Stocks

28 November 2011

High Court has power to deal with substantial question of law not formulated at time when appeal was admitted


HIGH COURT OF MADRAS

Helios and Metheson Information Technology Ltd.

v.

Assistant Commissioner of Income-tax*

F.M. Ibrahim Kalifulla and N. Kirubakaran, JJ.

T.C. (A) No. 1530 of 2008†

December 6, 2010

Section 260A of the Income-tax Act, 1961 - High Court - Appeals to - Assessment year 1997-98 - Whether High Court has power to deal with substantial question of law not formulated at time when appeal was entertained, subject however to satisfaction of Court, that such a question was involved in case and for reasons to be recorded for that purpose - Held, yes [In favour of assessee]

Section 147, read with section 148, of the Income-tax Act, 1961 - Income escaping assessment - Non-disclosure of primary facts - Assessment year 1997-98 - Assessee had started forex business on 03.01.1995 - It showed a receipt of Rs. 542 lakhs as an extraordinary item under a restrictive covenant on transfer of its forex division in its profit and loss account but did not make reference of same while filing return for assessment year 1997-98 - Assessing Officer re-opened assessment of assessee because it had not made full disclosure of its income - On further appeal, Tribunal found that location and conduct of said business by transferor and transferee was in same place, and directors of both companies were same - It, therefore, held that whole transaction was rightly construed not to be a true transaction and accordingly, upheld reopening proceedings and held that amount received towards restrictive covenant was revenue receipt liable to tax - Whether Tribunal was justified - Held, yes [In favour of revenue]

FACTS

The assessee had started forex business on 03.01.1995. It showed a receipt of Rs. 542 lakhs as an extraordinary item under a restrictive covenant on transfer of its forex division in its profit and loss account but did not make reference of same while filing return for the assessment year 1997-98. The Assessing Officer rightly re-opened assessment of assessee because it had not made full disclosure of its income.

On further appeal, Tribunal found that commencement of forex business, location and conduct of said business by transferor and transferee was in same place, and directors of both companies were same. It, therefore, held that the whole transaction was rightly construed not to be a true transaction and accordingly, upheld reopening proceedings and held that the amount received towards restrictive covenant was revenue receipt and taxable. The assessee filed instant appeal against said order and raised an additional question as to whether reopening of the assessment was maintainable. The revenue however contended that the said issue not having been framed earlier, and not having been specifically raised in the grounds of appeal before the High Court, the assessee could not be permitted to raise the said question at this point of time.

HELD

Under section 260A, the proviso to sub-section (4) specifically provides that nothing in the sub-section should be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is specified that the case involves such question. Therefore, there is every power vested in this Court to deal with the substantial question of law not formulated at the time when the appeal was entertained, subject however to the satisfaction of the Court, that such a question was involved in the case and for reasons to be recorded for that purpose. [Para 4]

The assessee succeeded before the Commissioner(Appeals), after the assessing authority ordered reopening of the assessment under section 148. Therefore, when the issue went before the Tribunal, that issue came to be dealt with in extenso by the Tribunal. In such circumstances, the issue relating to the validity of reopening of the assessment was fully contested by the parties before the Tribunal. Therefore, merely because the said issue was not specifically formulated as a question of law while entertaining this appeal, it cannot be held that on that simple ground the said question should not be allowed to be agitated by formulating a question of law. The assessee was agitating such question right from the date of issue of the date of notice under section 148, there is every justification in the assessee to now seek for framing the said issue as one of the substantial question of law to be considered. [Para 5]

As regards the issue relating to re-opening of assessment. The proviso to section 147 among other things, empowers the assessing authority to invoke section 148 to issue notice for reopening the assessment beyond the prescribed period of four years, from the end of the relevant assessment year, if the assessee failed to disclose fully and truly all material facts necessary for the assessment for that year. It is true that in the case on hand, the last date for the four year period expired on 31-3-2002 and the notice under section 148 came to be issued only on 20-12-2003. Assessment under section 143(3) came to be made on 29-3-2000. In the return filed by the assessee, there was no specific reference to the receipt of a sum of Rs. 542 lakhs. In the letter written by the Chartered Accountant dated 15-3-2000 the assessee, however, admitted that the date of commencement of forex business was only on 3-1-1995 with the details of the RBI license. It was rightly contended that the factum of common directors of the transferor company and the transferee company, and the location of both offices in the same place, though specifically raised in the grounds of appeal before the Tribunal, were not controverted by the assesseeassessee did not forward a true and full disclosure of the whole of the transaction relating to the receipt of Rs. 542 lakhs. The assessee cannot therefore, be heard to say that while issuing notice under section 148, no doubt was raised as regards the bonafides of the business prospects which earned a substantial sum of Rs. 542 lakhs in the transfer of the business relating to forex business and therefore, the revenue was not entitled to seek for reopening of the assessment. Therefore, the plea of the assessee that the reopening of the assessment under section 148 has not been validly made could not be agree with. [Paras 11 and 12]

On examining the merits of the claim it was found that the assessee's Chartered Accountant himself, in his letter dated 15-3-2000 disclosed that the date of commencement of forex business by the assessee was only on 3-1-1995. It could not be understood as to how, for a business that commenced hardly two years prior to the relevant assessment year there could have been any scope at all for the assessee to negotiate for a substantial receipt of Rs. 542 lakhs by way of non-compete fee. Apparently, the said claim of the assessee on the face of it looks wholly unacceptable and devoid of any merit. [Para 13]

Therefore, the Tribunal was right in holding that the assessee miserably failed to establish how the receipt of Rs. 542 lakhs as compensation could be taken as non-compete fee for transfer of its forex business. The order of the assessing authority and consequently, the impugned order of the Tribunal in having set aside the order of the Commissioner(Appeals) and restoring the order of the Assessing Officer, was perfectly justified. [Para 15]

Vijayaraghavan for the Appellant. K. Subramanian for the Respondent.

JUDGMENT

F.M. Ibrahim Kalifulla, J. - The assessee has come forward with this appeal. The challenge is to the order of the Tribunal dated March 28, 2008 in I. T. A. No. 1015/Mds/06. The assessment year is 1997-98. The substantial questions of law raised in this appeal are as under :

"(1) Whether on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount received towards restrictive covenant is revenue receipt and taxable ?

(2) Whether on the facts and circumstances of the case, the Tribunal failed to appreciate that the non-compete fee would be considered for taxation within the meaning of the provisions of section 28(va) only with effect from April 1, 2003 ?"

2. When this appeal was taken up for hearing, the learned counsel for the appellant submitted that one other substantial question of law also arises for consideration viz., "reopening of assessment by invoking sections 147 and 148 of the Income-tax Act was not maintainable."

3. Mr. K. Subramanian, learned senior standing counsel for the Revenue however contended that the said issue not having been framed earlier, and not having been specifically raised in the grounds of appeal before this court, the appellant cannot be permitted to raise the said question at this point of time.

4. When we consider the submission of this particular issue viz., as to raising a substantial question of law apart from what has been framed by this court while entertaining this appeal, as a matter of fact, we find that when the appellant was issued with notice under section 148 of the Income-tax Act (hereinafter referred to as "the Act"), on December 20, 2003, the appellant submitted a reply on March 21, 2005. In paragraph (b)(vi) of the reply, the appellant raised a contention to the effect that there was no fresh material to conclude that the transaction has not taken place at all and therefore, the notice issued under section 148 of the Act was not in accordance with law. That apart, under section 260A of the Act, the proviso to sub-section (4) specifically provides that nothing in the sub-section should be deemed to take away or abridge the power of the court to hear, for reasons to be recorded, the appeal on any other substantial question of law not formulated by it, if it is specified that the case involves such question. Therefore, there is every power vested in this court to deal with the substantial question of law not formulated at the time when the appeal was entertained, subject however to the satisfaction of the court, that such a question was involved in the case and for reasons to be recorded for that purpose.

5. As pointed out by us earlier, the appellant succeeded before the Commissioner of Income-tax (Appeals), after the assessing authority ordered reopening of the assessment under section 148 of the Act. Therefore, when the issue went before the Tribunal, that issue came to be dealt with in extenso by the Tribunal. In such circumstances, the issue relating to the validity of reopening of the assessment was fully contested by the parties before the Tribunal. Therefore, merely because the said issue was not specifically formulated as a question of law while entertaining this appeal, it cannot be held that on that simple ground the said question should not be allowed to be agitated by formulating a question of law. As we are convinced that the appellant was agitating such question right from the date of issue of the date of notice under section 148 of the Act, there is every justification in the appellant to now seek for framing the said issue as one of the substantial questions of law to be considered. Consequently, we formulate the said question also, which reads as under :

"Whether the issuance of notice under section 148 of the Act against the appellant was valid in law ?"

6. We heard Mr. Vijayaraghavan, learned counsel for the appellant and Mr. K. Subramanian, learned senior standing counsel for the Revenue.

7. Mr. Vijayaraghavan in his submissions contended that there is nothing new that has come to the knowledge of the Assessing Officer after the assessment under section 143 of the Act and, therefore, issuance of notice under section 148 of the Act on the same set of facts on mere change of opinion was not maintainable. The learned counsel would therefore contend that when the appellant disclosed the receipt of Rs. 542 lakhs as an extraordinary item in the profit and loss account, specifically referring to the same as by way of transfer of division, it cannot be held that there was no true and valid disclosure of the transaction in order to state that the reopening of the assessment under section 148 beyond the four years period was maintainable. According to the learned counsel, there being no fresh material and there being no allegation of lack of true and full particulars in the disclosure of accounts, the reopening of the assessment under section 148 of the Act by notice dated December 20, 2003 was beyond the four year period which ended on March 31, 2002 and consequently, the whole proceedings are liable to be set aside.

8. The learned counsel for the appellant then contended that in the notice dated December 20, 2003, the Assessing Officer proceeded on the footing that the transfer of forex business was like transfer of export import licence which is covered under section 28(iiia) and could be treated as a business income, whereas forex licence issued by the Reserve Bank of India was non-transferable and that, what was really transferred by the appellant was the entirety of its business prospects, which was nothing but transfer of capital asset. Consequently, the sum of Rs. 542 lakhs secured by the appellant by way of transfer of such capital asset cannot be construed as income of the appellant for the relevant year.

9. As against the above submissions, Mr. K. Subramanian, learned senior standing counsel for the Revenue contended that the appellant did not even produce a copy of the agreement, either along with the return of income or the so-called explanatory letter dated February 8, 2000 and therefore, there was no true and full disclosure of the transfer of forex business. According to the learned senior standing counsel, the appellant commenced the forex business only on January 3, 1995, while the assessment order related to the year 1997-98 and therefore, it was not known how there would have been any greater business asset created in relation to forex business. The learned senior standing counsel further contended that there was no true disclosure of the nature of transaction and consequently, the reopening of the assessment by issuance of notice under section 148 of the Act cannot be held to be invalid.

10. The learned senior standing counsel also contended that, on behalf of the Revenue, an appeal was preferred before the Tribunal and the facts relating to the commencement of the forex business, location and conduct of the said business by the transferor and the transferee in the same place, and the directors of both companies being the same were raised in the grounds of appeal. According to the learned counsel, the same were not controverted by the appellant before the Tribunal. The learned senior standing counsel further contended that the whole transaction was rightly construed not to be a true transaction and with the very meagre materials placed by the appellant before the assessing authority, there was every scope to hold that there was a goodwill earned, in order to hold that the receipt of Rs. 542 lakhs by way of extraordinary items (from transfer of division) was rightly brought to tax and also confirmed by the Tribunal. The learned counsel therefore contended that the order of the Tribunal does not call for interference.

11. Having heard the learned counsel for the respective parties and having perused the materials placed before us, we find that the Tribunal has analysed various factors before it to arrive at the conclusion that there was no true and full disclosure of material facts necessary for making the assessment at the original stage. The proviso to section 147 of the Act, among other things, empowers the assessing authority to invoke section 148 of the Act to issue notice for reopening the assessment beyond the prescribed period of four years, from the end of the relevant assessment year, if the assessee failed to disclose fully and truly all material facts necessary for the assessment for that year. It is true that in the case on hand, the last date for the four year period expired on March 31, 2002 and the notice under section 148 of the Act came to be issued only on December 20, 2003. Assessment under section 143(3) came to be made on March 29, 2000. In the return filed by the appellant, there was no specific reference to the receipt of a sum of Rs. 542 lakhs. However, in the profit and loss account, in the schedule, after ascertaining the profit, an extraordinary item was shown with the additional expression to the effect "from transfer of division". The sum was indicated as Rs. 542 lakhs. That apart, the appellant is stated to have submitted a note on the extraordinary item on February 8, 2000 stating that the said sum of Rs. 542 lakhs represents consideration as a restrictive trade covenant for not engaging in forex business. Reliance was placed upon a decision of this court in support of the said claim. In the letter written by the chartered accountant dated March 15, 2000 the appellant, however, admitted that the date of commencement of forex business was only on January 3, 1995 with the details of RBI license. Significantly, neither the copy of the agreement, nor the date of the agreement was disclosed at any time before the issuance of notice under section 148 of the Act, viz., December 20, 2003. In fact, even after the issuance of the notice under section 148 of the Act, copy of the agreement was not furnished before the Assessing Officer. By making a reference to the clarificatory letter dated February 8, 2000, the appellant wanted to contend that the assessment completed under section 143(3) ought not to have been reopened after the expiry of the period of four years.

12. As rightly pointed out by Mr. K. Subramanian, learned senior standing counsel for the Revenue, the factum of common directors of the transferor company and the transferee company, and the location of both offices in the same place, though specifically raised in the grounds of appeal before the Tribunal, were not controverted by the appellant. A conspectus consideration of the above factors would only go to show that the appellant did not forward a true and full disclosure of the whole of the transaction relating to the receipt of Rs. 542 lakhs. The appellant cannot therefore, be heard to say that while issuing notice under section 148 of the Act, no doubt was raised as regards the bona fides of the business prospects which earned a substantial sum of Rs. 542 lakhs in the transfer of the business relating to forex business and therefore, the respondent was not entitled to seek for reopening of the assessment. We are not therefore, inclined to countenance the plea that the reopening of the assessment under section 148 of the Act has not been validly made.

13. When we examine the merits of the claim made on behalf of the appellant, we find that the appellant's chartered accountant himself, in his letter dated March 15, 2000 disclosed that the date of commencement of forex business by the appellant was only on January 3, 1995. We are at a loss to understand as to how, for a business that commenced hardly two years prior to the relevant assessment year, there could have been any scope at all for the appellant to negotiate for a substantial receipt of Rs. 542 lakhs by way of non-compete fee. Apparently, the said claim of the appellant on the face of it looks wholly unacceptable and devoid of any merit.

14. Moreover, as rightly pointed out by the Tribunal, the failure of the appellant in not having disclosed the agreement before the Assessing Officer really raises very many doubts as to the genuineness of the alleged transaction by way of transfer of division. In fact, only in the order of the Commissioner (Appeals) there is a reference to the agreement dated March 15, 1997, by which, forex business was stated to have been transferred by the appellant. The two sentences from the agreement which the Commissioner (Appeals) has noted are ". . . EFE confirms that EFE shall not carry on forex service business from the date of this agreement ; and based on the preliminary due diligence both parties agreed that the price payable by the PFL for the transaction shall be INR 5 : 42 crores (INR five crores and forty-two lakhs only) for the EFE agreeing to cease to carry on forex services and not to take forex services in the company in future for the next 14 years." From these set of expressions, it is not known how the appellant could be said to have satisfactorily explained that the earning of Rs. 542 lakhs was by way of non-compete fee and thereby, treat the same as value of the transfer of capital asset. The various authorities relied on by the Tribunal in order to hold that there was absolutely no acceptable materials placed by the appellant either before the Appellate Tribunal or before the lower appellate authority to substantiate such claim that the payment of Rs. 542 lakhs as a non-compete fee was therefore, perfectly justified. As rightly held by the Tribunal, when admittedly, the business of the appellant itself was convened on February 13, 1995, that the directors were common, that the transferor and the transferee companies functioned in the same place, were all factors which made it explicit that the payment of Rs. 542 lakhs as a non-compete fee was shrouded with mystery, when it agreed not to deal in forex business with its assets concerned.

15. We are in full agreement with the conclusion of the Tribunal in holding that the appellant miserably failed to establish how the receipt of Rs. 542 lakhs as compensation could be taken as non-compete fee for transfer of its forex business. The order of the assessing authority and consequently, the impugned order of the Tribunal in having set aside the order of the Commissioner of Income-tax (Appeals) and restoring the order of the Assessing Officer, was perfectly justified. Therefore, while answering the third question of law in favour of the Revenue and against the appellant that the reopening of the assessment by issuance of notice under section 148 of the Act was valid in law, we answer the other two questions of law also against the appellant.

16. The appeal fails and the same is dismissed. No costs.

■■

____________

*Partly in favour of assessee.

†Arising from order of ITAT Madras Bench in IT Appeal No. 1015 of 2006, dated 28-3-2008.

25 November 2011

Impact, if Manner of quantification of Remuneration not provided in partnership deed

Where the partnership deed provided that the remuneration payable to partners shall not exceed the limits specified in section 40(b) but it did not provide for manner of quantification of remuneration payable to partners, then in such a situation the remuneration paid to partners was disallowable under section 40(b).

Vide (2011) 42 (I) ITCL 161 (Del-HC) Sood Brij & Associates v. Commissioner of Income Tax

24 November 2011

Whether expenses incurred on corporate film-making is revenue in nature?

YES, rules ITAT.


The issues before the Bench are - Whether corporate film making charges are akin to sales promotion and hence the same are allowable as revenue expenses - Whether, for claiming an amount as bad debt, it is necessary to establish that such an amount is of revenue character. And the verdict partly goes in favour of the assessee.

Facts of the case
Assessee is a company engaged in the business of manufacturing and repairs of specialized motors. It claimed the deduction of corporate film making expenses and claimed write-off of certain bad debts. During the course of assessment proceedings the AO observed that the expenses of corporate film-making provided enduring benefits to the assessee and hence the same were capital in nature. The AO also denied the claim of right of bad debts on the ground that the advances made by the assessee were capital in nature and hence the write-off of the same was not permissible. CIT (A) allowed the appeal of the assessee. Before the ITAT, the DR pointed out that the advances made by the assessee company were inter-corporate deposits and hence the same activity cannot be regarded as regular activity of business.

After hearing the parties ITAT held that,
  • we find that the categorical finding of the CIT(A) is that "it has been held in various decisions that the expenditure incurred in making of advertisement film is an expenditure of revenue in nature." Therefore, we find no infirmity in the order of CIT(A) deleting the disallowance of Rs. 1,25,000/- made by the AO on account of corporate film making charges treating the same as revenue expenditure. Accordingly, this ground of appeal of the revenue is dismissed;
  • the AO has observed in the assessment order that interest accrued on inter-corporate deposits in the past also not shown as business income. Whereas the learned CIT(A) has observed that income on inter-corporate deposits was duly offered for taxation by the assessee in the preceding years. He gave a finding that the placement of inter-corporate deposits was in the normal course of business. In view of the above contradictory findings given by the authorities below, we set aside the order of the CIT(A) and remit the matter back to the file of the AO to examine the issue whether interest received on inter-corporate deposits offered for taxation as business income or not, whether placement of inter-corporate deposits was the normal course of business or not and decide, the entire issue pertaining to addition of Rs. 58,03,193/- consisting of advance made to suppliers at Rs 70,367/- and inter corporate deposit placed with Alpic Finance Ltd. Rs. 48,00,000/-, amount not recovered from debtors Rs. 72,552/- and accrued interest on inter-corporate deposits Rs. 8,60,274/-, de-novo after providing reasonable opportunity of being heard to the assessee in the matter.

21 November 2011

Fraption


Also known as an interest rate guarantee, this type of option allows an investor to set up a forward rate agreement during an agreed amount of time that triggers in response to a pre-set strike price. Fraptions are used to protect investors from dramatic declines in interest rates.

14 January 2011

Indian economy will grow faster than Chinese in 2012: World Bank

For years, India has been the second-fastest growing major economy in the world. That could soon change, with the Indian economy set to expand at a faster pace than the Chinese economy in 2012, according to World Bank data.

This is expected to result from continued high demand in India even as measures to combat overheating kick in for the Chinese economy.

The multilateral agency`s World Economic Outlook has projected that India will grow at 8.7% in 2012, compared to China`s 8.4%. In 2011, however, China would continue to grow at a faster pace than India.

Although no reasons were mentioned in the report released on Thursday, the slowdown in China could be the result of an increase in interest rates as inflation has emerged a major concern across the border too, economists said. China has seen a rapid turnaround after the financial crisis on the back of fiscal stimulus.

In case of India, the economy has benefited from robust domestic demand and a revival in investor and consumer sentiment although higher interest rates are expected to shave off a few basis points from the overall growth rate. Improved external demand and stronger private capital inflows have also played a role. This year, a favourable monsoon has helped the farm sector expand and has in the process boosted rural demand as well.

Economists, however, played down the numbers. "If you are keeping scores, it`s fine but you must remember China is a $5.5 trillion economy while India is a $1.3 trillion economy. Even with a slower growth rate, incremental demand in China will remain much bigger than in the US," said Saumitra Chaudhuri, a member of the Prime Minister`s Economic Advisory Council and a member of the Planning Commission.

"It may be the case for one or two years but what matters is whether India can sustain high growth," added D K Joshi, chief economist at rating agency Crisil.

"It has to be seen how they are saying that the (China`s) growth rate will decline from 10% plus levels to 8.4%. For us, 8.7% is probably closer to our trend growth," said Pronab Sen, senior advisor in the Planning Commission.

China and India have seen rapid growth and have helped push up the global growth rate in the year`s post the financial meltdown. But India has always lagged its Asian rival, often referred to as the factory to the world, as China has flooded the international market with products ranging from lingerie to LCD television.

In recent years, foreign investors have bet big on India too, setting up manufacturing facilities but it has always been the second-most preferred destination. The increase in wages in China could, however, tilt the competitiveness scales in India's favour.

Overall, the report said that in 2011 and 2012, the global economy is shifting into a phase of slower but solid growth, with India and China contributing towards almost half of the global growth.

The World Bank estimated that global GDP, which expanded by 3.9% in 2010, will slow down to 3.3% in 2011 before reaching 3.6% in 2012.

In terms of policy prescriptions, the report said that in case of the South Asia, where India is driving growth, the recent monetary tightening would need to be pursued further given the region's high fiscal deficits, high inflation and rising current account deficit.

The report also warned that countries such as India, China and Brazil would have to grapple with high levels of capital inflows given the interest shown by foreign institutional investors. "Heavy inflows to certain big middle-income economies may carry risks and threaten medium-term recovery, especially if currency value rises suddenly or if asset bubbles emerge," it said.

12 January 2011

Your Apps Are Watching You

Few devices know more personal details about people than the smartphones in their pockets: phone numbers, current location, often the owner's real name—even a unique ID number that can never be changed or turned off.

WSJ's Julia Angwin explains to Simon Constable how smartphone apps collect and broadcast data about your habits. Many don't have privacy policies and there isn't much you can do about it.

These phones don't keep secrets. They are sharing this personal data widely and regularly, a Wall Street Journal investigation has found.

An examination of 101 popular smartphone "apps"—games and other software applications for iPhone and Android phones—showed that 56 transmitted the phone's unique device ID to other companies without users' awareness or consent. Forty-seven apps transmitted the phone's location in some way. Five sent age, gender and other personal details to outsiders.

The findings reveal the intrusive effort by online-tracking companies to gather personal data about people in order to flesh out detailed dossiers on them.

Among the apps tested, the iPhone apps transmitted more data than the apps on phones using Google Inc.'s Android operating system. Because of the test's size, it's not known if the pattern holds among the hundreds of thousands of apps available.

Apps sharing the most information included TextPlus 4, a popular iPhone app for text messaging. It sent the phone's unique ID number to eight ad companies and the phone's zip code, along with the user's age and gender, to two of them.

Both the Android and iPhone versions of Pandora, a popular music app, sent age, gender, location and phone identifiers to various ad networks. iPhone and Android versions of a game called Paper Toss—players try to throw paper wads into a trash can—each sent the phone's ID number to at least five ad companies. Grindr, an iPhone app for meeting gay men, sent gender, location and phone ID to three ad companies.

"In the world of mobile, there is no anonymity," says Michael Becker of the Mobile Marketing Association, an industry trade group. A cellphone is "always with us. It's always on."

iPhone maker Apple Inc. says it reviews each app before offering it to users. Both Apple and Google say they protect users by requiring apps to obtain permission before revealing certain kinds of information, such as location.

"We have created strong privacy protections for our customers, especially regarding location-based data," says Apple spokesman Tom Neumayr. "Privacy and trust are vitally important."

The Journal found that these rules can be skirted. One iPhone app, Pumpkin Maker (a pumpkin-carving game), transmits location to an ad network without asking permission. Apple declines to comment on whether the app violated its rules.

Smartphone users are all but powerless to limit the tracking. With few exceptions, app users can't "opt out" of phone tracking, as is possible, in limited form, on regular computers. On computers it is also possible to block or delete "cookies," which are tiny tracking files. These techniques generally don't work on cellphone apps.

The makers of TextPlus 4, Pandora and Grindr say the data they pass on to outside firms isn't linked to an individual's name. Personal details such as age and gender are volunteered by users, they say. The maker of Pumpkin Maker says he didn't know Apple required apps to seek user approval before transmitting location. The maker of Paper Toss didn't respond to requests for comment.

Many apps don't offer even a basic form of consumer protection: written privacy policies. Forty-five of the 101 apps didn't provide privacy policies on their websites or inside the apps at the time of testing. Neither Apple nor Google requires app privacy policies.

To expose the information being shared by smartphone apps, the Journal designed a system to intercept and record the data they transmit, then decoded the data stream. The research covered 50 iPhone apps and 50 on phones using Google's Android operating system. (Methodology available here.)

The Journal also tested its own iPhone app; it didn't send information to outsiders. The Journal doesn't have an Android phone app.

Among all apps tested, the most widely shared detail was the unique ID number assigned to every phone. It is effectively a "supercookie," says Vishal Gurbuxani, co-founder of Mobclix Inc., an exchange for mobile advertisers.

On iPhones, this number is the "UDID," or Unique Device Identifier. Android IDs go by other names. These IDs are set by phone makers, carriers or makers of the operating system, and typically can't be blocked or deleted.

"The great thing about mobile is you can't clear a UDID like you can a cookie," says Meghan O'Holleran of Traffic Marketplace, an Internet ad network that is expanding into mobile apps. "That's how we track everything."

Ms. O'Holleran says Traffic Marketplace, a unit of Epic Media Group, monitors smartphone users whenever it can. "We watch what apps you download, how frequently you use them, how much time you spend on them, how deep into the app you go," she says. She says the data is aggregated and not linked to an individual.

The main companies setting ground rules for app data-gathering have big stakes in the ad business. The two most popular platforms for new U.S. smartphones are Apple's iPhone and Google's Android. Google and Apple also run the two biggest services, by revenue, for putting ads on mobile phones.

Apple and Google ad networks let advertisers target groups of users. Both companies say they don't track individuals based on the way they use apps.

Apple limits what can be installed on an iPhone by requiring iPhone apps to be offered exclusively through its App Store. Apple reviews those apps for function, offensiveness and other criteria.

Apple says iPhone apps "cannot transmit data about a user without obtaining the user's prior permission and providing the user with access to information about how and where the data will be used." Many apps tested by the Journal appeared to violate that rule, by sending a user's location to ad networks, without informing users. Apple declines to discuss how it interprets or enforces the policy.

Phones running Google's Android operating system are made by companies including Motorola Inc. and Samsung Electronics Co. Google doesn't review the apps, which can be downloaded from many vendors. Google says app makers "bear the responsibility for how they handle user information."

Google requires Android apps to notify users, before they download the app, of the data sources the app intends to access. Possible sources include the phone's camera, memory, contact list, and more than 100 others. If users don't like what a particular app wants to access, they can choose not to install the app, Google says.

"Our focus is making sure that users have control over what apps they install, and notice of what information the app accesses," a Google spokesman says.

Neither Apple nor Google requires apps to ask permission to access some forms of the device ID, or to send it to outsiders. When smartphone users let an app see their location, apps generally don't disclose if they will pass the location to ad companies.

Lack of standard practices means different companies treat the same information differently. For example, Apple says that, internally, it treats the iPhone's UDID as "personally identifiable information." That's because, Apple says, it can be combined with other personal details about people—such as names or email addresses—that Apple has via the App Store or its iTunes music services. By contrast, Google and most app makers don't consider device IDs to be identifying information.

A growing industry is assembling this data into profiles of cellphone users. Mobclix, the ad exchange, matches more than 25 ad networks with some 15,000 apps seeking advertisers. The Palo Alto, Calif., company collects phone IDs, encodes them (to obscure the number), and assigns them to interest categories based on what apps people download and how much time they spend using an app, among other factors.

By tracking a phone's location, Mobclix also makes a "best guess" of where a person lives, says Mr. Gurbuxani, the Mobclix executive. Mobclix then matches that location with spending and demographic data from Nielsen Co.

In roughly a quarter-second, Mobclix can place a user in one of 150 "segments" it offers to advertisers, from "green enthusiasts" to "soccer moms." For example, "die hard gamers" are 15-to-25-year-old males with more than 20 apps on their phones who use an app for more than 20 minutes at a time.

Mobclix says its system is powerful, but that its categories are broad enough to not identify individuals. "It's about how you track people better," Mr. Gurbuxani says.

Some app makers have made changes in response to the findings. At least four app makers posted privacy policies after being contacted by the Journal, including Rovio Mobile Ltd., the Finnish company behind the popular game Angry Birds (in which birds battle egg-snatching pigs). A spokesman says Rovio had been working on the policy, and the Journal inquiry made it a good time to unveil it.

Free and paid versions of Angry Birds were tested on an iPhone. The apps sent the phone's UDID and location to the Chillingo unit of Electronic Arts Inc., which markets the games. Chillingo says it doesn't use the information for advertising and doesn't share it with outsiders.

Apps have been around for years, but burst into prominence when Apple opened its App Store in July 2008. Today, the App Store boasts more than 300,000 programs.

Other phone makers, including BlackBerry maker Research in Motion Ltd. and Nokia Corp., quickly built their own app stores. Google's Android Market, which opened later in 2008, has more than 100,000 apps. Market researcher Gartner Inc. estimates that world-wide app sales this year will total $6.7 billion.

Many developers offer apps for free, hoping to profit by selling ads inside the app. Noah Elkin of market researcher eMarketer says some people "are willing to tolerate advertising in apps to get something for free." Of the 101 apps tested, the paid apps generally sent less data to outsiders.

Ad sales on phones account for less than 5% of the $23 billion in annual Internet advertising. But spending on mobile ads is growing faster than the market overall.

Central to this growth: the ad networks whose business is connecting advertisers with apps. Many ad networks offer software "kits" that automatically insert ads into an app. The kits also track where users spend time inside the app.

Some developers feel pressure to release more data about people. Max Binshtok, creator of the DailyHoroscope Android app, says ad-network executives encouraged him to transmit users' locations.

Mr. Binshtok says he declined because of privacy concerns. But ads targeted by location bring in two to five times as much money as untargeted ads, Mr. Binshtok says. "We are losing a lot of revenue."

Other apps transmitted more data. The Android app for social-network site MySpace sent age and gender, along with a device ID, to Millennial Media, a big ad network.

In its software-kit instructions, Millennial Media lists 11 types of information about people that developers may transmit to "help Millennial provide more relevant ads." They include age, gender, income, ethnicity, sexual orientation and political views. In a re-test with a more complete profile, MySpace also sent a user's income, ethnicity and parental status.

A spokesman says MySpace discloses in its privacy policy that it will share details from user profiles to help advertisers provide "more relevant ads." My Space is a unit of News Corp., which publishes the Journal. Millennial did not respond to requests for comment on its software kit.

App makers transmitting data say it is anonymous to the outside firms that receive it. "There is no real-life I.D. here," says Joel Simkhai, CEO of Nearby Buddy Finder LLC, the maker of the Grindr app for gay men. "Because we are not tying [the information] to a name, I don't see an area of concern."

Scott Lahman, CEO of TextPlus 4 developer Gogii Inc., says his company "is dedicated to the privacy of our users. We do not share personally identifiable information or message content." A Pandora spokeswoman says, "We use listener data in accordance with our privacy policy," which discusses the app's data use, to deliver relevant advertising. When a user registers for the first time, the app asks for email address, gender, birth year and ZIP code.

Google was the biggest data recipient in the tests. Its AdMob, AdSense, Analytics and DoubleClick units collectively heard from 38 of the 101 apps. Google, whose ad units operate on both iPhones and Android phones, says it doesn't mix data received by these units.

Google's main mobile-ad network is AdMob, which it bought this year for $750 million. AdMob lets advertisers target phone users by location, type of device and "demographic data," including gender or age group.

A Google spokesman says AdMob targets ads based on what it knows about the types of people who use an app, phone location, and profile information a user has submitted to the app. "No profile of the user, their device, where they've been or what apps they've downloaded, is created or stored," he says.

Apple operates its iAd network only on the iPhone. Eighteen of the 51 iPhone apps sent information to Apple.

Apple targets ads to phone users based largely on what it knows about them through its App Store and iTunes music service. The targeting criteria can include the types of songs, videos and apps a person downloads, according to an Apple ad presentation reviewed by the Journal. The presentation named 103 targeting categories, including: karaoke, Christian/gospel music, anime, business news, health apps, games and horror movies.

People familiar with iAd say Apple doesn't track what users do inside apps and offers advertisers broad categories of people, not specific individuals.

Apple has signaled that it has ideas for targeting people more closely. In a patent application filed this past May, Apple outlined a system for placing and pricing ads based on a person's "web history or search history" and "the contents of a media library." For example, home-improvement advertisers might pay more to reach a person who downloaded do-it-yourself TV shows, the document says.

The patent application also lists another possible way to target people with ads: the contents of a friend's media library.

How would Apple learn who a cellphone user's friends are, and what kinds of media they prefer? The patent says Apple could tap "known connections on one or more social-networking websites" or "publicly available information or private databases describing purchasing decisions, brand preferences," and other data. In September, Apple introduced a social-networking service within iTunes, called Ping, that lets users share music preferences with friends. Apple declined to comment.

Tech companies file patents on blue-sky concepts all the time, and it isn't clear whether Apple will follow through on these ideas. If it did, it would be an evolution for Chief Executive Steve Jobs, who has spoken out against intrusive tracking. At a tech conference in June, he complained about apps "that want to take a lot of your personal data and suck it up."

10 January 2011

JP Morgan and Morgan Stanley get China nod


China has sent out signals that it will buy friendship with the United States with market access. It has opened doors for two New York-based investment bankers—JP Morgan and Morgan Stanley—ahead of Chinese president Hu Jintao's meeting with Barack Obama in Washington on January 18.

The move may have some implication for Indian companies seeking a listing in US stock exchanges. Bringing in two more foreign players in a field dominated by Chinese investment banks suggest a rising desire for US listings among Chinese companies , who might give some competition to Indian firms wooing the emerging market funds in that country.

The entry of JP Morgan and Morgan Stanley is bound to soften Washington's mood towards Beijing because China offers a hugely attractive IPO market for investment bankers. Chinese companies raised $74 billion through IPO’s last year.

But their Chinese partners will still call the shots in the new business as local laws do not allow more than a 33% stake for foreign partners in underwriting business. Foreign underwriters attract little business in China, with UBS ranking 18th in 2010.

Beijing recently softened the EU's policies towards it by offering to bail out countries like Spain that are affected by the financial crisis. The big question now is whether such sops would influence US policy on China on political issues that include Washington's relationship with India, Pakistan, Japan and North Korea.

JP Morgan, the world's third-biggest manager of equity sales in 2010, has taken China's First Capital Security as a partner. Morgan Stanley has tied up with Huaxin Securities.

7 January 2011

Mere commercial connection between income and industrial undertaking would not be sufficient for claiming deduction under section 80-IB

Mere commercial connection between income and industrial undertaking would not be sufficient for claiming deduction under section 80-IB.

The derivation of the income must be directly connected with the business in the sense that the income is generated by the business. It would not be sufficient if it is generated by the exploitation of a business asset.

The fact that the Legislature has used the expression "profits and gains derived from the business of industrial undertaking" has some significance and it connotes that the immediate and effective source of income eligible for grant of relief under section 80-IB must be the industrial undertaking itself and not any other source. - [2010] 8 TAXMANN.COM 267 (AHD. - ITAT)

6 January 2011

Can compensation received in lieu of future profits from abandoned project be taxed as business profits particularly when expenses attributable to project were allowed as revenue expenditure?

Can compensation received in lieu of future profits from abandoned project be taxed as business profits particularly when expenses attributable to project were allowed as revenue expenditure?
-YES, says Delhi HC


NEW DELHI, DEC 22, 2010: THE major issue before the High Court is - Whether compensation received by the assessee in lieu of future profits from the abandoned project is taxable as business profits particularly when the expenses attributable to the abandoned project were allowed as revenue expenses. YES is the High Court's answer. The other issues are - Whether once revenue proves that a particular receipt is income, the burden to prove that such receipt is not income shifts on the assessee and Whether the restrictive covenant having life span of three years and the same can be withdrawn at any time during this period after the approval of the other party, changes the colour of the receipt from revenue to capital.


Facts of the case

M/s. DCM and Kailash Nath & Associates (briefly KNA) entered into a collaboration Agreement dated 17th July, 1986 inter alia with respect to the development of 66.53 acres of land owned by DCM situated at Bara Hindu Rao, New Rohtak Road, Delhi. Under this Agreement, the KNA was to develop and construct multistoried residential flats, flatted factories, shopping complex, schools etc. on the aforesaid land belonging to the DCM. Owing to the magnitude of the project, however, with the mutual consent of DCM and KNA, the appellant-company, M/s. Ansals Properties and Industries Ltd., presently known as M/s. Ansals Properties & Infrastructure Ltd. was inducted for implementation of the project by an Agreement dated 24th November, 1988 entered into between the DCM, KNA and ANSALS. Thereafter some disputes arose between DCM and the assessee along with other participant - KNA and the assessee agreed to neglect the ongoing project subject to compensation - DCM paid the same - AO taxed the compensation as revenue receipt - CIT(A) affirmed the same - ITAT affirmed the order of the CIT(A).


On appeal, the HC held that,

  • the Tribunal has rightly opined that the compensation was for the loss of future profits and for the development already undertaken by the assessee, the expenses in relation to such development having already been claimed and allowed as revenue expenditure. Thus, the Tribunal held that what was paid was for the deprivation of the potential income;
  • the Tribunal rightly noted that there was not even a mention in the Agreement that the amount paid was towards the restrictive covenant and on the other hand a reading of the Settlement Agreement entered into between the parties clearly shows that the DCM had agreed to pay compensation for the "annulment of the very rights of KNA and ANSALS to carry on business of completing the project under the Principal Agreement and for being deprived of the potential income which could have arisen from carrying on such business, a sum of Rs.6.75 crores to KNA, which is inclusive of refund of Security Deposit of Rs.3.90 crores and a sum of Rs.8.25 crores to ANSALS, which is inclusive of refund of security deposit of 4 crores respectively………"
  • undoubtedly, in the preceding clause, i.e. Clause 2, it is mentioned that KNA and ANSALS had agreed that they shall not undertake, without prior written consent of the DCM, similar projects in the vicinity of the said project for a period of 3 years from the date of the signing of the Agreement, but the sum of Rs.8.25 crores, as is clear from a cumulative reading of clauses 2 and 3 of the Agreement, was paid as compensation for the termination of the Agreement to carry on the business of completing the project under the "Principal Agreement" and "for being deprived of the potential income which could have arisen from carrying on such business." The intention of the parties, it is settled law, is conveyed by the terms of the Agreement. In the absence of any ambiguity in the Agreement, the Tribunal was fully justified in construing the intention of the parties;
  • the scope and ambit of the restrictive covenant must be examined in the backdrop of the entire fact situation. On examination, it is found that the clause has limited significance, being to save the interest of the DCM, which was to develop the property as an absolute owner. By no stretch of imagination, such a clause was intended to divest the appellant of its income earning apparatus. Had the clause resulted in depriving the appellant of its income earning apparatus, and prohibited it from taking up a similar project anywhere in Delhi, there might have been some strength in the contention of the appellant that it had lost a capital asset and the amount which accrued to it for the loss of the capital asset must be viewed as a capital receipt not assessable to tax. This was not so; the Agreement between the parties was in the normal course of business. In other words, the normal incidence of business. Prohibition to carry on a similar project in the vicinity was on account of the nature of the business and was more by way of affording a safety valve to DCM;
  • as regards the restrictive covenant, it cannot be lost sight of that what was prohibited was not to undertake similar project anywhere in or around Delhi, but not to undertake a similar project in the vicinity and that too for the limited duration of 3 years. This was subject to another rider. The restrictive clause was not to undertake a similar project in the vicinity of the existing project for a period of three years, without the written consent of the DCM. To be noted that with the approval of the DCM, it was open to the appellant to undertake a similar project, assuming the site for such a project to be available;
  • the counsel for the appellant has sought to draw strength from the decision rendered by the Supreme Court in the case of Best & Co. Pvt. Ltd. where the duration of the restrictive covenant was five years. Yet, it was viewed by the Supreme Court as an independent obligation which came into operation on the termination of the agency and hence not taxable as a revenue receipt. But there is a marked difference in the facts of the said case when placed in juxtaposition to the facts of the instant case;
  • in any case, the restriction placed was far from absolute in that it was to remain operative for a limited duration of time and pertained to a limited geographical area within the contours of Delhi. This apart, it was left open to the appellant to approach DCM for its written approval to the appellant carrying on a similar project in the vicinity (assuming such a project was available in the vicinity). Since all disputes were being set at rest, this undertaking appears to have been incorporated in an incidental manner so as to avoid any conflict of interest amongst the erstwhile partners in the project. Viewed from any angle, it is to be seen as a safety valve for the DCM rather than an absolute restriction on the appellant from carrying on its business. Even otherwise, it could hardly be said that given the nature of the restrictive covenant in the Agreement, the appellant was hampered from operating its profit making apparatus in other spheres and even in the very same sphere.

5 January 2011

In case of a company, notice under section 148 is to be served on its Principal Officer for making a valid assessment under section 147

In case of a company, notice under section 148 is to be served on its Principal Officer for making a valid assessment under section 147.


Where the notice under section 148 was not served upon the Principal Officer of the assessee-company but on a person who was not empowered to receive the notice, the service of notice under section 148 was not a valid service, and the assessment completed under section 147 in the absence of a valid service was bad in law. - [2010] 8 TAXMANN.COM 266 (LUCKNOW - ITAT)

Facebook Deal Offers Freedom From Scrutiny

Facebook’s new financial security could buttress the company’s independence and help Mark Zuckerberg retain near absolute control.SAN FRANCISCO — In Silicon Valley, going public used to be the ultimate rite of passage for a start-up — a sign it had arrived.

No more.

With its $500 million infusion from Goldman Sachs and other investors, Facebook is now flush with cash, and a market value of about $50 billion, giving it the financial muscle it needs to compete with better-heeled rivals like Google.

And Facebook hopes for an even bigger advantage from the deal, the ability to delay an initial public offering. That would allow it to remain free of government regulation and from the volatility of Wall Street. It would also allow Mark Zuckerberg, the company’s chief executive, to retain near absolute control over the company he co-founded in a Harvard dorm room in 2004.

This strategy was unthinkable in Silicon Valley just a few years ago, when hundreds of start-ups with scant revenue and no profits, like Pets.com and Webvan, raced to go public, and investors eagerly lined up to buy their shares.

Lots of people would stand in line to buy shares in Facebook, but for now, only an exclusive few — wealthy clients of Goldman Sachs — will be able to. On Monday, Goldman sent e-mail to certain clients, offering them the chance to invest in the company.

That offer is the latest sign of the emergence of active markets in the shares of closely held companies. Those markets are helping successful start-ups like Facebook develop the financial wherewithal to compete in the big leagues of business. They have also become an avenue for venture capitalists and start-up employees to cash in their stock, turning many overworked engineers into instant millionaires.

And so a young mogul like Mr. Zuckerberg, the world’s youngest billionaire at age 26, can enjoy many of the benefits of going public without having to tie the knot with Wall Street. Other hot technology companies like Twitter, Zynga and Groupon are also tapping secondary markets to keep stock market investors at bay. They are in no rush to go public and no longer need the bragging rights that a stock offering used to bestow.

“This is a topsy-turvy world,” said Scott Dettmer, a founding partner of Gunderson Dettmer, a law firm that has advised venture capitalists, start-ups and entrepreneurs since the 1980s. He added that even a few years ago, “there were all sorts of business reasons to go public, but for entrepreneurs it was also a badge of honor.”

Perhaps more than any company founder, Mr. Zuckerberg, who declined to comment for this article, has frequently expressed his lack of interest in Wall Street, though Facebook is clearly not above taking its cash. He passed on opportunities to make a killing, for example, when, at age 22, he rejected billion-dollar offers for Facebook.

“Mark would absolutely prefer not have an I.P.O. until he absolutely has to,” said David Kirkpatrick, the author of “The Facebook Effect.” “He absolutely doesn’t want to sacrifice control because he believes that his vision is necessary to keep powering the company forward.”

Mr. Zuckerberg’s quest to keep Facebook private, though, will not last forever. Federal regulations require companies with 500 or more investors to disclose their financial results, eliminating one of the principal advantages of staying private.

The Goldman Sachs investment, for a stake of less than 1 percent in the company, is formulated in part to skirt those rules. But it may help for only a limited time. The Securities and Exchange Commission is investigating private company trades in secondary markets, and regulators may decide that what is good for Facebook is not necessarily good for the investing public.

Still, the huge cash infusion is a coup both for Mr. Zuckerberg, who is said to own about a quarter of the company, and Facebook. The deal gives the company cash to hire employees or build data centers.

It also puts Facebook, which makes most of its money through advertising, on a path to surpass Google, by some measures, as the most successful Internet company to come out of Silicon Valley. Facebook is on track to bring in as much as $2 billion in revenue this year.

The deal with Goldman values Facebook at nearly twice the $27 billion that Google was worth after its first day as a public company in August 2004. Google did not cross the $50 billion mark until about six months later.

The two companies have become enemies, but their founders share a deep suspicion of Wall Street, born in part from witnessing the devastation that followed the dot-com bubble. Like Mr. Zuckerberg, the founders of Google, Larry Page and Sergey Brin, set up two classes of shares, which kept them in control after the public offering. They also vowed not to be beholden to short-term investors.

Mr. Zuckerberg is exhibiting many of the same misgivings about the stock market. Mr. Zuckerberg has frequently demurred when asked about an eventual public offering. One of Facebook’s earliest investors said recently that the company would not go public before 2012.

But Mr. Zuckerberg is benefiting from the fast-growing market for trading in the shares of privately held tech companies, which the Google founders did not have. Through private exchanges like Secondmarket and Sharespost, and through direct transactions between investors, closely held companies, their investors and their employees have been able to sell their shares to others. For start-ups today, that has opened new options to going public.

“Companies have financing alternatives that they didn’t have,” said Marc Bodnick, a managing partner at Elevation Partners, which invested in Facebook in the last year.

Those alternatives have become more attractive for companies, in part because of the increased regulations imposed on public companies but also because of the rise in short-term trading, which leaves some executives feeling they have lost control of their companies.

Ben Horowitz, a partner with Andreessen Horowitz, a venture capital firm, said the cost of being a public company had risen to about $5 million a year, from about $1 million a year. Mr. Horowitz, an early employee of Netscape, said that such costs would have eaten into the meager profits of the pioneering Internet company when it went public in 1995. Additionally, accounting and legal requirements have become distractions for many start-ups, said Mr. Horowitz, whose firm is an investor in Facebook.

Those distractions are bothersome for strong-willed entrepreneurs like Mr. Zuckerberg.

“If you’re 30 years old and you think you’re building a business that’s going to be a 100-year-old business, what year you’re public doesn’t really matter,” Mr. Bodnick said. “But if you think the steps you’re taking are laying the groundwork to long-term strategic growth, it’s good to be quiet, it’s good to be out of the light.”

Still, some experts say that the option to remain private is a luxury that only few start-ups will be able to enjoy.

“Things have changed dramatically for the 2 percent of companies that stand out from the pack like Facebook,” said Lise Buyer, the principal of the Class V Group, which advises private companies about going public. Ms. Buyer, a former Google executive who was involved in its public offering, added: “If you are a semiconductor, or a biotech company, or an enterprise software company, you are not going to have investors throwing money at you without any disclosure.”


By MIGUEL HELFT

Source: The NewYork Times


RIM offers interception solution using Cloud Computing

With the approaching deadline to offer complete solution for monitoring of its contents by January 31, BlackBerry maker Research in Motion (RIM) has offered lawful interception in its security architecture through cloud computing from Indian operators. Cloud computing is Internet-based service, whereby shared servers provide software and data to computers and other devices on demand.

RIM infrastructure is ready to receive and process through the cloud computing-based system, lawfully intercepted

BlackBerry Messenger data from Indian service providers, the Canada-based firm said in a letter to the government.

Earlier, RIM had assured the Government that they will provide the 'final solution' for the lawful interception of BlackBerry Messenger services by January 31, 2011. The company has said that this was the understanding that they were to put in place the system by January 31.

According to sources in the know, the Ministry of Home Affairs has asked the Intelligence Bureau (IB) to validate the technology (cloud computing) being offered by RIM.

BlackBerry has over one million subscribers in India, which is one of the fastest growing markets in the world in terms of new subscriber additions.

The Canada-based company made it clear that its security systems are still cutting edge by saying, "RIM maintains a consistent global standard for lawful access requirements that does not include special deals for specific countries.

Last year, RIM had assured the Government that it would provide a final solution for lawful interception of BlackBerry Messenger services by January next year. The project is likely to be completed by the end of January 2011.

With regard to Blackberry's Enterprise mail service, however, it had asserted that the company had no ability to provide customers' encryption keys.

With respect to the same issue, Robert E Crow, Vice President, Industry, Government and University Relations, RIM, had met Home Minister P Chidambaram and explained the status of its project.

Company had also claimed that there was no deadline from the government and it was RIM that had said it would work with operators to ensure that security agencies were able to intercept BlackBerry Messenger data.

The company had also asserted that there was "no change" in its security architecture and sought to dispel talks of its ban in India as mere rumours.

The rumours around BlackBerry services stems from the fact that Indian government had earlier asked Blackberry to provide complete access or face a ban.

Source: Hindustan Times

4 January 2011

Where while deleting penalty, Tribunal had not considered decision of jurisdictional High Court, Tribunal's order was liable to be set aside

Where while deleting penalty, Tribunal had not considered decision of jurisdictional High Court, Tribunal's order was liable to be set aside - [2010] 8 TAXMANN.COM 265 (KAR.)

Goldman Sachs - Facebook

Facebook, the popular social networking site, has raised $500 million from Goldman Sachs and a Russian investor in a deal that values the company at $50 billion, according to people involved in the transaction.


The deal makes Facebook now worth more than companies like eBay, Yahoo and Time Warner.

The stake by Goldman Sachs, considered one of Wall Street’s savviest investors, signals the increasing might of Facebook, which has already been bearing down on giants like Google.

The new money will give Facebook more firepower to steal away valuable employees, develop new products and possibly pursue acquisitions — all without being a publicly traded company. The investment may also allow earlier shareholders, including Facebook employees, to cash out at least some of their stakes.

The new investment comes as the Securities and Exchange Commission has begun an inquiry into the increasingly hot private market for shares in Internet companies, including Facebook, Twitter, the gaming site Zynga and LinkedIn, an online professional networking site. Some experts suggest the inquiry is focused on whether certain companies are improperly using the private market to get around public disclosure requirements.

The deal could add pressure on Facebook to go public even as its executives have resisted. The popularity of shares of Microsoft and Google in the private market ultimately pressured them to pursue initial public offerings.

So far, Facebook’s chief executive, Mark Zuckerberg, has brushed aside the possibility of an initial public offering or a sale of the company. At an industry conference in November, he said on the topic, “Don’t hold your breath.” However, people involved in the fund-raising effort suggest that Facebook’s board has indicated an intention to consider a public offering in 2012.

There has been an explosion in user interest in social media sites. The social buying site Groupon, which recently rejected a $6 billion takeover bid from Google, is in the process of raising as much as $950 million from major institutional investors, at a valuation near $5 billion, according to people briefed on the matter who were not authorized to speak publicly.

“When you think back to the early days of Google, they were kind of ignored by Wall Street investors, until it was time to go public,” said Chris Sacca, an angel investor in Silicon Valley who is a former Google employee and an investor in Twitter. “This time, the Street is smartening up. They realize there are true growth businesses out here. Facebook has become a real business, and investors are coming out here and saying, ‘We want a piece of it.’ ”

The Facebook investment deal is likely to stir up a debate about what the company would be worth in the public market. Though it does not disclose its financial performance, analysts estimate the company is profitable and could bring in as much as $2 billion in revenue annually.

Under the terms of the deal, Goldman has invested $450 million, and Digital Sky Technologies, a Russian investment firm that has already sunk about half a billion dollars into Facebook, invested $50 million, people involved in the talks said.

Goldman has the right to sell part of its stake, up to $75 million, to the Russian firm, these people said. For Digital Sky Technologies, the deal means its original investment in Facebook, at a valuation of $10 billion, has gone up fivefold.

Representatives for Facebook, Goldman and Digital Sky Technologies all declined to comment.

Goldman’s involvement means it may be in a strong position to take Facebook public when it decides to do so in what is likely to be a lucrative and prominent deal.

As part of the deal, Goldman is expected to raise as much as $1.5 billion from investors for Facebook at the $50 billion valuation, people involved in the discussions said, speaking on the condition of anonymity because the transaction was not supposed to be made public until the fund-raising had been completed.

In a rare move, Goldman is planning to create a “special purpose vehicle” to allow its high-net-worth clients to invest in Facebook, these people said. While the S.E.C. requires companies with more than 499 investors to disclose their financial results to the public, Goldman’s proposed special purpose vehicle may be able get around such a rule because it would be managed by Goldman and considered just one investor, even though it could conceivably be pooling investments from thousands of clients.

It is unclear whether the S.E.C. will look favorably upon the arrangement.

Already, a thriving secondary market exists for shares of Facebook and other private Internet companies. In November, $40 million worth of Facebook shares changed hands in an auction on a private exchange called SecondMarket. According to SharesPost, Facebook’s value has roughly tripled over the last year, to $42.4 billion. Some investors appear to have bought Facebook shares at a price that implies a valuation of $56 billion. But the credibility of one of Wall Street’s largest names, Goldman, may help justify the company’s worth.

Facebook also surpassed Google as the most visited Web site in 2010, according to the Internet tracking firm Experian Hitwise.

Facebook received 8.9 percent of all Web visits in the United States between January and November 2010. Google’s main site was second with 7.2 percent, followed by Yahoo Mail service, Yahoo’s Web portal and YouTube, part of Google.

For Mr. Zuckerberg, the deal may double his personal fortune, which Forbes estimated at $6.9 billion when Facebook was valued at $23 billion. That would put him in a league with the founders of Google, Larry Page and Sergey Brin, who are reportedly worth $15 billion apiece.

Even as Goldman takes a stake in Facebook, its employees may struggle to view what they invested in. Like those at most major Wall Street firms, Goldman’s computers automatically block access to social networking sites, including Facebook.

By ANDREW ROSS SORKIN and EVELYN M. RUSLI

Source: The New York Times

After Vodafone, Govt mulls taxing Kraft-Cadbury deal

The finance ministry is looking into whether Kraft Foods will have to pay taxes to Indian authorities in its $19 bn takeover of Cadbury last year, in response to a public interest petition.


The case is the second in recent years where questions have been raised on global firms' tax liability in India following a blockbuster deal, adding to regulatory uncertainty for foreign companies chasing the India growth story.

Indian tax authorities last year asked Vodafone to pay $2.5 billion tax on its 2007 purchase of Hutchison Whampoa Ltd's mobile business in the country, which the company is currently fighting in court.

Uncertainty over taxes, environmental clearances and other regulations, on top of a slew of corruption scandals, have eroded Asia's third-largest economy's appeal among overseas corporate investors.


"These types of cases are something the Indian authorities have been pursuing for the past two or three years, but it is not a widespread international practice," said Abhishek Goenka, a partner at BMR Advisors in Bangalore.


"We are expecting a number of similar cases which will obviously create an element of concern for cross-border M&A from an Indian perspective," he added.


Foreign direct investment in India fell more than 24 percent in the first seven months of the current fiscal year to $12.56 billion, and analysts have said flows were likely to remain subdued for the near term on concerns over the slow pace of reforms and political volatility in India.

WEAK CASE?


Last month, a New Delhi-based law firm filed a writ petition on behalf of a social activist Ved Prakash in the Delhi High Court, saying Cadbury evaded substantial tax liability in India, as a global deal in which U.S.-based Kraft took over Cadbury also included assets in India.


"On paper, it looks weak," N.C. Hegde, a tax partner at Deloitte Haskins & Sells in Mumbai, told Reuters on Tuesday.


Kraft's Cadbury acquisition was global, with India just a part of the transaction, and thus should not be subject to Indian taxes, he said.


The Delhi High Court asked the petitioners to make a representation before the ministry of finance.


"It seems to be very premature now. The court could not ignore a public interest litigation ... the court will ask the government to look into the matter, the government will look into if they have any kind of case against Cadbury," Hegde said.

Source: The Economic Times

3 January 2011

Whether, for expenses to be allowed against 'income from other sources' a nexus between expenditur and income is mandatory? [Sec 57(iii)]

Sec 57(iii) - Whether, for expenses to be allowed against 'income from other sources' a nexus between expenditur and income is mandatory?
-YES, says ITAT


BANGALORE, DEC 21, 2010: THE issues before the ITAT are - whether, for expenses to be allowed against 'income from other sources' u/s 57, nexus between the expenditure and the receipt is mandatory. YES, says Tribunal. The nex questin is - Whether such expenses can be allowed in the manner business expenditure is allowed. NO, says the Tribunal.


Facts of the case

The assessee is the owner of a hotel property at Bangalore consisting of land, building and other facilities, which was given on lease to Taj Group of Hotels. The assessee receives lease rent computed on the basis of the profit of the business. In the previous year relevant to the assessment year under appeal, the assessee received a license fee of Rs.3,59,88,998/-. It is the principal source of income of the assessee company. It has also received an interest income of Rs.13,36,240/. After claiming the expenditure under different heads, a total income of Rs.3,07,71,200/- was returned by the assessee company. The assessee had always claimed that the lease income was received under the head `business income'. But this proposition was not accepted by the Revenue. The Revenue treated the license fee and other incidental income as `income from other sources'. This dispute reached up to the High Court of Karnataka and the HC held that the Revenue was right in treating the income under the head `income from other sources'. Thus, the dispute on the head of income was resolved and the assessee also accepted the same.

In the course of assessment proceedings, the Assessing Officer found that the assessee company had claimed expenditure to the extent of Rs.68,09,588/- under different heads. The Assessing Officer observed that the assessee company was earning income as licence fee under the head `income from other sources' and it was not carrying on defacto business and, therefore, the expenses allowable in the computation of income must be confined to the rule provided u/s 57 of the Income-tax Act. The Assessing Officer held that the expenses cannot be held as deduction in the nature of business expenditure. The expenses can be allowed only to the extent permitted u/s 57. Initially he proposed to disallow all the expenditure claimed by the assessee company. In response to that proposal, the assessee submitted that the expenses were allowable under the head `income from other sources' and the claim of the assessee has already been accepted by the ITAT Bangalore Bench in its own case relating to the assessment years 1995-96 to 1998-99 and, therefore, based on the order of the ITAT, expenses need to be allowed.

The Assessing Officer accepted some of the contentions of the assessee and agreed to allow essential expenditure in the nature of salaries, PF, ESI etc. The Assessing Officer allowed expenditure necessary for the assessee company to retain its corporate status and other establishment expenses. But the Assessing Officer held that many of the expenses claimed by the assessee company as deduction are not directly connected to its income assessed under the head `income from other sources'. For eg. he found that salary, wages and bonus amounting of Rs.17,08,300/- included the commission of Rs.15,26,770/- paid to the executive Chairman of the assessee company which cannot be allowed. Finally, the Assessing Officer disallowed expenditure to the extent of Rs.49,27,648/- as against a total amount of Rs.68,09,588/- claimed by the assessee company. The CIT (A) confirmed the additions made by the assessing officer except depreciation allowance.

On further appeal, the Tribunal held,

  • it is one thing that the assessee company might have incurred expenses under the above heads and it is another thing that whether all those expenses could be allowed as deduction in computing income from other sources;
  • expenses could be allowed as deduction u/s 57(iii) only if the assessee has established the nexus between the expenditure and the income earned;
  • in the present case, the assessee was not able to establish any nexus between the various disallowances confirmed by the CIT(A) and the income earned by the assessee company by way of lease rentals. The assessee could not produce evidence to prove the nexus of the traveling expenses of the directors, entertainment expenses and the commission expenses with the income from other sources that whether these have resulted into any increase in lease rentals. Hence, addition is confirmed.