Debt

An amount owed to a person or organization for funds borrowed. Debt can be represented by a loan note, bond, mortgage or other form stating repayment terms and, if applicable, interest requirements. These different forms all imply intent to pay back an amount owed by a specific date, which is set forth in the repayment terms.

Sec. 54F benefit available on sum invested in construction of house nonetheless parts of investment may be from different sources and not from capital gains

GOULI MAHADEVAPPA V. ITO (Karnataka High Court)

Where capital gain is assessed on notional basis under section 50C, whatever amount is invested in new residential house within prescribed period under section 54F would get benefit of deduction nonetheless parts of the investments may be from different sources and not from capital gains

In the instant case, the assessee had sold a house property for Rs. 20 lakhs having registration value of Rs 36 lakhs as fixed by the State authorities under the Stamp Act and had sought exemption under section 54F as he had re-invested Rs. 24 lakh for construction of residential house. The Assessing Officer had deducted the cost price of land paid by the assessee at Rs. 1.93 lakhs and Rs. 20 lakhs towards investment in construction of residential house from the value of Rs 36 lakhs of the property under section 50C, and determined the long-term capital gain of Rs. 14.06 lakhs. The Tribunal upheld the order of the Assessing Officer. Aggrieved by the order of Tribunal, assessee filed the instant appeal.

The High Court held in favour of assessee as under:

1. The assessee had stated that he has invested Rs. 20 lakhs out of the sale consideration and had made further investment of Rs. 4 lakhs of agricultural income towards construction of the house. The total amount shown to have been invested for construction of house was Rs. 24 lakhs. The benefit of exemption of Rs. 4 lakhs was disallowed, which didn't appear to be sound and proper;
2. As the ultimate object and purpose of section 50C is to see that the undisclosed income of capital gains received by the assessees should be taxed and the law should not encourage and permit the assessee to peg down the market value at his whims and fancy to avoid tax. In other words, the ultimate object is to curb the growth of black money;
3. When the capital gain is assessed on a notional basis, whatever amount is invested in new residential house within the prescribed period under section 54F, the assessee should get the benefit of deduction, irrespective of the fact that the funds from other sources are utilized for new residential house;
4. In that context, whatever amount was actually invested by the assessee for construction of house should be deducted, irrespective of the fact that parts of the investments were from different sources and not from the capital gains. Thus, full reinvestment made by assessee (i.e., 24 lakhs) in construction of residential house was to be allowed under section 54F.

Monopoly

A situation in which a single company owns all or nearly all of the market for a given type of product or service. This would happen in the case that there is a barrier to entry into the industry that allows the single company to operate without competition (for example, vast economies of scale, barriers to entry, or governmental regulation). In such an industry structure, the producer will often produce a volume that is less than the amount which would maximize social welfare.

No TDS under sec. 194H on brokerage paid by an agent to sub-brokers for dealing in securities or mutual funds

ITO V. MITTAL INVESTMENT & CO. (Delhi - Trib.)

Sub-brokerage paid by an agent to sub-agents for services rendered in connection with securities/mutual funds is outside the purview of section 194H

In the instant case, the assessee-firm, engaged as an agent of post office schemes, PPF, RBI Bonds, LIC, Mutual fund, etc., had claimed expenditure on account of commission paid to sub-brokers in respect of sale and purchase of mutual funds. The AO disallowed the claim as no tax under section 194H was deducted on above payments. According to him only the companies issuing securities were exempted from liability of deduction of tax under section 194H on payment of commission and not the brokers or sub-brokers dealing with the securities. However, on appeal, the CIT (A) deleted the impugned addition. Thus, instant appeal was filed by the revenue.

The Tribunal held in favour of assessee:

• Commission or brokerage has been defined in the Explanation (i) to section 194H. A bare perusal of such Explanation clearly shows that if the commission or brokerage has been paid by a person acting on behalf of another person for services rendered in connection with securities then said commission or brokerage would be outside the purview of section 194H;
• It is evident from clause (h) of section 2 of the Securities Contract Act, 1956 that mutual funds are not outside the ambit of the term 'securities'. The Explanation (i) to section 194H uses the term 'in relation to' which clearly implies that whenever any commission or brokerage is paid in relation to securities then it would be outside the ambit of section 194H. Admittedly, the assessee had paid sub-brokerage in relation to securities (mutual fund) and, therefore, it was outside the ambit of section 194H. 

No exemption for ‘LTC’ spent on overseas journey even if part of journey is performed in India

OM PARKASH GUPTA V. ITO (Chandigarh - Trib.)

Leave Travel Concession (LTC) is exempt from tax only when employee has utilized LTC for travel within India. Nothing in Rule 2B provides assessee with a liberty to claim exemption where part of his package is spent on his overseas travel and part of his journey has been performed within India.

In the instant case, the assessee had claimed exemption of LTC received from his employer under section 10(5) of the IT Act. The Assessing Officer disallowed the LTC exemption claimed by assessee after noticing that leave travel package covered Singapore and Malaysia also, on the footing that section 10(5) doesn’t allow exemption for overseas travel. Further, the CIT(A) upheld the order of Assessing Officer. Aggrieved assessee filed the instant appeal to Tribunal.

The Tribunal held in favour of revenue as under:

• The provisions of the Act are in relation to LTC for proceeding on leave to any place in India;

• LTC is exempt from tax only when employee has utilized LTC for travel within India;

• Nothing in Rule 2B provides assessee with at liberty to claim exemption where part of his package is spent on his overseas travel and part of his journey has been performed within India. Thus, assessee’s exemption claim under section 10(5) was rejected.

Price Earning Ratio

The most common measure of how expensive a stock is. The P/E ratio is equal to a stock's market capitalization divided by its after-tax earnings over a 12-month period, usually the trailing period but occasionally the current or forward period. The value is the same whether the calculation is done for the whole company or on a per-share basis. For example, the P/E ratio of company A with a share price of Rs. 50 and earnings per share of Rs.10 is 5. The higher the P/E ratio, the more the market is willing to pay for each rupee of annual earnings. Companies with high P/E ratios are more likely to be considered "risky" investments than those with low P/E ratios, since a high P/E ratio signifies high expectations. Comparing P/E ratios is most valuable for companies within the same industry. The last year's price/earnings ratio (P/E ratio) would be actual, while current year and forward year price/earnings ratio (P/E ratio) would be estimates, but in each case, the "P" in the equation is the current price. Companies that are not currently profitable (that is, ones which have negative earnings) don't have a P/E ratio at all.

Prosecution in Service Tax matters can’t be continued if assessee has been acquitted in adjudication proceedings on merit

Dinesh Aggarwal v. DRI (Delhi High Court)

If assessee has been exonerated on merits in adjudication proceedings from charge of misrepresentation and suppression, criminal prosecution on same set of facts and circumstances cannot be allowed to be continued

The Department initiated adjudication proceedings and criminal prosecution against the assessee alleging wilful misrepresentation and under-valuation. In adjudication proceedings, Tribunal held in favour of assessee on merits. The Assessee filed a writ petition challenging continuance of prosecution proceedings. Department made an application that assessee's writ petition was premature on ground that it had challenged order of Tribunal.

The High Court quashed the criminal proceeding against the assessee with the following observations:

• Application filed by Department seeking rejection of writ petition on ground of being pre-mature was a gross abuse of the processes of law; 
• Although there is no automatic closure or quashing of the criminal complaint, in the event, there is a favourable verdict in the departmental or the adjudicatory proceedings in favour of an accused but in case the adjudicatory proceedings culminate into a favourable order in favour of the accused on merits and the criminal complaint is in sum and substance based on the same facts then, obviously, it would be a gross abuse of the processes of law to continue with the criminal complaint; 
• Mere contemplation by Department to assail the order of Tribunal before the Apex Court or before any other appellate forum where they have a right to do so, couldn’t result in deferring the decision in the present petition; 
• Since the assessee had been exonerated in the departmental adjudicatory proceedings regarding both the allegations of mis-declaration and under-valuation, there was no point in continuing with the criminal trial as it was resulting in abuse of the process of law.

Every audit objection can’t lead to invocation of extended period, and levy penalty

LANDIS + GYR LTD. V. COMMISSIONER OF CENTRAL EXCISE (Kolkata - CESTAT)

Every shortcoming noticed during Audit cannot be held as due to mala fide intention on the part of the assessee so as to invoke extended period of limitation and levy penalty

The assessee was engaged in trading and manufacturing activities. On being pointed out in Departmental audit in 2007, the assessee reversed proportionate credit relating to trading activity for past 2 years and paid interest. Later, in 2009, Department issued show-cause notice seeking levy of penalty arguing that if audit had not pointed out wrong credit, amount would not have been recovered from the assessee.

The Tribunal set aside the penalty imposed on the assessee with the following observation

1. Suppression or misstatement of facts with intent to evade payment of tax is a pre-condition of levy of penalty. Show-cause notice had not listed circumstances or facts which were suppressed and how the assessee availed credit with mala fide intentions; 
2. Objective of conducting Audit is to ascertain correctness of payment of tax, etc., hence, every shortcoming noticed during Audit cannot be held as due to mala fide intention on part of the assessee; 
3. Irrespective of fact whether tax was paid either involving extended period or otherwise, or paid voluntarily or in pursuance to a demand notice, penalty under section 78 cannot be justified unless it is found that tax short paid or not paid was on account of suppression of fact, misstatement etc.; 
4. Hence, in absence of mala fide intention of assessee, penalty under section 78 was set aside.

Input service distributor may distribute credit of Service Tax even if it has been paid prior to registration

DAGGER FORST TOOLS LTD. V. COMMISSIONER OF CENTRAL EXCISE (Mumbai - CESTAT)

There is no restriction under CENVAT Credit Rules with regard to period for availing CENVAT credit of service tax paid; hence, Input Service Distributor (‘ISD’) may distribute credit of service tax paid prior to its registration as ISD

The assessee had registered itself as ISD with effect from 04.10.2008. Thereafter, it had distributed the credit of service tax paid on common input service to its various units in respect of services received during the period February, 2008 to October, 2008. The department denied Cenvat credit on ground that the services were received prior to registration as ISD and the taxes were also paid on those services prior to that date.

The Tribunal held in favour of assessee as under:

• There was no restriction under the CENVAT Credit Rules, 2004, with regard to the period for availing CENVAT credit of service tax paid. In other words, a manufacturer/input service provider could avail CENVAT credit of the service tax paid irrespective of any time limitation; 
• The only condition to be satisfied was that they should have paid the service tax prior to availing the credit. So long as this condition was satisfied, there was no time limit prescribed in the Rule within which the CENVAT credit had to be taken. If that be so, there was no reason why in the case of input service distributor alone, a restriction should be placed with respect to availment of CENVAT credit, i.e., input service distributor was permitted to distribute only taxes paid on or after registration. Such a restriction was totally unwarranted and was not provided for in the law; 
• Hence, credit was held validly distributed.

Five C's of Credit

The five key elements a borrower should have to obtain credit: 

1. Character (integrity)
2. Capacity (sufficient cash flow to service the obligation)
3. Capital (net worth)
4. Collateral (assets to secure the debt) and 
5. Conditions (of the borrower and the overall economy).

Transportation of passengers via ropeway isn't covered under tour operator's service

SHAIL SHIKHAR ASSOCIATES V. COMMISSIONER OF CENTRAL EXCISE (New Delhi-CESTAT) (TM)

Leasing of a ropeway installed by Municipal Board and operating it to entertain tourists by carrying them from road to hills and back doesn't amount to Tour Operator's services

In the instant case the assessee had leased a ropeway installed by Municipal Board and was engaged in operating it to entertain tourists by carrying them from road to hills and back. The Department sought to levy service tax on the assessee under Tour Operator's services.

The Tribunal held in favour of assessee as under:

1. By a licence deed, the assessee was allowed to operate the ropeway. In terms of section 65(115) to call a person as "Tour Operator" he should be either a planner of tour or an organizer or arranger thereof. So, scheduling tour brings the service provider to the category of tour operator. Meaning of the term "tour" is given by section 65(113) of the Act. "Tour" means journey from one place to another, irrespective of distance from such place; 
2. The tourists are not governed by any planning, scheduling, organising or arranging for their journey and are not dependent on the licensee-assessee for such planning, scheduling, organizing or arranging for their tours but only avail the facility of ropeway provided by assessee-licensee during working hours on payment of fees prescribed in licence deed. They are not beneficiaries of any planning, scheduling or arranging of tours, since tour to be taxable has to follow activities enumerated under section 65(115); 
3. Accordingly, the assessee had not acted as "tour operator" within the meaning of Section 65(115) for which the taxing entry 65(105)(n) thereof was not attracted. Consequently, the assessee was not liable to service tax.

High Court upholds transfer of order under Sec. 127 for co-ordinated investigation; recommends US like ‘restatement of law’

CIT V. UNION OF INDIA (CHHATTISGARH High Court)

Order of transfer of cases under section 127(2) is administrative and not quasi-judicial merely because assessee is required to be heard before the order is passed. The word 'coordinated investigation' is not vague. It has a definite meaning. The transfer order can’t be set aside merely on the ground that the transfer has been done on vague terms.

In the instant case, following issues arosed before Chattisgarh High Court:

• Whether the power of transfer under Section 127(2) of the Income Tax Act, 1961 is not a judicial power? 
• Order of transfer under sec. 127(2) can’t be passed when there is denial of reasonable opportunity to the assessees? 
• Whether the word 'co-ordinated investigation' is vague and the transfer order can be set aside merely on the ground that the transfer has been done on vague terms?

Deliberating on these issues, the High Court held as under:

1. Section 127(2) of the Act provides that transfer can be done only if opportunity is afforded to an assessee and after recording reasons. But merely for this reason it cannot be said to be quasi-judicial in nature; 
2. The transfer order does not decide the rights of the parties in the assessment; 
3. The ultimate order deciding the right is the order of the assessment which decides the basis and the tax to be paid. This order is a judicial order. The transfer order is merely for administrative reason and it cannot be said that nature of power is judicial; 
4. It was not disputed that the search took place in the premises of Mahamaya group of companies, as well as residential and official premises of its directors and its employees, at different places, where incriminating documents were seized; 
5. The documents were inter-connected and affected the assessment of the parties. It was necessary to see their overall effect on the assessments. It could only be done after analyzing and investigating into all the documents found at different places and not separately, for which a co-ordinated investigation was necessary. Thus, the words 'coordinated investigation' were not vague; 
6. The notice had indicated the reason for transfer as 'centralisation' for 'co-ordinated investigation'. It was for this reason that order for transfer were made. There was no denial of reasonable opportunity to the assesses.

In addition to the aforesaid findings, the High Court also recommended adoption of US-like 'restatement of law'

The submissions raised by the party should have been considered before arriving at the decision. But more often than not, there was an insistence on dealing with every case that was cited. Perhaps, such insistence, even if the decisions were inapplicable or irrelevant, was misplaced. It might not be proper to record in the judgement that a counsel had cited irrelevant, or inapplicable, or overruled, or already distinguished case. It would be of real help to our jurisprudence if we also adopted an approach similar to the US, about 'Restatement of Indian law'. 

Pune ITAT allowed claim of jeweller for business loss incurred due to confiscation of its silver stock

RAJMAL LAKHICHAND v. ACIT (Pune - Trib.)

In the instant case, during search conducted in the business premises of assessee, a jeweller, certain stock of silver was confiscated by customs officials. Assessee claimed deduction on account of loss occurred due to confiscation of silver in relevant assessment year. Said claim was disallowed by the Assessing Officer as well as the CIT(A).

The Tribunal held in favour of assessee as under:

The business loss on account of confiscation could be claimed and allowed in the year in which the assessee prima facie loses the hope for recovery of the goods. Thus, the assessee’s claim of loss was crystallized in the year under consideration when assessee received the order of CEGAT. Therefore, the loss incurred due to confiscation of silver stock was to be allowed as assessee was in the business of silver trade and loss had been suffered during the course of its business.

Human Capital

The set of skills which an employee acquires on the job, through training and experience, and which increase that employee's value in the marketplace.

Arithmetic Mean of ALPs to be determined even if actual price exceeds one of the ALPs determined by TP method

CIT V. MENTOR GRAPHICS (NOIDA) (P.) LTD. (Delhi High Court)

 Proviso to section 92C(2) requiring calculation of arithmetical mean of multiple ALPs (more than 1 ALP) determined as per Most Appropriate Method doesn’t become inapplicable where one of the ALPs determined as per Most Appropriate Method is less than the price indicated by assessee.

In the instant case the most appropriate method, as accepted by both, the assessee and revenue, was the Transactional Net Margin Method. The dispute that arose was with regard to the following observation of the Tribunal:

Where one of the prices determined by the most appropriate method is less than the price as indicated by the assessee. Then there would be no need to adopt the process of taking the arithmetical mean of all the prices arrived at through the employment of the most appropriate method.

The High Court held as under:

• When more than one price is thrown up by the most appropriate method, the statute requires that the arm's length price shall be taken to be the arithmetical mean of such prices. This is the plain and simple meaning of the proviso to section 92C(2) of the said Act; 
• The Tribunal was wrong in holding that if one profit level indicator of a comparable, out of a set of comparables, was lower than the profit level indicator of the taxpayer, then the transaction reported by the taxpayer was at an arm's length price; 
• The proviso to section 92C(2) is explicit in that where more than one price is determined by most appropriate method, the arm's length price would be taken to be the arithmetical mean of such prices.

Variable Cost

A cost of labor, material or overhead that changes according to the change in the volume of production units. Combined with fixed costs, variable costs make up the total cost of production. While the total variable cost changes with increased production, the total fixed costs stays the same.

Assessee can claim both sections 54 and 54F deductions for investment in one house, ITAT rules

VENKATA RAMANA UMAREDDY V. DY.CIT (Hyderabad - Trib.)

 Section 54 and section 54F are independent provisions and assessee can claim exemption under both sections for investment in same house

In the instant case, during the relevant financial year, the assessee had earned long-term capital gain (LTCG) out of transfer of two distinct and separate assets - one being a plot of land and the other a house property. He claimed that the entire LTCG arising from the sale of the two assets was invested in purchase of the new residential house and, hence, he was entitled to avail of exemption under sections 54 and 54F. The Assessing Officer rejected such claim by holding that for claiming exemption under sections 54 and 54F the assessee had to invest in two houses. Further, the CIT(A) upheld the order of AO. Aggrieved assessee filed the instant appeal.

The Tribunal held in favour of assessee as under:

1. Sections 54 and 54F are independent of each other and operate in respect of LTCG arising out of transfer of distinct and separate long-term capital assets. However, both the sections allow exemption only on purchase or construction of a new residential house; 
2. The only reasoning on which the lower authorities had rejected assessee's claim of exemption under section 54 was that the assessee couldn’t claim exemption under both the sections towards investment in a single house. According to the lower authorities, for claiming exemption under sections 54 and 54F the assessee had to invest in two houses. Such an interpretation of the provisions was totally misconceived and misplaced; 
3. There was also no specific bar either under section 54 or 54F of the Act prohibiting allowance of exemption under both the sections in case the conditions of the provisions were fulfilled; 
4. Since long-term capital gain arose from sale of two distinct and separate assets, viz., residential house and plot of land and the assessee had invested the entire capital gain in purchase of a new residential house, he was entitled to claim exemption both under sections 54 and 54F.

Sec. 73(3) doesn’t contemplate issuance of Show Cause Notice, except where assessee doesn’t pay Service Tax even after demand

VSE Stock Services Ltd. v. Commissioner of Central Excise (Ahmedabad - CESTAT)

On receipt of intimation under section 73(3), if there is short-payment by assessee, then, instead of issuing show-cause notice straight away, department must send a letter asking assessee to pay such amount

During the periods from April, 2007 to July, 2007 and November to December, 2007, the assessee had utilized Cenvat Credit of certain amount for payment of Service Tax in respect of stock broker service provided by it. It was found that this credit was not admissible to the assessee since it was availed after end of the month and as soon as it was pointed out, the assessee paid the amount with interest. Nonetheless, on verification, it was found that there was a short payment of certain amount and this was pointed out by way of issuing show-cause notice. In the impugned order, penalty of Rs.5000/- was imposed under section 77.

The Tribunal set aside the penalty with the following observations.

• As per section 73(3), read with proviso thereto on receipt of intimation under section 73(3), if there was short-payment, then, instead of issuing show-cause notice straight away, department should have sent a letter asking assessee to pay such amount; 
• Further, when the assessee had discharged short-paid service tax along with interest, show-cause notice should have been dropped; 
• Hence, penalty under section 77 could not have been imposed, which was set aside accordingly.

Bill of exchange

An unconditional order issued by a person or business which directs the recipient to pay a fixed sum of money to a third party at a future date. The future date may be either fixed or negotiable. A bill of exchange must be in writing and signed and dated. Also called draft.

Consumer

An individual who buys products or services for personal use and not for manufacture or resale. A consumer is someone who can make the decision whether or not to purchase an item at the store, and someone who can be influenced by marketing and advertisements. Any time someone goes to a store and purchases a toy, shirt, beverage, or anything else, they are making that decision as a consumer.

Asset Securitisation

Securitisation is a process of transformation of illiquid asset into security which may be traded later in the open market. It is the process of transformation of the assets of a lending institution into negotiable instruments. The term ‘securitisation’ refers to both switching away from bank intermediation to direct financing via capital market and/or money market, and the transformation of a pr eviously illiquid asset like automobile loans, mortgage loans, trade receivables, etc. into marketable instruments.
 

This is a method of recycling of funds . It is beneficial to financial intermediaries, as it helps in enhancing lending funds. Future receivables, EMIs and annuities are pooled together and transferred to an special purpose vehicle (SPV). These receivables of the future are shifted to mutual funds and bigger financial institutions. This process is similar to that of commercial banks seeking refinance with NABARD, IDBI, etc.