Stocks

8 February 2014

Interest on I-T refund not taxable at concessional rate of 10% as per Treaty if Non Resident has Permanent Establishment in India

DIRECTOR OF INCOME-TAX V. PRIDE FORAMER SAS (2013) 40 taxmann.com 100 (Uttarakhand)
Interest earned by a non-resident on income-tax refund is not taxable in India at concessional rate of 10% as per India-France treaty if such non-resident has a Permanent Establishment in India
In the instant appeal, appellant had sought interpretation of Article 12 of India-France treaty. It contented that interest earned in India on income-tax refund was taxable at 10% as per Article 12(2) of treaty.
The High Court held as under:
  • Plain reading of Article 12 of treaty would make it absolutely clear that Paras 1 and 2 of Article 12 will apply, inter alia, when the recipient of interest does not have a permanent establishment in the country, where he has received interest;
  • There was no dispute that the respondent-assessee had a permanent place of business in India and it had paid tax in India on its income, except income from interest;
  • The interest earned in India on the refund of income-tax was, therefore, not covered by Paras 1 and 2 of Article 12 of the said Treaty. To that extent, the judgment of the Tribunal was to be set aside and, accordingly, the appeal was to be allowed.

7 February 2014

Revenue earned by eBay from its website won't be Fees and Technical Services; its Indian marketing agents won't form its agency Permanent Establishment

eBAY INTERNATIONAL AG V. DY. DIT (2013) 40 taxmann.com 20 (Mumbai - Trib.)
  • The assessee, incorporated in Switzerland, operated specific websites in India that provided an online platform for facilitating the purchase and sale of goods and services to users based in India; 
  • For the purpose, the assessee had entered into marketing support agreements with eBay India and eBay motors, for availing of certain support services in connection with its websites; 
  • The Assessing officer concluded that the payments received by the assessee from operations of websites were mainly in the nature of Fees and Technical Services. Further, it also held that the assessee had a PE in India in the form of its entities namely, eBay India and eBay motors; 
  • On appeal, the DRP upheld the order of AO. Aggrieved-assessee filed the instant appeal.
The Tribunal held in favour of assessee as under:
  • The modus operandi of the transactions undertaken through the websites made it clear that the fees accruing to assessee on successful completion of the transactions between the buyer and seller could not be described as Fees and Technical Services, as the assessee had no role to play in effecting sales and these were in nature of business profits; 
  • The existence of PE as per Article 5 of India-Singapore DTAA (‘treaty’) is a must for bringing to charge any business profits as per Article 7 of treaty. The eBay India and eBay motors were dependent agents of assessee, as they were assisting it in carrying on business in India and if any of the conditions given in para 5 of Article 5 of treaty was satisfied, then they would constitute dependent agent PE of the assessee in India; 
  • First condition provided in Para 5 of treaty refer to that the dependent agent "has and habitually exercises in that State, an authority to negotiate and enter into contracts for or on behalf of the enterprise”. By performing the activities as narrated in the agreement, it was seen that eBay India had at no stage negotiated or entered into contract for or on behalf of the assessee; 
  • Second condition provided in Article 5 of treaty refers to the dependent agent habitually maintaining a stock of goods for or on behalf of the enterprise. This condition was not satisfied as eBay India didn’t maintain any stock of goods for delivery for or on behalf of the assessee; 
  • Third condition applies where the dependent agent manufactures or processes the goods or merchandize in that State for the enterprise. Obviously, this clause was also not applicable because eBay Motors was not required to manufacture or process the goods or merchandise on behalf of the assessee; 
  • Thus, the eBay India and eBay motors were dependent agents of assessee but they did not constitute dependent agent PE and, thus, profits earned by assessee could not be taxed as per Article 7 of treaty.

6 February 2014

Principle of res judicata can override contrary ruling of Supreme Court; CESTAT rules in assessee's favour

Commissioner of Central Excise v. Raptakos Brett & Co. Ltd. (2013) 39 taxmann.com 63 (Mumbai - CESTAT)
Where earlier judgment of Tribunal in case of very same assessee had been accepted by Department, principle of res judicata is applicable and judgment of Tribunal will govern case despite contrary Supreme Court judgment
The Assessee claimed a deduction from value of excisable goods, which was allowed by the Commissioner (Appeals).In case of other assessees, said deduction was held not allowable by Supreme Court . The Department applied Supreme Court judgment and held that assessee was not eligible for said deduction.
The Tribunal allowed Assessee’s claim with following observation:-
  • In assessee's own case, for earlier period, the Tribunal had allowed assessee's claim and said order had attained finality being not challenged by Department 
  • Though decision of Apex Court has retrospective effect, but, since earlier judgment in case of very same the assessee had been accepted by Department, principle of res judicata was applicable. 
  • Therefore, impugned order allowing deduction was to be upheld.

Interpretation of Taxing Statutes


Article 246 of the Constitution of India deals with the distribution of legislative power between the Union and the State legislature with reference to the different Lists in the Seventh Schedule of the Constitution of India.
The power to legislate with respect to taxes enumerated in List I is within the exclusive domain of the Parliament while the power to legislate in respect of taxes enumerated in List II is within the exclusive domain of the State legislature excluding the matters falling under List III which gives the concurrent power both to State and Parliament with respect to the matters enumerated in List III.
The Parliament and the State legislatures can legislate in respect to the matters therein relating to taxes in such List. One cannot travel beyond the powers conferred under the said provisions.
Apart from the interpretation of the taxing Statutes, one has to look into the taxing Enactment itself, whether it falls under the State List or under the Central List.
I am reminded of the judgment in the case of Cape Brandy Syndicate v. IRC [1921] 1 KB 64 delivered by Rowlat. J. This judgment has been followed by our Supreme Court in the case of CIT v. Ajax Products Ltd. [1965] 55 ITR, 741 in which it was held as follows :
“In a taxing statute one has to look merely at what is clearly said. There is no room for any intendment. There is no equity about a tax. There is no presumption as to a tax. Nothing is to be read in, nothing to be implied. One can only look at the language used."
Thus, when the language of a taxing statute is clear, if an assessee falls within the four corners of the statute, he is to be taxed; if not, no tax is to be levied. Keeping in view the aforesaid dictum regarding the interpretation of the taxing statutes, there are various cardinal principles with respect to the interpretation of taxing statutes which can be bifurcated in the following broader categories:


Rule of Literal Interpretation 
The rule of literal construction is widely accepted rule for interpreting the taxing statutes. If the language of the statute is clear and unambiguous, we have to accept the plain meaning even if it leads to some harshness or injustice to the assessee. As long as there is no ambiguity in the statutory language, the rule of literal interpretation has to be applied. A  dealer or assessee cannot be subjected to tax without clear and unambiguous words for the purpose of levying the tax which is authorised by law, enacted by the Parliament or by the State Legislature.
If the person sought to be taxed comes within the letter of law he must be taxed, howsoever, great the hardship may appear to be as held by the Hon’ble Apex Court in various decision, e.g., CTT v. T. C. Sundaram Iyyengar [1975] 101 ITR 764 (SC), Smt. Tarulata Shyam v. CIT [1971] 108 ITR 345 (SC), Keshavji Ravji & Co. v. CIT [1990] 49 Taxman 87 (SC) and CIT vs. Indian Enggt. & Comml. Corpn. (P.) Ltd. [1993] 201 ITR 723/68 Taxman 39 (SC).
However, if a person cannot be brought within the purview of the law for levying the tax he cannot be subjected to tax if the plain language of the statute does not provide for it.
In the taxing statute a person or a transaction cannot be subjected to tax on the ground of spirit of the law or by inference or by analogy as held by the Apex Court in cases of Mathuram Agrawal v.State of Madhya Pradesh AIR 2000 SC 109 at page 113 and Hansraj & Sons v. State of Jammu & Kashmir, AIR 2002 SC 2692 at pages 2698 and 2699.
In these circumstances, neither any tax can be levied nor assessment can be made on the basis of the presumption or assumption that subject falls within the taxing provision. One has to merely look to the language by applying the rule of literal construction if the subject falls within the provisions of law, it can be subjected to tax and not otherwise.

Rule of Beneficial Construction
In cases where there are two interpretations possible, the one which is beneficial to the assessee would be preferred. This principle was laid down in a landmark judgment in IRC v. Duke of Westminister 1936 AC 1 wherein Tomlin L J. stated that an assessee may arrange his affairs within the bounds of the law so as to minimise the incidence of tax.
In the case of McDowell & Co. Ltd. v. CTO [1985] 154 ITR 148 (SC) the Apex Court clamped down on the liberal construction and the pendulum swung to the other extreme, as the Court made fine distinctions between tax evasion, tax avoidance and tax planning and virtually rendered the Westminister principle nugatory. Here the Court followed the interpretation that the letter and spirit of the law must be followed.
In this post-McDowell era, the department generally got favourable verdicts and a lot of assessees suffered due to the Courts coming down heavily on tax avoidance measures, which were equated with tax evasion.
The decision in the case of McDowell & Co. was considered in detail by the Hon’ble Supreme Court in the case of Union of India v. Azadi Bachao Andolan, 2004 (10) SCC, 1 : also reported in (2003) Vol. 263 ITR, page 707. Paras 142 to 154 of the judgment has dealt in detail with the decision of McDowell & Co.
In this case Court dealt with conflicts between the Indo-Mauritius Double Tax Avoidance Agreement and the Income-tax Act, 1961. It was held that an assessee was entitled to arrange his affairs so as to minimise the incidence of tax, thus, partly confirming the Westminister principle.
The Supreme Court has repeatedly held that if two views are possible with respect to any provisions under a taxing statute, the view which is in favour of the assessee should be accepted.
It has now become well established that if the words used in a taxing statute are reasonably open to two interpretations, the interpretation which goes in favour of the assessee should be accepted, as held by the Apex Court in Hindustan Lever Ltd. v. Municipal Corporation of Greater Bombay, 1995 (3) Scale, page 24, and in the case of Birla Cement Works v. CBDT, 2001 Vol. 3 JT, page 256.
It was held by the Supreme Court in : CIT v. Poddar Cement (P.) Ltd. [1997] 226 ITR 625 (SC) – Where there are two possible interpretations of a particular section which is akin to a charging section, the interpretation which is favourable to the assessee should be preferred while construing that particular provision. Reiterating the same view, in the case of CIT v. Shaan Finance (P.) Ltd. [1998] 231 ITR 308 (SC) it has been held that in interpreting a fiscal statute, the Court cannot proceed to make good the deficiencies if there be any. The Court must interpret the statute as it stands and in case of doubt, in a manner favourable to the taxpayer. CIT v. Vegetable Products Ltd [1973] 88 ITR 192 It has been held that if the Court finds that the language of taxing provision is ambiguous or capable of more meaning than one, then the Court has to adopt the interpretation which favours the assessee.
The rule of beneficial construction will also be applicable while determining the levy of tax on a commodity regarding its classification. The question as to whether a particular commodity is taxable under specific entry or it is taxable under the residuary entry, the attempt should be made to find out as to whether the said commodity answers the description of a specific entry.
The Hon’ble Apex Court in the case of Mauri Yeast India Private Ltd. v. State of U.P. & Others, reported in 2008 UPTC, 729, para 42, has held as follows:
“It is now a well settled principle of law that in interpreting different entries, attempt shall be made to find out as to whether the same answers the description of the content of the basic entry and only in the event it is not possible to do so, recourse to the residuary entry should be taken by way of last resort.”
The Apex Court in the case of Bharat Forge & Press Industries Pvt. Ltd. v. Collector of Central Excise, reported in 1990(1) SCC, 532, para 4, has held as follows:
“….Unless the department can establish that the goods in question can by no conceivable process of reasoning be brought under any of the tariff items, resort cannot be had to the residuary item.” Even otherwise, it has also been held in the case of Mauri Yeast India Private Limited (supra) and also in the case of Bihar State Electricity Board v. Usha Martin Industries, 1997 (5) SCC, 289, as follows:
“It is now well settled principle of law that when two views are possible, one which favours the assessee should be adopted.”

Doctrine of Purposive Construction 
If the strict interpretation of the taxing statute is likely to lead to a manifest absurdity, then the golden rule of construction implies that the meaning of the words should be so effected that such an absurdity is avoided. The application of this rule is rather limited in the realm of construction of taxing statutes, since the literalrule would gain precedence over the golden rule and it is often remarked that equity and taxation are strangers.
For the purpose of construction of a taxing statute, the context, scheme of the relevant provision as a whole and its purpose are also relevant. Hence the object of the Legislature has to be kept in mind for giving a purposive construction of the various provisions of the Act. Under Entry 54, List-II of the 7th Schedule of the Constitution, Sales Tax Laws and VAT Laws have been enacted for levy of tax on the transaction of purchase or sale. Hence the provisions raising presumptions of not surrendering the transit passes in respect of the goods passing through the State to be deemed sales and provisions relating to imposition of penalty in absence thereof has been treated as legal and valid by the Hon’ble Supreme Court in the case of Sindhi Transport Company v. State of U.P. reported in 1986 (2) SCC 486. Hence the doctrine of purposive construction ought to be applied and the transactions must be considered in the sense in which the Legislature intended it to be done.

Doctrine of Harmonious Construction
When any provision of a taxing statute is interpreted, it must be so constructed that the meaning of such provision must harmonise with the intention of the Legislature behind the  provision in particular and the enactment in general – CIT v. Chandanben Maganlal [2002] 120 Taxman 38 (Guj.). However, this would always be subject to the fact that the particular provision, or even the entire enactment, should not be held unconstitutional.

Construction of Penal Provisions
There are several penal provisions in taxation statutes and these have special rules of interpretation and notable among these are:
(a) Strict construction.
(b) Prospective in operation and not retrospective; thus, any act which is currently not an offence cannot be made one retrospectively by amendment of a penal provision with retrospective effect;
(c) Presumption of mens rea (i.e., guilty intention to commit the crime) unless the statute specifically provides for the absence of the same. With regard to the penalty proceedings the Hon’ble Supreme Court has given two important decisions:
(1) In Union of India & Ors. v. Dharamendra Textile Processors & Ors. 2008 (13) SCC 369 while examining the scope of Section 11-AC of the of the Central Excise Act, 1944, a three Judge Bench of Supreme Court, observed that: “A penalty imposed for a tax delinquency is a civil obligation, remedial and coercive in its nature, and is far different from the penalty for a crime or a fine or forfeiture provided as punishment for the violation
of criminal or penal laws.”
(2) However, in Union of India v. Rajasthan Spinning & Weaving Mills 2009 (13) SCC 448 Supreme Court observed that:
“We fail to see how the decision in Dharamendra Textile can be said to hold that Section 11-AC would apply to every case of non-payment or short-payment of duty regardless of the conditions expressly mentioned in the section for its application… The decision in Dharamendra Textile must, therefore, be understood to mean that though the application of Section 11-AC would depend upon the existence or otherwise of the conditions expressly stated in the section.”
These decisions were considered by the Supreme Court in connection with the penalty proceedings under Section 10-A read with 10(b) of the Central Sales Tax Act in Civil Appeal No. 2344-2347 of 2004 CST v. M/s. Sanjiv Fabrics and Civil Appeal Nos. 6382-6383 of 2004 M/s. Hari Oil & General Mills v. CST reported in 2010 (Vol.9) SCC 630 and after considering the various decisions, the Apex Court has held in para 22 of its judgment as follows :
"We are of the considered opinion that the use of the expression “falsely represents” is indicative of the fact that the offence under Section 10(b) of the Act comes into existence only where a dealer acts deliberately in defiance of law or is guilty of contumacious or dishonest conduct. Therefore, in proceedings for levy of penalty under Section 10-A of the Act, burden would be on the revenue to prove the existence of circumstances constituting the said offence. Furthermore, it is evident from the heading of Section 10-A of the Act that for breach of any provision of the Act, constituting an offence under Section 10 of the Act, ordinary remedy is prosecution which may entail a sentence of imprisonment and the penalty under Section 10-A of the Act is only in lieu of prosecution. In light of the language employed in the Section and the nature of penalty contemplated therein, we find it difficult to hold that all types of omissions or commissions in the use of Form ‘C’ will be embraced in the expression "false representation”. In our opinion, therefore, a finding of mens rea is a condition precedent for levying penalty under Section 10(b) read with Section 10-A of the Act.”

Charging sections to be strictly construed while procedural sections should be liberally construed
The charging section in a taxing statute has to be strictly construed but the provisions which do not create any charge but lay down the machinery for its calculation or procedure for assessment of tax or its collection has to be construed by the ordinary rule of construction. For interpreting the machinery provisions it should be so construed as to effectuate the liability imposed by the charging section and to make the machinery provisions workable. If the provision gives an incentive, exemption and deduction, then such provision has to be construed liberally so as to determine the liability.
In construing the machinery provisions literal construction can always be departed and an interpretation which gives the benefit, incentive should be liberally accepted.
Interpretation of Exemption Provisions This is a very important and practical rule of interpretation and generally resorted to while interpreting the sections pertaining to incentives, exemptions and deductions where the spirit is to promote exports, increase earnings in foreign convertible exchange, promote industrialisation, infrastructure development, etc. Similarly, interpretation will have to be adopted where certain exemptions are provided to any person or industry then the provision of such exemption has to be strictly construed but once the subject comes within the eligibility of exemptions, the other provisions to effectuate the exemption should be liberally construed as held by the Supreme Court in the case of :
Bajaj Tempo Ltd. 196 ITR 188 (SC) A provision in a taxing statute granting incentives for promoting growth and development should be construed liberally, and since as provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the provision and not to frustrate it. While interpreting the various provisions, the Court must not adopt a hyper technical approach and to apply cut-and-dry formula. A pragmatic approach should be adopted so that the object of the introduction/insertion of a particular provision could be achieved.
[Similar views have been expressed in Juggilal
Kamlapat v. CIT [1969] 73 ITR 702 (SC); CIT v. Strawboard Manufacturing Co. Ltd. [1989] 177 ITR 431 (SC) at page 434 and CIT v. South Arcot District Co-operative Marketing Society Ltd. 176 ITR 117 (SC) at page 119].
The object of provisions of taxing statute being to promote the setting of the new units and to increase the production of goods such provision has to be interpreted liberally so that the object can be achieved, as held by Supreme Court in the case of Commissioner Trade Tax vs. DSM Group of Industries, reported in 2005 UPTC page 121. Paragraph 13, at pages 136 and 137 of the said judgment are important, which is reproduced below :
13. Mr. Sudhir Chandra cited a number of authorities for the proposition that Notifications have to be interpreted keeping in view the object. He submitted that the object was to encourage investments and production. He submitted that a liberal interpretation which advances the object of the Notification should be given. Mr. Sudhir Chandra relied upon the authorities in the cases of Oblum Electrical Industries Pvt. Ltd., Hyderabad v. Collector of Customs, Bombay reported in (1997) 7 SCC 581; Commissioner of Sales Tax v. Industrial Coal Enterprises, reported in (1999) 2 SCC 607 and K.K. Steel Union Ltd., v. Commissioner of Customs, Kanda, Gujarat, reported in (2001) 4 SCC 736. In our view, there can be no dispute with the above mentioned proposition of law. Therefore, there is no necessity to consider in detail the authorities relied upon.”
In the case of Sriniwas Cable Components v. State of M.P., (2012) 10 SCC, page 421 it was held in para 29 as follows : ’29. It is now a well-established principle of law that whereas eligibility criteria laid down in an exemption notification are required to be construed strictly, once it is found that the applicant satisfies the same, the exemption notification should be construed liberally [See
CIT v. DSM Group of Industries (SCC para 26); TISCO Ltd. v. State of Jharkhand (SCC paras 42 to 45); State Level Committee v. Morgandshammar India Ltd., Navopan India Ltd. v. CCE & Customs A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala and Reiz Electrocontrols (P) Ltd. v. CCE.] ’
In the case of G.P. Ceramics Pvt. Ltd. v. Commissioner Trade Tax, (2009) 2 SCC, 90, which has been referred in (2012) 10 SCC, page 421 it was considered in paras 15 & 16, it has been mentioned that the sole question which was considered by the Apex Court was as to whether land allotted in favour of industrial undertaking which was followed by execution of lease-deed, supply of a copy of letter of allotment will satisfy the statutory requirement of a registered leasedeed and the court found that the criteria was fulfilled and therefore the benefit of exemption for 10 years was granted in para 36 of the judgment. Para 29, at page 101, of the judgment is very important which fully applies in our case and is quoted below:
’29. It is now a well-established principle of law that whereas eligibility criteria laid down in an exemption notification are required to be construed strictly, once it is found that the applicant satisfies the same, the exemption notification should be construed liberally. [See CIT v. DSM Group of Industries (SCC para 26); TISCO Ltd. v. State of Jharkhand (SCC paras 42 to 45); State Level Committee v. Morgandshammar India Ltd., Navopan India Ltd. v. CCE & Customs A.P. Steel Re-Rolling Mill Ltd. v. State of Kerala and Reiz Electrocontrols (P) Ltd. v. CCE.] ’

Rule of ‘ejusdem generis’ or noscitur a sociis
The Rule is that the meaning of a general word is restricted by the special words appearing along
with it. To illustrate:
“If a man tells his wife to go to the market to buy vegetables, fruits, groceries and anything else she needs, the ‘anything else’ would be taken to mean food and grocery items due to the rule of ejusdem generis and not cosmetics or other feminine accessories.”
Thus, the meaning of a word must be taken by the company it keeps (Rule of noscitur a sociis).
In the case of CIT v. Raj Kumar [2009] 181 Taxman 155 (Del.) regarding Deemed dividend under Section 2(22)(e) of the Income-tax Act, 1961, the word ‘advance’, which appears in company of word ‘loan’ was interpreted. Section 2(22)(e) reads as:
“Any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) [made after the 31st day of May, 1987, by way of advance or loan to a shareholder, …….]
It was held that advance can only mean such advance which carries with it an obligation of repayment. A trade advance, which is in nature of money transacted to give effect to a commercial transaction, cannot be treated as ‘deemed dividend’ falling within ambit of provisions of Section 2(22)(e). Rule of noscitur a sociis was applied.

External aids to interpretation 
The Court may also use certain external aids like works of prominent authors, dictionaries, legislative debates, etc., to interpret a statute correctly.
Relevance of Finance Minister’s speech to interpret tax statutes: The words of the statute do themselves best declare the intention of the law given. It is only if there is any ambiguity in the language, in understanding the intention of the Legislature, that the aid can be taken of the proceedings in the Parliament including the aims and objects of the Act. Section 57 of the Evidence Act not only enables but enjoins the duty upon the Courts to take judicial notice of the course of proceedings in the Parliament. In Sole Trustee, Loka Shikshana Trust v. CIT [1975] 101 ITR 234 (SC), it was held that:
“if the real meaning and purpose of the words used cannot be understood at all satisfactorily reference can be made to the past history of legislation on the subject and the speech of the mover of the amendment who was, undoubtedly, in the best position to explain what defect in the law the amendment had sought to remove. If the reason given by him only elucidates what is also deducible from the words used in the amended provision, we do not see why we should refuse to take it into consideration as an aid to a correct interpretation.
Interpretation of a statutory provision is always a question of law on which the reasons stated by the mover of the amendment can only be used as an aid in interpretation if we think, as I do in the instant case, that it helps us considerably in understanding the meaning of the amended law. We find no bar against such a use of the speech.” (p. 252).
There is no bar in resorting to or referring to speech of FM. Interpretation of a statute being an exercise in the ascertainment of meaning, everything which is logically relevant should be admissible – Chunnilal Onkarmal (P.) Ltd. v. UOI [1996] 221 ITR 459 (MP); K. P. Varghese v. ITO [1981] 131 ITR 597 (SC); CIT v. M. K. Vaidya [1997] 224 ITR 186 (Kar.); CIT v. Export India Corporation (P.) Ltd. [1996] 219 ITR 461 (P&H); Ganji Krishna Rao v. CIT [1996] 220 ITR 654 (AP); Addl. CIT v. Sarvaraya Textiles Ltd. [1982] 137 ITR 369 (AP). Contrary decisions where it is held that FM’s Speech is not admissible: In the cases of CIT v. Bhandari Machinery Co. (P.) Ltd. [1998] 231 ITR 294 (Del.); Aswini Kumar Ghose v. Arabinda Bose AIR 1952 SC 369; State of Travancore, Cochin v. Bombay Company Ltd. AIR 1952 SC 366; CWT v. Yuvraj Amrinder Singh [1985] 156 ITR 525 (SC); B.R. Sound-n-Music v. O.P. Bhardwaj [1988] 173 ITR 433 (Bom.), it was held that:
“The speeches made by the members of the House in the course of the debates are not admissible as external aids to the interpretation of a statutory provision. A statute, as passed by Parliament, is the expression of the collective intention of the Legislature as a whole, and any statement made by the individual, albeit a Minister, of the intention and objects of the Act cannot be used to cut down the generality of the words used in the statute.
The Statement of Objects and Reasons, seeks only to explain what reasons induced the mover to introduce the Bill in the House and what objects he sought to achieve. But those objects and reasons may or may not correspond to the objective, which the majority of members had in view when they passed it into law. The Statement of Objects and Reasons appended to the Bill should be ruled out as an aid to the construction of a statute. Strictly speaking, even the speech of the Finance Minister and notes on Clauses do not lend support to the view taken by the Tribunal.” [Also see Express Newspapers (P.) Ltd. v. UOI AIR 1958 SC 578, para 173; State of West Bengal v. UOI AIR 1963 SC 1241, para 13].

Generalia Specialibus Non Derogant : General provisions must yield to the special provision
Generally speaking, the sections in the Act do not overlap one another and each section deals only with the matter specified therein and goes no further. If a case appears to be governed by either of two provisions, it is clearly the right of the assessee to claim that he should be assessed under the one, which leaves him with a lighter burden.
The literal meaning of the expression ‘Generalia Specialibus Non Derogant’ is that general words or things do not derogate from the special. The Courts have held the expression to mean that when there is a conflict between a general and special provision, the latter shall prevail as held in the cases of CIT v. Shahzada Nand and Sons 60 ITR 392 (SC) and UOI v. Indian Fisheries (P.) Ltd. AIR 1966 SC 35, or the general provisions must yield to the special provision.

[Source: Article published in souvenir of All India Taxclave held on 26th & 27th October, 2013 at Vadodara)

5 February 2014

Sum paid for copyright in a film for a term more than that stipulated in Copyright Act excludes it from term 'royalty'

Mrs. K. Bhagyalakshmi v. Dy. CIT (2013) 40 taxmann.com 350 (Madras)
Facts:
  • The assessee was carrying on business in the purchase and sale of Telugu films.  She had entered into an agreement for purchase of film rights and such rights were given for a period of 99 years; 
  • During assessment, the Assessing Officer (‘AO’) made additions on account of non-deduction of tax by assessee under Section 194J on the payments made for transfer of such rights; 
  • The AO made such addition on the ground that it was mere grant of satellite right in the movie produced by the assignor and the payments made for transfer of such rights fall within the meaning of "Royalty"; 
  • On appeal, the CIT(A) reversed the finding of AO. Further, the Tribunal upheld the disallowance made by AO. Aggrieved-assessee filed the instant appeal.
The High Court held in favour of assessee as under:
  • In terms of section 26 of the Copy Right Act, 1957, in the case of cinematographic film, copy right shall subsist until 60 years; 
  • Therefore, as the agreement was for more than 60 years (period for which copyright is valid), it could only be treated as sale and would fall within the exclusion from definition of royalty "sale, distribution or exhibition of cinematography film" in clause (v) to Explanation (2) to section 9(1); 
  • Therefore, the CIT(A) was justified in holding in favour of assessee and treating such transfer as sales.

Income Tax Notice

A notice from the Income Tax Department is every taxpayer's worst nightmare come true. However it need not be so. You should not panic if you get a tax notice. A majority of the notices is sent in the normal course of processing returns.
To start with, check whether the notice is really meant for you. The tax department issues notices according to PAN, not the name of the taxpayer. Also confirm its validity.

A notice under Section 143(3) for scrutiny assessment has to be served within six months of the end of the financial year in which the return was filed. If served later than this period, it will be considered invalid. If the notice comes by snail mail, preserve the envelope. It is proof of the dates on which it was posted and received.

However, the deadline can be longer in case of notices served under Section 148. Under this, the assessing officer can reopen a case up to six years from the end of the relevant assessment year if he has reasons to suspect income evasion. If the amount in question is less than 1 lakh, only returns that are up to four years old can be reopened.

Should you seek help from an expert when you get a notice? Even if the notice is simply about a factual matter, such as an arithmetical error, TDS mismatch or deduction amount or even if when it is a serious issue, such as a notice for scrutiny or reassessment under
Section 148, one should get a professional to respond.

Engaging a specialist would push up the compliance cost, but it would ensure that the matter is skillfully handled. A chartered accountant will be better equipped to deal with the situation and provide apt response.

A scrutiny notice may ask for several documents, including bank statements, pay-slips, rent receipts and brokerage statements. While it may not be possible to put all this together in the short time. it is important to convey your intent to the tax department.

Make sure you respond within the deadline. Send whatever documents you can get and request for more time. This will establish that your intention is to comply with the notice.

4 February 2014

Defects in panchnamas don’t affect validity of search, yet remedial steps are needed to avoid this practice: High Court

MDLR Resorts (P.) Ltd. v. Commissioner of Income-tax (2013) 40 taxmann.com 365 (Delhi)
Facts:
The present writ petitions were filed by petitioners contending that no panchnamas were drawn against them, their names were subsequently interpolated and mentioned in warrants of search and, thus, proceedings initiated under section 153A were void and bad for want of jurisdiction.
The High Court dismissed these petitions by holding as under:
  • The expression ‘panchnama’ has not been defined in the Act. As per the manual prepared by the Revenue relating to search and seizure operations, at the end of search or when it is temporarily concluded, a panchnama is required to be prepared or drawn. It is evidently clear that this document has considerable evidentiary value and should be prepared with care and caution; 
  • The panchnama should be exhaustive, should record all events in the same sequence in which they have occurred and should specify details like name of person against whom warrant was issued, time of temporary conclusion of search, etc. Panchnama should be prepared even in cases where nothing is found or seized in the search; 
  • There was certainly lapse and failure to comply with the requirements of search and seizure manual, as the panchnama did not contain names of petitioners and did not record any suspension of search; 
  • Even the obstruction and presence of third persons were not mentioned in the panchnamas. But this would not affect the validity of the search. However, the respondents had to take remedial steps and ensure that such lapses did not occur in future, otherwise similar allegations would be repeated, entailing litigation; 
  • This would curtail any allegation of interpolation, addition of names, etc. However, in the facts of the present case, we do not think that the lapse or failure in the panchnamas would affect the validity of the search or would nullify notice under section 153A of the Act. Thus, the instant writ petition was to be dismissed as contention of the petitioners had no merits and the same was to be rejected.