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Direct Tax Amicus March, 2019

Lakshmikumaran & Sridharan
MEMBER FIRM OF TerraLex

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India March 26 2019

The Income-tax Act, 1961, under Chapter VI-A, provides for certain special deductions. These special deductions have been subject matter oflitigation all along. One such provision is Section80HH, which provides for deduction in respect of profits and gains from newly established industrial undertakings or hotel business in backward areas.

In a recent judgment in the case of Vijay

Industries1, a three-judge bench of the Hon’ble

Supreme Court decided the issue as to whether

the deduction under Section 80HH is to be

calculated after deducting ‘depreciation’ and

‘investment allowance’ from profits and gains or

not. The Court held that the deduction under

Section 80HH is to be allowed on the ‘profit and

gains’ without applying the provisions of the Act

(‘Gross amount’) and not on profits and gains

computed as per the Act (‘Net amount’). The

relevant assessment years in this case were

assessment years 1979-80 and 1980-81.

In this case, the assessee had challenged

the judgment of division bench of Hon’ble

Supreme Court in Motilal Pesticides2, wherein in

respect of same section 80HH and for the same

assessment years, the Court had held that the

deduction is to be allowed on the net amount and

not on the gross amount. This ruling was being

1 Civil Appeal No. 1581-82/2005 (SC). 2 [2000] 160 CTR 389 (SC).

regularly followed by the department to compute

deduction under 80HH on net amount.

This article tries to analyse the legal position

existing prior to Vijay Industries judgment, and

the change in position brought by this judgment.

Position of law before Vijay Industries:

The provisions relating to special deductions

under chapter VI-A, heading “C- Deductions in

respect of certain income†have been interpreted

differently by the courts in India as discussed in

the following paragraphs. This part of the article

tries to discuss the interpretation given by the

courts to other provisions of Chapter VI-A and its

relevance in interpreting Section 80HH.

Interpretation of phrase “where the total

income (as computed in accordance with the

other provisions of this Act) includes any

profits and gainsâ€

In Cambay Electric Supply Industrial Co Ltd3,

the Supreme Court interpreted the above-

mentioned phrase in Section 80E, as it existed,

and held that the deduction is to be allowed on

the net amount, i.e. profits and gains after

deducting unabsorbed depreciation and

unabsorbed development rebate. The Court held

that since the total income is required to be

computed as per the provisions of the Act,

unabsorbed depreciation and unabsorbed

development rebate will have to be considered

for arriving at the amount eligible for deduction.

3 [1978] 113 ITR 84 (SC).

Article

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

3

DIRECT TAX AMICUS March, 2019

Interpretation of the phrase “where the gross

total income includes any income by way

of…..â€

In Cloth Traders4, the Supreme Court held

that the deduction under Section 80M in respect

of dividend is to be allowed on gross amount.

Court held that the opening words in the section,

namely, "Where the gross total income of an

assessee.......includes any income by way of

dividends from a domestic company" refer only to

the inclusion of the category of income by way of

dividends and not to the quantum of the income

included in the gross total income. Therefore, the

deduction is to be calculated with reference to the

whole amount of dividends. In this judgment, the

Court referred to some other provisions such as

80-K, 80-MM, 80N-, 80-O, etc. and noted that

deductions under these sections as well are on

the whole amount. However, it is to be noted that

the judgment of Cambay Electric Supply

Industrial Co. Ltd. was not discussed in Cloth

Traders.

Insertion of Section 80AA and 80AB

After the judgment of Cloth Traders, the

legislature inserted Section 80AA (applicable to

Section 80M) and 80AB (applicable to other

deductions) in Chapter VIA of the Act. Both these

sections provided that the deductions specified in

the aforesaid sections will be calculated with

reference to the net income as computed in

accordance with the provisions of the Act (before

making any deduction under Chapter VIA) and

not with reference to the gross amount of such

income. Section 80AA was inserted with

retrospective effect i.e. from 1st April, 1968

whereas 80AB was prospective in operation from

1st April, 1981 (from assessment year 1981-82

onwards).

4 [1979] 118 ITR 243 (SC).

Constitution bench in Distributors Baroda

The Constitution Bench of the Hon’ble

Supreme Court in Distributors Baroda5

overturned the decision of Cloth Traders and held

that the deduction in respect of Section 80M is to

be allowed on net amount and not gross amount.

The Supreme Court in this judgment did not

discuss the retrospectivity of Section 80AA, as it

was not necessary in view of its interpretation of

Section 80M.

The Court held that the condition for

applicability of Section 80M is that the gross total

income must include the income by way of

dividend. The deduction is to be made from 'such

income by way of dividends', and therefore, it is

elementary that 'such income by way of

dividends' from which deduction has to be made

must be part of the gross total income. The Court

held that it is not the full amount of dividend

which is included in the gross total income, but

what is included would only be the amount of

dividend as computed in accordance with the

provisions of the Act. Accordingly, the deduction

required to be made for computing the total

income from the gross total income can only be

from the amount of dividend computed.

Therefore, the deduction was to be allowed on

net amount and not gross amount. The court

rejected the interpretation of Cloth Traders that

the term ‘such income by way of dividends’ only

refers to category of income and not to quantum

of income.

After this judgment, section 80AA was

rendered superfluous.

However, in Motilal Pesticides, the question

came up whether the interpretation as provided in

Distributors Baroda in respect of Section 80M is

to be followed for the purposes of section 80HH

or not.

5 [1985] 155 ITR 120 (SC).

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

4

DIRECT TAX AMICUS March, 2019

The Court held that the language of Section

80HH and 80M was similar and following the

judgment of Distributors Baroda, the deduction is

to be allowed on the net amount. The Court held

that the interpretation of Distributors Baroda is

irrespective of Section 80AA. Further, the Court

noted that though Section 80AB was to have

prospective operation, similar to section 80 AA,

even Section 80AB is to be understood to have

been enacted to declare the law as it always

stood. Therefore, it was held that the deduction

was to be allowed on net amount.

Judgment of Vijay Industries and analysis

In this judgment, the Court held that Chapter

VI-A is a standalone chapter dehors Chapter IV

of the Act. Therefore, provisions relating to

various kinds of deductions mentioned therein

have to be construed independent of Chapter IV

of the Act. Further, the Court held that there is a

distinction between the concept of ‘income’ on

one hand and ‘profits and gains’ on the other

hand.

The Court held that the scheme of Chapter

VI-A which includes Sections 80C to 80U contain

different subject matters and also specify

particular percentage of deductions for a

particular period. Further, different provisions

from Sections 80C to 80U also specify as to how

such a deduction is to be worked out. The court

held that insofar as Section 80HH is concerned, it

specifically mentions deduction at the rate of 20%

of ‘profits and gains’. On reading of Section

80HH along with Section 80A, it is clear that such

a deduction has to be on gross profits and gains

i.e. before computing the income as specified in

Sections 30 to 43D of the Act.

The Court noted that the change in legal

position was brought by Section 80AB which is

prospective in operation and therefore not

applicable to relevant assessment years.

It may be noted that the judgment of Cambay

Electric Supply Industrial Co Ltd and Distributors

Baroda were referred to and discussed.

However, the same were distinguished on the

ground that the language of Section 80HH was

different from 80E and 80M.

The judgment of Distributor Baroda was

distinguished on the basis that it was a decision

on Section 80M which used the term ‘income by

way of dividend’, whereas 80HH uses the term

‘profit and gains’ and does not use term ‘income’.

However, one could always debate whether the

judgment of Supreme Court in Distributors

Baroda has been properly considered in Vijay

Industries.

In Distributors Baroda, while holding that the

deduction is to be allowed on net amount, the

Court interpreted the condition for applicability of

Section 80M, i.e. gross total income must include

income by way of dividend. The Court held that it

not only refers to category of income but also to

quantum of income. The Court held that what is

included in gross total income is the amount of

dividends computed in accordance with the

provisions of the Act. The judgment of Vijay

Industries unfortunately does not discuss this

point.

Be that as it may, section 80AB inserted with

effect from 1st April, 1981 seems to make it very

clear that deductions specified in Chapter VIA will

be calculated with reference to the net income as

computed in accordance with the provisions of

the Act (before making any deduction under

Chapter VIA) and not with reference to the gross

amount of such income. Therefore, the recent

judgment in the case of Vijay Industries may not

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

5

DIRECT TAX AMICUS March, 2019

have any impact on Chapter VIA deductions for

the period post 1st April, 1981.

However, this judgment is likely to have an

impact on the interpretation of various other

sections which grants exemptions or deductions

with reference to “profits and gains†of a business

or activity rather than the “income†therefrom.

May be the final verdict on this issue is yet to be

pronounced.

[The author is an Associate, Direct Tax

Team, Lakshmikumaran & Sridharan, Delhi]

Receipt of share premium by start-ups from certain resident investors not to attract Section 56(2)(viib)

The CBDT has issued Notification No. 13/2019,

dated 5-3-2019 stating that Section 56 (2)(viib)

would not apply to consideration received from a

resident who fulfils the conditions laid down in the

notification dated 19-2-2019 issued by DPIIT. As

per the notification issued by DPIIT, investment in

excess of fair market value of shares, by a

resident in a start-up company would not be

taxed as income in the hands of the company if it

fulfils conditions specified. The conditions

mentioned include, stipulation that the net worth

of the investor exceeds INR 100 crores or its

turnover in the previous year exceeds INR 250

crores, the aggregate of paid up share capital

and share premium received by the start-up

should not exceed INR 25 crores and also

restrictions on investment by the start-up in

certain assets.

Non-compete fee received by persons associated with transferor of business taxable as business income, not as capital gain

The assessee claimed that consideration

received by him for sale of ‘technical concept’

was not taxable since it pertained to sale of self-

generated asset with nil cost of acquisition and

hence capital gains could not be computed. The

assessee had entered into an agreement with his

‘employer’ (IFCo) who incurred expenses to

develop/commercially exploit a concept of

website malware monitoring developed by him.

No consideration was paid to the assessee for

providing the right, but as per the terms of the

agreement the company was allowed to exploit

the right manufacture or use in business the

concept/product without payment of royalty. The

Ratio Decidendi

Notification

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

6

DIRECT TAX AMICUS March, 2019

agreements further stated that if IFCo was not

able to commercialise the concept or it sold the

business within seven years, the reversionary

right to use the concept would revert to the

assessee. The product developed along with

certain other assets was sold to another

company (purchaser). The assessee also signed

a non-compete covenant whereby the assessee

agreed not to engage in any activity which would

compete with the business of the purchaser.

The CIT(A) upheld the reasoning of the AO that

since the assessee was an employee of IFCo at

time the concept was developed the employer

would own the same in terms of Section 17 (c) of

the Copyright Act 1957 and hence the assessee

claim that the consideration was for transfer of a

capital asset was incorrect. Further, the CIT (A)

concluded that the sum received by the assessee

was for ‘not carrying on any activity in relation to

any businesses under Section 28(va) (a) of the

Income Tax Act and hence was taxable as

revenue receipt. The CIT(A), following Dr. B.V

Raju (2012) 18 taxman.com 188 (Hyderabad)

(SB), held that non-compete fee paid to the

transferor of a business could be taxable under

capital gains but sums paid to persons

associated with the transferor to ensure that they

also do not indulge in competing business would

be taxable under Section 28(va)(a). The CIT(A)

Order was upheld by the Tribunal. [Ashish

Tandon v. ACIT, ITA No.: 1954/Ahd/ 2017, ITAT,

Ahd, Order dated 8-2-2019]

Assessee must have filed return in previous year in order to claim carry forward of loss

High Court of Bombay held that in order to be

eligible to carry forward loss of previous year, the

assessee must have filed a return of income

claiming such loss. In the case of the assessee, it

was incorporated as a trust in the US and later

converted to a LLC. The assessee had five

investment funds operating under a separate

PAN and sought to carry forward the loss of three

of the funds. It argued that since there was no

change in the status of the assessee as per the

laws of US which were the applicable law, it was

eligible to carry forward the loss as per Section

74 of the Income Tax Act, 1961. However, the

High Court upheld the reasoning of the AAR,

holding that while the status of the assessee

remained unchanged, it should also fulfil the

condition of having filed a return of income before

the due date as per Section 80 of the Income Tax

Act. Since the returns had been filed by the

investment funds and not the assessee, it was

not entitled to carry forward the loss. [Aberdeen

Institutional Commingled Funds v. AAR, DCIT,

WP 9358/2018, decision dated 8-3-2019]

Option price paid for right of first refusal is not taxable as business income

The revenue department argued that option price

received by the assessee in terms of a joint

venture agreement to co-promote insurance

business was taxable as business income in the

hands of the assessee. However, the assessee

contended that the transaction was in nature of

capital contribution and investment in shares was

not the business of the assessee. The said

agreement was entered into with a non-resident

company in view of the restriction on foreign

companies to enter the insurance business and

the clauses provided that in case the non-

resident was permitted to increase its stake, the

asesssee would offer shares to the non-resident

first. In consideration of this the non-resident had

paid a sum as option price to the assessee. The

option price was to be refunded at the time of

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

7

DIRECT TAX AMICUS March, 2019

transfer of shares to the non-resident. Thus, in

the years prior to the actual transfer of shares,

the sum was not offered to tax. The

Commissioner invoked his powers under Section

263 of the Income Tax Act, stating that the

assessment was erroneous and prejudicial to the

interest of Revenue. However, the ITAT set aside

the order of the Pr. CIT. [Dabur Invest Corp v.

Pr.CIT, ITA No. 1763/DEL/2018, ITA No.

1764/DEL/2018, ITAT, Delhi order dated 11-3-

2019]

Appeal proceedings against defunct company not infructuous

The departmental appeal before the jurisdictional

High Court was dismissed by terming it

‘infructuous’, on the sole ground that since the

assessee company’s name had been struck-off

from the Register of the Company u/s. 560(5) of

the Companies Act, 1956, it stands dissolved and

the issue need not be decided. The Apex Court

set aside the order of the High Court and

remanded the matter for fresh consideration on

merits, on the following grounds – (i) High Court

had overlooked Proviso to Section 560(5) of the

1956 Act that covers the liability of the Company

and its official after its dissolution under Sec.

560(5); (ii) High Court had failed to consider

Chapter XV of the Income Tax Act, 1961, which

deals with 'liability in special cases', wherein Sec.

176 specifically talks about ‘discontinuance of

business or dissolution’. Therefore, it was held

that considering the foregoing provisions, which

squarely cover the scenario in the facts of the

case, the High Court was incorrect in dismissing

the appeal. [CIT v. Gopal Shri Scrips Pvt. Ltd,

Civil Appeal No. 2922/2019, Supreme Court

judgement dated 12-2-2019]

Retrenchment expenses paid to out- going workmen upon closure of one out of the three manufacturing units is an allowable expense

The assessee was running three units for

manufacture of chemicals, wherein, all the units

had a single management. One of the units was

making huge losses and therefore the assessee-

company decided to close it, for the reason that it

would better facilitate carrying on of business of

the other units. Consequently, the loss-making

unit was closed and the out-going workmen were

paid retrenchment compensation as per the

contract with the labour union. This retrenchment

compensation and the other expenses relating to

the sale of the unit were disallowed by the AO for

being a capital expenditure, for AY 2004-05. The

Court held that, first; the retrenchment

compensation was necessitated for reason of the

closure of business and the employees being

sent out of employment. Second, assessee had

only a single management for all units and the

purpose of closure of the unit was that it was a

loss making unit and its sale would facilitate

carrying on of business of the other units, i.e. for

increasing business efficiency. Therefore, their

expenses are revenue expenses and thus

allowed under Section 37 of the Income Tax Act.

[CIT v. TCM Ltd., ITA No. 171 of 2011, Kerala

High Court judgement dated 12-2-2019]

Increase in general reserve post amalgamation is not taxable as income

Under a Composite Scheme of Arrangement and

Amalgamation the assessee company undertook

a restructuring of various entities within the

group. As per the Scheme various business

undertaking of the assessee were transferred to

SPVs by way of demerger, without consideration

and it was held by an entity which later

amalgamated with the assessee. The investment

held by the amalgamating company was

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

8

DIRECT TAX AMICUS March, 2019

recorded at market value and hence the balance

of general reserve increased. The department

argued that the increase was taxable as business

income in terms of Section 28(iv) of the Income

Tax Act. The assessee argued that the

legislative intent behind introduction of sub-

section (iv) to Section 28 was to tax real and

tangible benefit arising from a business or

profession. The ITAT held that amalgamation is

not a business transaction and increase in

general reserve on recording of investments does

not give rise to income. [Aamby Valley Ltd. v.

ACIT, ITAT, Mumbai Order dated 22-2-2019]

Section 56(2) (viia) does not apply to transfer of shares in amalgamation

The ITAT also held that Section 56(2) (viia)

cannot apply to transaction of amalgamation.

Referring to the Memorandum to the Finance bill,

2010, it stated that the objective of introducing

the section is to prevent the practice of

transferring unlisted shares and for a transfer

there must be a transferor and transferee and an

asset which is transferred. In case of

amalgamation, there is not transfer, rather there

is a statutory vesting and hence Section 56(2)

(viia) is not attracted. Also, the section is in

nature of an anti-abuse provision and would not

apply to court approved Schemes. [Aamby Valley

Ltd. v. ACIT, ITAT, Mumbai Order dated 22-2-

2019]

Amendment to Section 47(vii) is retrospective

The revenue department also argued that since

the words ’except when the shareholder itself is

the amalgamated company’ were inserted in

Section 47(vii) in 2012 and hence in transactions

prior to 2012, the assessee cannot take benefit of

the same and in absence of consideration being

paid, the transaction would not qualify as a tax

neutral transfer. However, the ITAT held that the

insertion was made only to make the provision

workable and the amendment would apply even

to transactions prior to 2012. [Aamby Valley Ltd.

v. ACIT, ITAT, Mumbai Order dated 22-2-2019]

Transfer of cases under Section 127 does not affect jurisdiction of High Court

The assessee preferred an appeal in High Court

of Bombay against the order passed by the

Bangalore Tribunal. The assessee’s case had

been transferred from Bangalore to Pune as per

Section 127 the Income Tax Act. It was argued

that transfer of case or ‘all proceedings under the

Act’ would cover appeals under the Income Tax

Act, before the High court. However, the High

Court held that the jurisdiction of High Court

would be decided based on the situs of the

tribunal passing the order and transfer of cases

under Section 127 of the Income Tax Act, cannot

apply to High Court which are constituted under

the Constitution and hence appeal against the

order of Bangalore Tribunal would lie in

Karnataka High Court. [Pr. CIT v. Sungard

Solutions (I) P Ltd, ITA 1142/2016, Bombay High

Court judgement dated 26-2-2019]

Extension of stay - Ratio in Asian Resurfacing (P) Ltd. not applicable when case adjourned not at instance of Assessee

The Assessee filed an application for stay

seeking extension of stay beyond 6 months. The

argument by the Assessee was that it has a

strong prima facie case on merits and that the

delay on disposal of the matter cannot be

attributed to the Assessee. The Assessee had

further argued that when the matter was first

posted, the Bench did not function, that on the

second occasion, the matter was adjourned for

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

9

DIRECT TAX AMICUS March, 2019

want of time and on the third occasion, the

Department sought an adjournment. The

Department placed reliance on the Apex Court

ruling in Asian Resurfacing of Road Agency

Private Limited and argued that in light of the said

ruling, stay beyond 6 months is not permissible

unless the Court, by an order in writing, grants

so, in exceptional circumstances. It was held that

since on all three occasions, the matter has been

adjourned not at the instance of the assessee,

stay extension application was to be allowed and

the stay was ordered to be extended for a further

period of 6 months or disposal of Appeal

whichever is earlier. It was also directed that the

assessee shall not seek time whenever the

matter is posted next for hearing. [Sheela Foam

Limited v. DCIT (TS-116-ITAT-2019 (Delhi

ITAT))]

Receipt from surrender of sub-tenancy rights would be a capital receipt

The assessee’s wife had taken the ground floor

and mezzanine floor of premises on rent. The

assessee was granted permission by his wife to

use the ground floor of the premises to carry out

his medical profession for which the assessee

paid periodical rents to his wife. The rentals

received were disclosed by the assessee’s wife

in her return of income. In FY 2013-14, the

assessee’s wife transferred her tenancy rights to

a third party for a consideration. Since the

assessee was a subtenant, he was also a

confirming party to the arrangement. The

assessee received a consideration of Rs.1.40

crores for transferring his occupational right in the

ground floor. It was held that sub-tenancy rights

would constitute a capital asset and the income

from transfer of the same would be taxable under

the head “Capital gainsâ€. [ACIT v. Jayesh

Kashrichand Shah (TS-118-ITAT (2019)-ITAT

Mumbai))]

Primary onus on the assessee to establish genuineness of the transaction and credit worthiness of the investor under Section 68

The assessee company has received certain

sums as share capital and share premium from

certain companies based in Mumbai, Kolkata and

Guwahati. The face value of the shares of the

Assessee Company was Rs.10. However, the

same was subscribed to by the investor

companies at a premium Rs.190 per share. To

establish the genuineness of the transaction and

to also enquire of the credit worthiness of the

investors, the department sent notices to the

investor companies. However, none of the

representatives of the investor companies

appeared in person. Further, the department,

upon perusing the return of income filed by the

companies and noted that very meagre return of

income was disclosed by these companies. The

department also observed that some of these

investor entities were non-existent. For these

reasons, the total amounts received by the

assessee company as share capital and share

premium was added to the total income of the

assessee company under Section 68. The CIT

(A) and the ITAT had deleted the disallowances

made on the ground that the assessee had

provided confirmations from the investor

companies and that the amounts were received

through normal banking channels. Before the

Apex Court, the question of law was whether the

Assessee had discharged its onus in establishing

the genuineness of the transaction as required

under Section 68 of the IT Act. It was held that

the onus is on the Assessee to establish the

genuineness of the transaction and that the

enquires made by the department clearly

revealed that the investors companies were

either non-existent or did not have sufficient

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

10

DIRECT TAX AMICUS March, 2019

sources to invest such huge sums in share

capital of the Assessee company and that it was

not demonstrated by the Assessee as to why

shares were subscribed to at a very high

premium. Therefore, it was held that the primary

onus has not been discharged by the Assessee

and the additions made under Section 68 of the

IT Act were justified. [PCIT v. N.R.A.Steel P

Limited (2019) 103 taxmann.com 48 (SC).

Price paid to sugarcane growers in excess of the minimum cane price fixed as per Sugarcane Control Order (1966) not allowable as a deduction.

The assessee a cooperative society was

engaged in the business of production and sale

of sugarcane. The assessment years in question

were AY 1996-97 and 1997-98 for which years

the Assessee was asked to explain as to why the

price paid in excess of what was fixed as

minimum cane price under the Sugar Control

Order, 1996, to sugarcane growers which

includes members of the society as also non-

members should not be disallowed as deduction.

The Assessee contended that the price paid was

as per the rate fixed by the Commissionerate of

Sugar for the State of Maharashtra which was in

turn decided based on Mantri Committee

guidelines. The tax authorities observed that

while the minimum cane price was payable as

per Clause 3 of the Sugar Control Order, Clause

5A of the said Order stipulated additional cane

price to be paid based on profitability of the

factory (society) and therefore such additional

price which is decided based on the profitability

would amount to distribution of profits and hence

not allowable as a deduction. It was held that

difference between the price payable as per

Clause 3 of the Order and Clause 5A of the order

comprises of an element of profit and to that

extent the difference constitutes profit element,

the same would amount to distribution of surplus

by the society and deduction would not be

permissible under Section 37(1). [CIT v. Tasgaon

Taluka S.S.K.Ltd (2019) 103 taxmann.com 57

(SC)]

Deduction under Section 80-IC available at 100% from 6th year onwards if substantial expansion is undertaken by the assessee

The assessee had set up a unit in the State of

Himachal Pradesh and had claimed deduction of

100% of profits, under Section 80-IC of the IT Act

for the first five assessment years. Thereafter

substantial expansion was carried out and

Assessee sought to claim 100% deduction from

the 6th Assessment year onwards. If such a

substantial expansion not been carried out, then,

the assessee would have been eligible to claim

deduction of only 25% of the profits under

Section 80-IC of the IT Act from the 6th to the 10th

Assessment year. The deduction was denied by

the department on the ground that there cannot

be two initial assessment years for the purposes

of claim of deduction under Section 80-IC of the

IT Act. Held, distinguishing the decision in

Classic Binding Industries, that the definition of

initial assessment year, as is given in subsection

(8) to Section 80IC itself contemplates a scenario

where there can be two initial assessment years

and that the cap in Section 80-IC is only on the

number of assessment years and not on the

quantum of deduction. Thus, the Apex Court held

that the Assessee can claim deduction of 100%

from the 6th year onwards till the end of the 10th

assessment year if substantial expansion is

carried out. [PCIT v. Aarham Softronics (2019)

102 taxmann.com 343 (SC)]

Provisions of Section 92BA would not apply in case of indirect shareholding

The assessee had purchased loans from HDFC

Ltd. where it had 16.39% stake and where its

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

11

DIRECT TAX AMICUS March, 2019

wholly owned subsidiary has 6.25% stake. The

department sought to apply the provisions of

Section 92BA on the ground that assessee

effectively held more than 20% shareholding in

HDFC Ltd. Section 92BA provides that any

expenditure in respect of which payment has

been made or is to be made to a person referred

in 40A(2)(b) will be considered as a specified

domestic transaction and subject to transfer

pricing. Section 40A(2)(b) covers any person who

has a substantial interest in the assessee will be

covered and substantial interest is defined to

mean beneficial ownership in shares carrying not

less than 20% of voting power. It was held that

the assessee owns only 16.39% shares in HDFC

Bank and if one were to say assessee is

beneficially holding the 6.35% shareholding in

HDFC Ltd., then, this would mean that assessee

is beneficial owner of shares held by HDFC

Investments which is contrary to the canon of

company law that shareholder cannot be

construed as legal and beneficial owner of

properties and assets of the company where it

holds shares (Bacha F.Guzdar [1955] 27 ITR 1

(SC)). It was further, the expression used in

Section 92BA is expenditure and purchase of

loans is not expenditure for the assessee rather it

is consideration paid for asset acquired and

hence the transaction would not fall under the

definition of Specified Domestic Transaction.

[HDFC Bank Limited v. CIT (2019) 306 CTR

(Bom) 189

Transit mixture enabling RMC to be kept wet during transportation is ‘plant’

At issue was the claim for depreciation at 30% by

the assessee, a manufacturer of Ready Mix

Concrete (RMC) in respect of vehicles on which

the transit mixer was mounted. The assessee

argued that the RMC manufactured at the factory

was to be transported to the sites and the transit

mixer mounted on the vehicles, was used to keep

the same wet by constant rotation. It was claimed

that the vehicles were to be treated as vehicles

used for hire since the contract for supply of RMC

was a composite one. Alternately it argued that

the transit mixer would qualify as plant since it

was used to complete the process of production

and would be eligible for additional depreciation.

ITAT did not accept the first contention as

regards the use of vehicles for hire since no

separate charges were received but agreed that

the assessee could claim higher depreciation on

the transit mixture since it qualified as a plant.

[Innovative Infrastructure P. Ltd v. DCIT, I.T.A.

Nos. 3425 & 3426/Ahd/2015, ITAT, Ahmedabad,

order dated 12-3-2019]

Expenses pertaining to previous year should be claimed at least on approximate basis: Assessee cannot plead impossibility in determining expenditure

The assessee was maintaining books on

mercantile basis and did not claim expenditure

related to legal fees in the previous year on the

plea that the amount was being negotiated and it

was finalised only in the following year. It also

argued that the deduction was tax neutral since

in either year the amount was otherwise

allowable and did not have an element of rate

arbitrage. However, ITAT held that the assessee’

s plea of expenses being indeterminable could

not be a ground to shift claim of deduction to the

following year since it would distort the

computation of profits and the assessee ought to

have claimed expenses on an approximate basis

and revised the same later. [Living Media India

Ltd. v. DCIT, ITA No.648/Del/2016, Order of

ITAT, Delhi dated 12-3-2019]

© 2019 Lakshmikumaran & Sridharan, India All rights reserved

12

DIRECT TAX AMICUS March, 2019

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