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CIT v Gujarat Siddhi Cement Ltd (SC) - Investment Allowance under Sec 32-A of IT Act, 1961 Allowable on Subsequent Years' Cost Increases Attributable to Foreign Exchange Rate Fluctuations

In  CIT v Gujarat Siddhi Cement Ltd (SC),  the taxpayer had acquired Plant and Machinery,  the price of which was payable in foreign exchange.  During the previous year relevant to the Assessment Year 1993-94 (being a year subsequent to the  year of installation of the Plant and Machinery),  consequent to an adverse fluctuation in the rate of exchange,  the cost of the Plant and Machinery stood increased,  pursuant to the provisions of Section 43-A of the Income-tax Act, 1961 ("Act").  The taxpayer claimed the Investment Allowance under Section 32-A of the Act,  in respect of the increase in the cost of the Plant and Machinery.  This claim was negatived by the Assessing Officer for the reason that the Plant and Machinery had been installed in an earlier year and not in the year in which the increase in its cost had occurred.   In appellate proceedings,  while the Commissioner(Appeals) upheld the disallowance,  the Appellate Tribunal and the High Court directed acceptance of the taxpayer's claim. 

Upon the Revenue preferring an appeal to the Supreme Court,  the Court held that its decision in  CIT v Arvind Mills (1992 Supp (2) SCC 190)  was concerned with the allowability of the Development Rebate under Section 33 and not the Investment Allowance under Section 32-A and that, at the relevant time,  sub-section (2) of Section 43-A (omitted subsequently) specifically disentitled a taxpayer from claiming the Development Rebate in respect of cost increases attributable to foreign exchange  rate fluctuations. In effect,  the Court held that the ratio of Arvind Mills (supra) had no application to the Investment Allowance under Section 32-A and that,  accordingly,  the Investment Allowance could not be denied in respect of the increased cost,  even if such increased cost occurred in a year different from the year of installation of the relevant asset.

Vijay Ship Breaking Corpn & Ors v CIT (SC) -- Shipbreaking entitled to Deductions under Sections 80-HH & 80-I; Usance Interest NOT Subject to TDS under Section 195

By a judgment delivered on October 1,  2008,  in  Vijay Ship Breaking Corpn and Ors v CIT,  the Supreme Court of India has held as follows :

(1)   Profits derived from Shipbreaking are eligible for deductions under Sections 80-HH and 80-I of the Income-tax Act,  1961 ("Act").

(2)   Usance Interest paid to a non-resident is  NOT  subject to deduction therefrom of income-tax at source ("TDS") under Section 195 of the Act.

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CIT v Baby Marine Exports (SC) - Export House Premium Recd by Supporting Manufacturer Eligible for Sec 80-HHC Deduction

After what appears to be an eternity, there is some good news on the tax front for Indian exporters. In a judgment delivered on March 30, 2007 in the case of CIT v Baby Marine Exports [in Civil Appeals No 281-284 and 286 of 2006], the Supreme Court of India has held that "export house premium", received by a supporting manufacturer from a Trading House or an Export House which has exported goods manufactured by such supporting manufacturer, constitutes part of the profits derived by such supporting manufacturer from the sale of goods or merchandise to such Trading House or Export House, "..... because it is an integral part of business operation of the respondent which consists of sale of goods by the respondent to the export house.". Consequently, a supporting manufacturer is entitled to a deduction under Section 80-HHC in respect of such "export house premium".

Even more important are the following important determinations of the Court :

"Section 80HHC was incorporated with the object of granting incentive to earners of foreign exchange. This Court in Sea Pearl Industries v. CIT Cochin (2001) 2 SCC 33 also observed that the object of Section 80HHC is to grant incentive to earners of foreign exchange. In IPCA Laboratory Ltd. v. Dy. Commissioner of Income Tax, Mumbai reported in (2004) 12 SCC 742 this Court has taken the same view. This Court in the said judgment observed that Section 80HHC has been incorporated with a view to provide incentive to export houses and this Section must receive liberal interpretation.

In Bajaj Tempo Ltd. v. Commissioner of Income Tax, Bombay reported in (1992) 3 SCC 78, this Court while interpreting Section 15-C of the Income Tax Act, 1922 observed that the Section, read as a whole, was a provision, directed towards encouraging industrialization by permitting an assessee setting up a new undertaking to claim benefit of not paying tax to certain extent on the capital employed. Similarly, Section 80 HHC has also been incorporated to give incentive for the earners of the foreign exchange. We must always keep the object of the Act in view while interpreting the Section. The legislative intention must be the foundation of the court's interpretation."

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OECD's Report on "Improving the Resolution of Tax Treaty Disputes"

The Organisation for Economic Co-operation and Development ("OECD")'s Committee on Fiscal Affairs has, on January 30, 2007, adopted a Report titled "Improving the Resolution of Tax Treaty Disputes".

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CIT v Ralson Industries Ltd -- Supreme Court's Judgment on Sections 154 and 263 of Income-tax Act, 1961

             By its judgment delivered on January 4, 2007 in the case of CIT v Ralson Industries Ltd [ Appeal (Civil) No 10 of 2007 ], the Supreme Court of India has pronounced upon the validity of a revision initiated by the Commissioner of Income-tax under Section 263 of the Income-tax Act, 1961 for revising the Assessment Order made under Section 143(3) by the Assessing Officer, after the Assessing Officer has initiated and completed proceedings for rectification under Section 154 of that Assessment Order on the very points on which the revision has been initiated by the Commissioner.

2.         The facts of the case may now briefly be adverted to. In computing deductions claimed by it under Section 80-HHC and Section 80-I, the taxpayer apparently took into consideration transport receipts amounting to Rs 27,62,982 and interest receipts of Rs 1,41,878. The deductions so claimed were allowed by the Assessing Officer in his Assessment Order made under Section 143(3). Subsequently, the Assessing Officer issued a Notice to the taxpayer under Section 154, apparently proposing exclusion of the said two items of receipt in computing the two deductions. However, in the Order under Section 154, the Assessing Officer, after considering the taxpayer's response to the said Notice, did not disturb the deductions allowed in the Assessment Order. After the Order under Section 154 was made by the Assessing Officer, the Commissioner, by an Order made under Section 263, revised the Assessment Order by directing the Assessing Officer to exclude the said two items of receipt in computing the two deductions aforesaid.

3.         The taxpayer thereupon preferred an appeal to the Income-tax Appellate Tribunal against the Commissioner's Order under Section 263. The Tribunal allowed the appeal of the taxpayer, for the following reasons :

(i) The matter had to be decided against the Revenue in view of the judgment of the jurisdictional Madhya Pradesh High Court in CIT v Vippy Solvex Products Pvt Ltd [1997] 228 ITR 587 (MP).

(ii) The Order under Section 154 having been made upon due consideration of the assessee's explanation for having included the said two items of receipt in computing the said two deductions, the Commissioner lacked jurisdiction to make any order under Section 263.

4.         A reference to the Madhya Pradesh High Court at the instance of the Revenue was answered against the Revenue, the High Court holding, on the basis of its decision in Chunnilal Onkarmal Pvt Ltd [1997] 224 ITR 233 (MP), that no substantial question of law arose out of the order of the Appellate Tribunal.

5.         Upon the Revenue carrying the matter in appeal to the Supreme Court, the Supreme Court held as follows :

(i) "The scope and ambit of a proceeding for rectification of an order under Section 154 and a proceeding for revision under Section 263 are distinct and different...... When different jurisdictions are conferred upon different authorities to be exercised on different conditions, both may not be held to be overlapping with each other. An order of assessment may or may not be rectified. If an order of rectification is passed by the Assessing Authority, the rectified order shall be given effect to. However, only because an order of assessment has undergone recification at the hands of the Assessing Officer, in our opinion, the same would not mean that revisional authority shall be denuded of exercising its revisional jurisdiction. Such an interpretation, in our opinion, would run counter to the scheme of the Act." (emphasis supplied)

(ii) The Appellate Tribunal's reliance on Vippy Solvex Products's Case (supra) was misplaced.

(iii)"The decision of the Madhya Pradesh High Court in Chunnilal Onkarmal (supra) is also not apposite. Initiation of a proceeding under Section 263 of the Act cannot be held to have become bad in law only because an order of rectification was passed. No such hard and fast rule can, in our opinion, be laid down. Each case is required to be considered on its own facts. In a given situation, the High Court may be held to be entitled to set aside both orders and remit the matter for consideration of the matter afresh. But in our opinion, it would not be correct to contend that only because a proceeding for rectification was initiated subsequently, the revisional jurisdiction could not have been invoked under any circumstances whatsoever. If such a proceeding was initiated, in our opinion, the contesting parties could bring the same to the notice of the Commissioner so as to enable him to take into consideration the subsequent events also. It goes without saying that if and when the Commissioner of Income Tax takes up for consideration a subsequent event, the assessee would be entitled to make its submission also in regard thereto." (emphasis supplied)

6.         The judgment of the High Court was, accordingly, set aside by the Supreme Court, with the rider that the interests of justice would be met if the Commissioner was directed to have a fresh look at matter in the light of the the order of rectification passed by the Assessing Officer.