claimed
the set-off of the losses suffered by the erstwhile partnership firm against his income
earned as an individual proprietor, considering the case as inheritance of business.
However, considering that only the person who has suffered the loss is entitled to carry
forward and set-off the same, the claim of the assessee was disallowed by the Assessing
Officer. The Tribunal concurred with the Assessing Officers view.
The High Court observed that upon dissolution, the partnership firm ceased to exist.
Also, the partnership firm and the proprietorship concern are two separate and distinct
units for the purpose of assessment. As per section 170(1), the partnership firm shall be
assessed as such from 1st April of the previous year till the date of dissolution (i.e., 18
th

September, 2004). Thereafter, the income of the sole- proprietorship shall be taxable in
the hands of the assessee as an individual. Thus, section 170(1) provides as to who will
be assessable in respect of the income of the previous year from business, when there is
a change in the person carrying on business by succession.
Section 78(2), however, deals with carry forward of losses in case of succession of
business. It provides that only the person who has incurred the losses, and no one else,
would be entitled to carry forward the same and set it off. An exception provided
thereunder is in the case of succession by inheritance.
Therefore, section 170(1) providing the person in whose hands income is assessable in
case of succession and section 78(2) providing for carry forward of losses in case of
succession of business, deal with different situations and resultantly, there is no
contradiction between these sections.
The income earned by the sole proprietor would include his share of loss as an individual
but not the loss suffered by the erstwhile partnership firm in which he was a partner. The
exception given in section 78(2), permitting carry forward of losses by the successor in
case of inheritance, is not applicable in the present case since the partnership firm was
dissolved and ceased to continue. Taking over of business by a partner cannot be
considered as a case of inheritance due to death as per the law of succession. The High
Court opined that the decision in Madhukant M. Mehtas case and Saroj Aggarwals case
cannot be applied since this is not a case of succession by inheritance.
Therefore, the loss suffered by the erstwhile partnership firm before dissolution of the
firm cannot be carried forward by the successor sole-proprietor, since it is not a case of
succession by inheritance. The assessee sole-proprietor is, therefore, not entitled to set-
off the loss of the erstwhile partnership firm against his income.
Note - In Madhukant M. Mehtas case, the sole proprietor had expired and after his death
the heirs succeeded the business as a partnership concern. Therefore, the losses
suffered by the deceased proprietor was allowed to be set-off by the partnership firm
since the case falls within the exception mentioned under section 78(2), i.e., a case of
succession by inheritance.
Also, in Saroj Aggarwals case, upon death of a partner, his legal heirs were inducted as
partners in the partnership firm. The partnership firm was not dissolved on the death of
the partner. The partnership firm which suffered the losses continued with induction of
the legal heirs of the deceased partner. This, being a case of succession by inheritance,
the benefit of carry forward of losses was given to the re-constituted partnership firm.
In the present case, however, the partnership firm was dissolved and the take over of the
running business of the firm by the erstwhile partner as a sole proprietor was not a case of
succession by inheritance. Hence, the carry forward of losses of the firm by the sole
proprietor was not allowed in this case.
Deductions from Gross Total Income
15. Can Duty Drawback be treated as profit derived from the business of the industrial
undertaking to be eligible for deduction under section 80-IB?
CIT v. Orchev Pharma P. Ltd. (2013) 354 ITR 227 (SC)
On this issue, the Supreme Court, following the decision in case of Liberty India v. CIT
(2009) 317 ITR 218 (SC) held that Duty Drawback receipts cannot be said to be profits
derived from the business of industrial undertaking for the purpose of computation of
deduction under section 80-IB.
Note - In the case of Liberty India v. CIT (2009) 317 ITR 218 (SC), the Supreme Court
observed that DEPB / Duty drawback are incentives which flow from the schemes framed
by the Central Government or from section 75 of the Customs Act, 1962. Section 80-IB
provides for the allowing of deduction in respect of profits and gains derived from eligible
business. However, incentive profits are not profits derived from eligible business
under section 80-IB. They belong to the category of ancillary profits of such
undertaking. Profits derived by way of incentives such as DEPB/Duty drawback cannot
be credited against the cost of manufacture of goods debited in the profit and loss
account and they do not fall within the expression "profits derived from industrial
undertaking" under section 80-IB. Hence, Duty drawback receipts and DEPB benefits do
not form part of the profits derived from the eligible business for the purpose of the
deduction under section 80-IB.
Assessment Procedure / Appeals and Revision
16. Where the Commissioner sets aside the assessment order under section 263 on
issues relating to a particular business of an assessee and the matter was restored
to the Assessing Officer, can the Assessing Officer make enquiries relating to
another business of the assessee, in respect of which the original order passed by
the Assessing Officer had attained finality?
Smt. Shobha Govil v. Additional Commissioner, Income-tax (2013) 354 ITR 668
(Allahabad)

Facts of the case:
In the present case, the assessee was engaged in two distinct lines of businesses,
namely, mentha and cattle feed and green vegetable business, for which separate books
of account were maintained by him. Assessment proceedings were initiated against the
assessee and an order was passed in respect of both the businesses by the Assessing
Officer. Thereafter, the Commissioner issued a notice under section 263, treating the
assessment order as erroneous and prejudicial to the Revenue, on account of certain
issues pertaining to the assessment of income from the cattle feed and green vegetable
business only. Since the assessees reply to the said show-cause notice was not found
satisfactory, the Commissioner set aside the assessment order and restored the matter
back to the Assessing Officer.
Thereafter, the Assessing Officer served a detailed questionnaire making inquiries with
regard to both the mentha business and the cattle feed and green vegetable business.
The assessee objected to the questionnaire on the ground that the remand order passed
by the Commissioner was confined only to determination of income from the cattle feed
and green vegetable business. The Assessing Officer opined that the entire assessment
order has been set aside and the scope of inquiry, therefore, cannot be restricted to the
cattle feed and green vegetable business alone.
Issue:
The issue under consideration before the High Court is whether in a case where the
assessment order was set-aside by the Commissioner on issues pertaining to a certain
business and the matter was restored to the Assessing Officer, can the Assessing Officer
make queries and serve questionnaire with regard to the business affairs pertaining to
another business of the assessee, in respect of which the original assessment order had
attained finality.
On this issue, the High Court observed that the books of account of mentha business had
been audited and the audited accounts books and the auditors report relating to the said
business were on record. Further, no objection was raised nor was any defect pointed
out with regard to the maintenance of accounts relating to mentha business either by the
assessing authority or by the Commissioner of Income-tax while exercising the power
under section 263. The income and expenditure with regard to mentha business had
attained finality as the same had not been adversely commented upon in revision by the
Commissioner.
The High Court disagreed with the Assessing Officers contention that the entire
assessment order was set aside by the Commissioner due to which the scope of inquiry
cannot be restricted to cattle feed and green vegetable business alone. The High Court
opined that the revision order has to be read as a whole along with the show-cause
notice, which was confined to cattle feed and green vegetable business alone.

The High Court, therefore, held that since the objections raised by the Commissioner in
his show-cause pertained only to the cattle feed and green vegetable business, the
Assessing Officers queries should also be confined to the said business and cannot
extend to mentha business. The High Court, however, clarified that it is open to the
Assessing Officer to raise all relevant queries to determine the income of the assessee
with regard to the cattle feed and green vegetable business.
Penalties
17. Can the conversion of land held as stock-in-trade into investment just before the
sale of property, for the purpose of availing the benefit of concessional rate of tax
as well as indexation benefit on long-term capital gains, be treated as furnishing of
inaccurate particulars of income to attract levy of penalty?
CIT v. Splender Construction (2013) 352 ITR 588 (Delhi)
Facts of the case:
In the present case, land owned by the assessee company was shown as stock-in-trade
in the books of account upto the preceding previous year. However, in the balance sheet
of the current previous year, no stock-in-trade was declared. The company claimed that
in the current previous year, the said land held as stock-in-trade was converted into
investment. The same was sold in the same year and long-term capital gain was
declared in the return of income filed. The assessee claimed the benefit of indexed cost
of acquisition as well as concessional rate of tax@20% on such long-term capital gains,
by considering the period of holding of land from the date of its purchase.
The Assessing Officer, however, considered the period of holding of the land from the
date when it was converted into "investment". Since the period was less than 36 months,
he taxed the gains arising on sale of such land as short-term capital gains chargeable at
the normal rates of tax (@30% plus surcharge and cesses, as applicable). The
Commissioner (Appeals) and the Tribunal concurred with the Assessing Officers view.
The appeal filed by the assessee before the High Court was admitted, but dismissed
there and then, after hearing the objections of the assessee.
Assessing Officers view vs. Tribunals view:
The Assessing Officer also initiated penalty proceedings under section 271(1)(c) claiming
that the above mentioned action of conversion of stock-in-trade into investment just
before the sale of asset to avail the benefit of concessional rate of tax on long-term
capital gains, amounts to furnishing inaccurate particulars of its income. After giving the
assessee an opportunity of being heard, the Assessing Officer passed a penalty order,
which was confirmed by the Commissioner (Appeals). The Tribunal, however, allowed
the appeal of the assessee and deleted the penalty, on the ground that whether the asset
was a long-term capital asset or a short-term capital asset was a debatable issue, since
a substantial question of law had arisen on this issue before the High Court.
The High Court observed that the change in the books of account by the assessee-
company, just before the sale of the property, was made to avoid payment of full taxes by
changing the complexion of the earnings from sale of the property. The assessee-
company had, under the garb of long-term capital gains wanted to pay lesser tax, which
is the reason why it had converted its stock-in-trade into investment before sale of the
land. It had, thus, clearly furnished inaccurate particulars of income.
The High Court, held that the issue was not a debatable one, considering that
the order of the Assessing Officer was sustained by all successive authorities and
it had also dismissed the appeal at the admission stage itself, there and then, after
hearing the arguments.
Accordingly, it set aside the order of the Tribunal and restored the penalty order of the
Assessing Officer.
Miscellaneous Provisions
18. Can loan, exceeding the specified limit, advanced by a partnership firm to the sole-
proprietorship concern of its partner be viewed as a violation of section 269SS to
attract levy of penalty?
CIT v. V. Sivakumar (2013) 354 ITR 9 (Mad.)
Facts of the case:
In the present case, the assessee was a partner in four firms and also had a sole-
proprietary business. In the relevant previous year, the partnership firms had advanced
loan to the assessee in cash exceeding the specified amount mentioned in section
269SS. The Assessing Officer initiated penalty proceedings under section 271D in view
of violation of section 269SS. The Assessing Officer recorded a factual finding that the
said money had been advanced by the partnership firm as a loan and were debited to the
accounts of the proprietary concern; therefore, it was evident that the assessee had
taken loan from the firms in cash in the capacity of the proprietor and not as a partner.
Consequently, the provisions of section 269SS had been violated.
Assessees contention:
The assessee contended that the amount is taken in the capacity of the partner and it
cannot be taken as an independent transaction and therefore, there is no violation of
section 269SS. Also, the assessee contended that the partnership firm has no separate
legal entity and there is no separate identification between the firm and the partner.
Tribunals view:
The Tribunal, relying upon the various court decisions, confirmed the finding of the
Commissioner (Appeals) that partnership firm is not a juristic person and there is no
separate identity for the firm and the partners; Being a partner, the assessee had
withdrawn amounts from the firms and there were no reasons to doubt the genuineness
of the transactions. Consequently, the transactions between the firm and the partner
cannot be brought within the meaning of section 269SS.
The High Court, relying upon the various court decisions, upheld the decision of the
Tribunal holding that there is no separate identity for the partnership firm and that the
partner is entitled to use the funds of the firm. In the present case, the assessee has
acted bonafide and that there was a reasonable cause within the meaning of section
273B. Therefore, the transaction cannot be said to be in violation of section 269SS and
no penalty is attracted in this case.
Provisions for deduction and collection of tax
19. Can the transmission, wheeling and SLDC charges paid by a company engaged in
distribution and supply of electricity, under a service contract, to the transmission
company be treated as fees for technical services so as to attract TDS provisions
under section 194J or in the alternative, under 194C?
Ajmer Vidyut Vitran Nigam Ltd., In re (2013) 353 ITR 640 (AAR)
Facts of the case:
In the present case, the applicant is a government company engaged in the business of
distribution and supply of electricity to customers in various districts of Rajasthan. The
activity of distribution is preceded by the production of electricity and its transmission
from the point of production to the point of distribution. The production is by the
generating company, which is another entity and transmission to the applicant is through
the transmission system network of the transmission company. The transmission
company carries the electrical energy to the applicant at the distribution system network
of the applicant. The applicant then distributes the energy to the end customers.
The transmission of electricity from the point of generation to the point of distribution of the
applicant is termed as wheeling. The applicant pays transmission and wheeling charges for
this wheeling, which it contends are statutory charges. The transmission company also
functions as a State Load Dispatch Centre (SLDC), which is responsible for the general co-
ordination of production and transmission of electricity to ensure uniform distribution in the
State. The applicant pays to the transmission company, SLDC charges, which it claims as
statutory in nature, since the levy is in terms of the Electricity Act, 2003.
Applicants contention:
The applicant contended that the above charges were not in the nature of fees for technical
services to attract TDS provisions under section 194J, on the following grounds
(i) The transmission does not involve rendering of any technical services nor were
technically qualified staff of the transmission company involved in the transmission
of electrical energy;
(ii) The SLDC charges were also mere statutory charges and does not involve
rendering of technical services;
(iii) The payment of transmission, wheeling and SLDC charges were in the nature of
reimbursement of actual cost and hence, do not generate any income in the hands
of the transmission company.
The Revenue, on the other hand, was of the view that the transmission of electrical
energy from the point of generation to the point of distribution of the applicant involves
rendering of technical services and consequently, the applicant was bound to withhold
tax. The Revenue supported its view on the basis of the following contentions
(i) Transmission of electrical energy is a technical service and requires constant
involvement of a technical system consisting of sophisticated instruments, constant
monitoring and supervision by persons with a technical ability and knowledge to
operate and manage the system so as to ensure regular and consistent supply of
electricity at the grid voltage at the distribution point of the applicant.
(ii) As regards SLDC charges, the services rendered require the technical support and
services of technically qualified staff and therefore they were technical services within
the meaning of section 194J.
(iii) The fact that the contract between both the parties is backed by a statutory
obligation cannot alter the nature of services rendered.
AARs observations:
The AAR did not agree with the applicants contention regarding transmission and
wheeling charges not constituting fees for technical services on the ground that no
rendering of technical services was involved for maintaining proper and regular
transmission of electrical energy. It was also not in agreement with the applicants
argument that the services of technical personnel were not needed for ensuring due and
proper transmission of electrical energy from the generation point to the distribution
point. The AAR concurred with the Revenues view that the personnel of the transmission
company had to ensure regular and consistent transmission of electrical energy at the
grid voltage at the distribution point of the applicant.
AARs decision:
The AAR, considering the definition of fees for technical services under section 9(1)(vii)
and the process involved in proper transmission of electrical energy, held that
transmission and wheeling charges paid by the applicant to the transmission company
are in the nature of fees for technical services, in respect of which the applicant has to
withhold tax thereon under section 194J.
As regards SLDC charges, the AAR opined that the main duty of the SLDC is to ensure
integrated operation of the power system in the State for optimum scheduling and
dispatch of electricity within the State. The SLDC charges paid appeared to be more of a
supervisory charge with a duty to ensure just and proper generation and distribution in
the State as a whole. Therefore, such services were not in the nature of technical
service to the applicant; Resultantly, it does not attract TDS provisions under section
194J or under section 194C.
20. Can discount given on supply of SIM cards and pre-paid cards by a telecom
company to its franchisee be treated as commission to attract the TDS provisions
under section 194H?
Bharti Cellular Ltd. v. ACIT (2013) 354 ITR 507 (Cal.)
On this issue, the Calcutta High Court observed the Supreme Court ruling in Bhopal
Sugar Mills case (1977) 40 STC 42, wherein it was held that the true relationship
between the parties has to be gathered from the nature of the contract, its terms and
conditions. The terminology used by the parties is not decisive of the said relationship.
The High Court, on perusal of the agreement between the assessee-telecom company
and the franchisees, observed that
(1) the property in the start-up pack and pre-paid coupons, even after transfer and
delivery to the franchisee, remained with the assessee-telecom company;
(2) the franchisee really acted as a facilitator and/or instrument of providing services by
the assessee-telecom company to the ultimate subscriber;
(3) the franchisee had no free choice to sell the pre-paid coupons and sim cards and
everything including the selling price was regulated by the assessee-telecom
company;
(4) the rate at which the franchisee sells to the retailers is also regulated and fixed by
the assessee-telecom company.
In the real sense, the franchisee acted on behalf of the assessee-telecom company for selling
start-up pack, prepaid recharge coupons to the customer. Therefore, the relationship
between the assessee and the franchisee is essentially that of principal and agent,
though the nomenclature used is franchisee. The franchisees were, thus, agents of the
assessee, getting a fixed percentage of commission, in the form of discount.
Considering the above, the High Court held that there is an indirect payment of
commission, in the form of discount, by the assessee-telecom company to the
franchisee. Therefore, the assessee is liable to deduct tax at source on such commission
as per the provisions of section 194H.
Note - Similar ruling was pronounced by the Kerala High Court in Vodafone Essar
Cellular Ltd. v. ACIT (TDS) (2011) 332 ITR 255, wherein it was held that there was no
sale of goods involved as claimed by the assessee-telecom company and the entire
charges collected by the assessee from the distributors at the time of delivery of SIM
cards or recharge coupons were only for rendering services to ultimate subscribers. The
assessee was accountable to the subscribers for failure to render prompt services
pursuant to connections given by the distributor. Therefore, the distributor only acted as
a middleman on behalf of the assessee for procuring and retaining customers and
consequently, the discount given to him was within the meaning of commission on which
tax was deductible under section 194H.
21. Would commission payment remitted outside India to a non-resident (who is not liable
to pay tax in India) for procuring export orders outside India attract disallowance under
section 40(a)(i) for non-deduction of tax at source under section 195?
CIT v. Model Exims (2013) 358 ITR 72 (Allahabad)
Facts of the case:
The assessee is a partnership firm engaged in manufacture and export of finished leather,
shoe-uppers and leather products. For the assessment year 2007-08, the assessee made a
payment to overseas entities, in respect of the services of procurement of export orders
outside India, without deduction of tax at source under section 195, on the understanding that
these payments were covered by Circular Nos. 23/1969, 163/1975 and 786/2000
2
and were
hence, not taxable under the scheme of the Act.
The Assessing Officer, however, disallowed the commission payment under section 40(a)(i)
for non-deduction of tax at source, on the basis of the provisions contained under section 195
and section 9.
The Revenue contended that the liability to deduct tax arises out of section 195;
therefore, the liability has to be determined in accordance with the provisions of law and
not of the circulars. Even if earlier circulars did not make it obligatory on the part of
assessee to deduct TDS, the assessee would be liable to deduct tax at source as
(i) the Circulars did not create any vested right and were only clarificatory in nature;
(ii) the Circulars were withdrawn by virtue of Circular No.7/2009 dated 22.10.2009, and the
withdrawal would be retrospective in nature; and
(iii) the assessment is to be made after withdrawal of the circulars, in accordance with law.
The High Court observed that the earlier Circulars did not oblige the assessee to deduct tax
at source. The assessment in question for the assessment year 2007-08 would be governed
by the said circulars, which were operative at the relevant time. The assessee was not
entitled to deduct tax at source as per the said circulars. Circular No. 7/2009 dated
22.10.2009, withdrawing the earlier circulars became operative only from that date and not
earlier. The circulars in force in the relevant year were binding upon the Department; the
Assessing Officer did not have any right to ignore the circulars and to disallow the
expenditure under section 40(a)(i) for non-deduction of tax at source under section 195.
2
These circulars were later withdrawn by Circular No. 7 dated 22.10.2009
The High Court further observed that there was no obligation to deduct tax at source under
section 195 on commission paid to a non-resident, who was not liable to pay tax in India. The
payment of commission to foreign agents also did not entitle such foreign agents to pay tax in
India. Thus, there was no obligation to deduct tax at source under section 195 on the
commission paid to a non-resident recipient, who was not liable to pay tax in India. Further,
there was also nothing on record to demonstrate that the non-resident agents had been
appointed as selling agents, designers or technical advisers
3
.
Note Even after withdrawal of Circular Nos. 23/1969, 163/1975 and 786/2000 by Circular
No.7/2009 dated 22.10.2009, commission payment to a foreign agent, not having a
permanent establishment in India, for booking orders outside India is not subject to tax
deduction at source. A foreign agent of an Indian exporter operates in his own country and
no part of his income accrues or arises in India. His commission is usually remitted directly to
him and is, therefore, not received by him or on his behalf in India. The commission paid to
the non-resident agent for services rendered outside India is, thus, not chargeable to tax in
India.
Since commission income for booking orders by non-resident who remains outside India is
not subject to tax in India, consequently, disallowance under section 40(a)(i) is not attracted in
respect of payment of commission to such non-resident outside India even though tax has not
been deducted at source.
3
In case the payments were in the nature of fees for technical services, the same would have necessitated
deduction of tax at source on account of deemed accrual of such income as per Explanation below section
9(2), if such services were utilized in India.

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PAPER 7: DIRECT TAX LAWS

PART III : QUESTIONS AND ANSWERS

(ii) in relation to a specified domestic transaction

(3) Has not only the capability to

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