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.

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

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.

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.

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.

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."

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.