Gist of cases reported in SOT 40

Tribunal cannot decide on issues which are not subject matter of appeal: In Linklaters LLP v. ITO (2010) 40 SOT 51 (Mum) it was held that the tribunal cannot increase the scope of subject matter of appeal as much as to make disallowance of an expenditure not made by the lower authorities nor make any addition of income, not made by the lower authorities. However, the tribunal can look into the subject matter of appeal and can examine any aspect of the matter regardless of whether it was examined by the lower authorities or not.

Section 194 H is not attracted in respect of principal- to-principal transactions: In ITO v. Mother Dairy Food Processing Ltd (2010) 40 SOT 9 (Del) the assessee entered into agreement with its concessionaires (vendors) for selling milk and milk products. The goods were sold to vendors at a price less than MRP on principal-to-principal basis. No commission was paid separately except the reduction in price from the MRP. The tribunal accordingly held that the transaction was not that of principal and commission agent and thus the provisions of section 194H were not attracted.

Time limit for imposition of penalty (Section 275):

In Silicon Graphics Systems (India) (P) Ltd v. Asstt. CIT (2010) 40 SOT 1 (Del) (URO) the tribunal analyzed the period of limitation prescribed in section 275 which is as under.

Category I
Cases were the relevant assessment or other order in the course of which action for imposition of penalty has been initiated is the subject matter of appeal before Commissioner or tribunal, which is governed by section 275(1)(a).

Time limit for imposition of penalty
(i) The financial year in which the proceedings in the course of which action for imposition of penalty has been initiated, are completed; or
(ii) Six months from the end of the month in which the order of the CIT (Appeals) or ITAT is received by the Chief Commissioner or the Commissioner
- whichever period expires later.

Category II
Where the relevant assessment order or other order is the subject matter of revision under section 263 or section 264 which is governed by section 275(1)(b).

Time limit for imposition of penalty:
Six months from the end of the month in which the order of revision is passed.

Category III
All other cases not falling in the preceding categories governed by section 275(1)(c).

Time limit for imposition of penalty:
(i) The financial year in which the proceedings in the course of which action for imposition of penalty has been initiated, are completed; or
(ii) Six months from the end of the month in which the action for imposition of penalty is initiated
- whichever period expires later.


Slump sale cannot be treated as itemized sale: In J.B.Electronics v. Joint CIT (2010) 40 SOT 176 (Pune) (TM) the assessee transferred its business unit as a going concern to its sister concern. The unit was transferred in a fully functional state along with assets, employees and all contracts. The amount excessively realized was credited to profit and loss account. It was claimed as exempt from tax (assessment year 1997-98 – during which section 50B was not inserted). The AO treated the difference as nothing but goodwill chargeable to tax and it was confirmed by CIT (Appeals). The tribunal held that when the assets were transferred on a going concern basis, it could not be regarded as itemized sale. Since it is a slump sale, it fell outside the provisions of section 50. Readers may note that presently section 50B provides for taxing such transactions (i.e. from assessment year 1998-99 onwards).

Payment for mere passing of information cannot be called as ‘royalty’: In ITO v. Patwa Kinariwala Electronics Ltd (2010) 40 SOT 148 (Ahd) it was held that royalty means consideration (including lump sum consideration) paid for imparting any information concerning working of or use of a patent, invention, model, design, secret formula or process or trademark or similar property. Mere passing of information concerning design of a machine which is tailor made to meet the requirements of a buyer will not amount to transfer of any right of exclusive user so as to term the payment made as “royalty”.

Liabilities in books of account could not be presumed as non-existent: In Nitin S.Garg v. Asstt. CIT (2010) 40 SOT 253 (Ahd) the AO made additions in respect of the amount shown as liabilities representing the expenditure incurred during the earlier years. The liabilities were to the extent of Rs.129.83 lakhs shown as subsisting on the opening date of the assessment year 2001-02. The AO made addition on the ground that the assessee had not given the details of the addresses of the parties and the details were not verifiable. He presumed that the liabilities claimed in respect of the expenditure incurred had ceased and was liable to be taxed under section 41(1). The Commissioner (Appeals) also confirmed the additions made by the AO. The tribunal held that the liabilities reflected in the balance sheet could not be treated as cessation of liabilities. Merely because the liabilities were outstanding for so many years, it could not be presumed that they ceased to exist. Section 41(1) is attracted only when there is cessation or remission of a trading liability. The AO had to prove that the assessee has obtained the benefits in respect of such trading liabilities by way of remission or cessation thereof. Accordingly, the tribunal decided the case in favour of the assessee.

Routers and switches to be classified as computer when they are used along with computer: In Dy.CIT v. Datacraft India Ltd (2010) 40 SOT 294 (Mum) (SB) it was held that the definition of the term ‘computer’ given in Information Technology Act, 2000 cannot be applied in the context of section 32. Accordingly, it was held that when routers and switches are used along with computer, their functions are integrated with computer. Accordingly, they are to be included in the block of “computer” for the purpose of determining the applicable depreciation rate.

Amounts receivable from clients by share broker are eligible for write off as bad debt: In Dy.CIT v. Shreyas S.Morakhia (2010) 40 SOT 432 (Mum) (SB) it was held that the amounts receivable by a share broker from the clients is a trading debt and thus any amount not realizable from clients when written off as bad debt, it is deductible.