An Assessing Officer cannot interfere with a Transfer Pricing Officer’s finding that a transaction between related domestic parties is at arm’s length.

An Assessing Officer cannot interfere with a Transfer Pricing Officer’s finding that a transaction between related domestic parties is at arm’s length.

Issue

Can an Assessing Officer (AO) disregard the findings of a Transfer Pricing Officer (TPO) and make their own adjustment to the price of a Specified Domestic Transaction (SDT), especially when the TPO has already examined the transaction and found it to be at arm’s length?

Facts

• An assessee’s manufacturing unit was buying power from its own Captive Power Plant (CPP). This internal sale of power is a Specified Domestic Transaction (SDT) and the profit on it was claimed as a deduction under Section 80-IA.
• This transaction was referred to the Transfer Pricing Officer (TPO), who, after a detailed examination, concluded that the price was at arm’s length and that no adjustment was needed.
• However, the Assessing Officer (AO) disagreed with the TPO. The AO felt the price was too high, so he independently substituted a lower price and, as a result, reduced the assessee’s 80-IA deduction.

Decision

The court ruled in favour of the assessee.

• It held that once a reference has been made to the TPO under the law, the TPO’s determination of the Arm’s Length Price (ALP) is binding on the AO. The AO has no independent power to interfere with or ignore the TPO’s expert report.
• The court stated that the AO cannot adopt a “selective approach,” for example, by accepting the TPO’s report for international transactions but ignoring it for domestic transactions. The report must be accepted as a whole.

Key Takeways

1. The TPO is the Designated Expert: The Income-tax Act designates the TPO as the specialized authority for determining the arm’s length price of related party transactions. The AO’s role is to give effect to the TPO’s report, not to second-guess it.
2. A TPO’s Report is Binding on the AO: Unless the TPO’s order is properly challenged through the correct legal channels (e.g., by the assessee in an appeal or by the department through a revision), the Assessing Officer is bound by its findings and must incorporate them into the assessment order.

For the purpose of the disallowance under Section 14A, only those investments that have actually yielded exempt income during the year should be considered.

Issue

For the purpose of calculating the disallowance of administrative expenses under Rule 8D(2)(iii) of the Income-tax Rules, 1962, should the average value of investments include all investments owned by the taxpayer, or only those specific investments that yielded tax-exempt income during that year?

Decision

The court ruled in favour of the assessee. It held that it is a settled legal principle that only those investments which yielded exempt income during the relevant previous year can be taken into account when computing the average value of investment for the purpose of the 0.5% disallowance under Rule 8D(2)(iii).

Key Takeways

• The “Yielded Income” Rule: You can’t be said to have incurred an expense to earn an income that was never actually earned. Therefore, investments that did not generate any exempt income during a particular year must be excluded from the calculation for that year.
• A Settled Legal Position: This principle has been affirmed by numerous High Courts and was conclusively settled by the Supreme Court in the case of PCIT v. Caraf Builders & Constructions.

A taxpayer can make a fresh claim for a deduction for the first time at the appellate stage, and the rule of consistency should be applied for recurring issues.

Issue

Can a taxpayer make a fresh claim (for example, that a receipt is capital in nature and not taxable) for the first time during the appellate proceedings, and should the nature of a recurring receipt like a subsidy be decided based on precedents in the assessee’s own case?

Facts

• The assessee received two types of subsidies. During the assessment, they made a fresh claim that these subsidies were capital receipts and therefore not taxable. This claim was not made in their original or revised return.
• The AO refused to entertain this new claim. The Commissioner (Appeals), however, allowed it, both on the grounds that a fresh claim is permissible and on the merits that the subsidies were indeed capital in nature.
• A key fact was that the issue of whether these specific subsidies were capital or revenue had already been decided in the assessee’s favour in its own case for earlier assessment years.

Decision

The court ruled in favour of the assessee.

• It upheld the Commissioner (Appeals)’s power to entertain a fresh claim at the appellate stage.
• On the merits of the case, it applied the rule of consistency. Since the issue had already been settled by a coordinate Bench in the assessee’s own case in prior years on the same facts, there was no reason to take a different view. The subsidies were therefore held to be capital in nature and not taxable.

Key Takeways

1. Appellate Powers are Co-terminus: The first appellate authority has powers that are “co-terminus” with those of the AO. This means the Commissioner (Appeals) can do whatever the AO could have done, which includes considering a new claim for a deduction that the taxpayer is legally entitled to.
2. The Rule of Consistency: Tax authorities are expected to be consistent. If an issue has been decided in a particular way for a taxpayer in one year, the same decision should be followed in subsequent years, as long as the facts and the law have not changed.

The provisions of Section 14A of the Income-tax Act, 1961, which disallow expenses related to exempt income, do not apply when computing the “book profit” for the purpose of Minimum Alternate Tax (MAT).

Issue

Does the disallowance of expenditure that is calculated under Section 14A need to be added back when computing the “book profit” for MAT under Section 115JB?

Decision

The court ruled in favour of the assessee. It held that the provisions of Section 14A do not apply while computing book profit under Section 115JB. The calculation of book profit starts with the net profit as per the company’s profit and loss account and is subject only to the specific positive and negative adjustments that are listed in the explanation to Section 115JB. A disallowance calculated under Section 14A is not one of those specified adjustments.

Key Takeways

• A Settled Legal Position: This issue has been definitively settled by the Supreme Court in the case of Maxopp Investment Ltd. v. CIT.
• Two Separate and Distinct Computations: The computation of taxable income under the normal provisions of the Act and the computation of book profit under Section 115JB are two completely separate and parallel legal processes. The rules and disallowances of one do not automatically apply to the other.

The weighted deduction for R&D expenses under Section 35(2AB) of the Income-tax Act, 1961, was allowed based on the rule of consistency, even if the approval form was not furnished.

Issue

Can a weighted deduction for R&D expenses under Section 35(2AB) be disallowed for the non-furnishing of the approval form (Form 3CL), especially when this issue has been decided in the assessee’s favour in a prior year?

Facts

The assessee claimed a weighted deduction under Section 35(2AB). The Assessing Officer (AO) disallowed this claim on the procedural ground that the assessee had not entered into the required agreement and had not furnished Form 3CL, which is the certificate of approval from the DSIR.

Decision

The court ruled in favour of the assessee. It did not go into the detailed merits of the procedural requirement but instead applied the rule of consistency. It noted that this very same issue had been consistently decided in the assessee’s favour in its own case for earlier assessment years. Following that binding precedent, the claim was directed to be allowed.

Key Takeways

• The Rule of Consistency is a Powerful Argument: When the facts and the legal issue are identical to those in a prior year for the same assessee, and an appellate authority has already decided the issue in their favour, that decision should generally be followed in subsequent years unless the department can show a material change in the facts or the law.
• Substantive vs. Procedural Compliance: This ruling (by following precedent) suggests a lenient view, prioritizing the substantive fact that the R&D activity was likely approved over the procedural requirement of filing the form.

The balance of 50% of additional depreciation can be claimed in the succeeding year if the asset was used for less than 180 days in the year of acquisition.

Issue

Is a taxpayer entitled to claim the remaining 50% of the additional depreciation on a new asset in the immediately succeeding assessment year, if that asset was acquired and put to use for less than 180 days in the year of its acquisition?

Facts

The assessee had purchased new plant and machinery in the previous financial year (2013-14) and had put it to use for less than 180 days in that year. In that year, they correctly claimed half the allowable additional depreciation (10%). In the current year, they claimed the remaining balance of 10%. The Assessing Officer (AO) disallowed this claim, believing that the entire benefit had to be claimed in the first year or was lost.

Decision

The court ruled in favour of the assessee. It applied the rule of consistency, noting that this very issue had been decided in the assessee’s favour in the preceding year’s appeal. It upheld the clear legal position that the second proviso to Section 32(1)(ii) of the Act explicitly allows for the balance 50% of additional depreciation to be claimed in the immediately succeeding previous year.

Key Takeways

• A Clear Statutory Provision: The law itself explicitly permits the claim of the balance of additional depreciation in the next year. This is not a matter of interpretation but a clear statutory allowance.
• The “180 Days” Rule Explained: This rule is designed to be fair. It splits the benefit of additional depreciation over two years if the asset is used for only a short period in the year of its acquisition, ensuring that the taxpayer ultimately gets the full intended tax benefit.

An Assessing Officer cannot disallow depreciation in the current year on a component of an asset’s cost that was accepted and allowed to be capitalized and depreciated in prior years’ assessments.

Issue

Can an Assessing Officer disallow depreciation on a component of the cost of an asset (in this case, a capitalized unrealized forex loss) in the current year, if the AO’s own predecessor had accepted the capitalization of that component and had allowed depreciation on it in earlier assessment years?

Facts

• In a previous assessment year, the assessee had added an unrealized foreign exchange loss (related to a loan for acquiring the asset) to the value of its plant and machinery. It had then claimed depreciation on this enhanced value.
• The Assessing Officer in those earlier years had examined and allowed this claim.
• In the current year, a different AO took a different view. He held that an unrealized loss cannot be added to the block of assets as per Section 43A and disallowed the portion of the depreciation claim that was related to this forex loss component.

Decision

The court ruled in favour of the assessee.

• It applied the rule of consistency. It held that since the Assessing Officer himself (or his predecessor) had allowed the depreciation on the very same forex loss component in the earlier years, and that decision had become final, he was not justified in taking a different stand and making a disallowance in the current year on the same set of facts.

Key Takeways

• The Rule of Consistency Binds the Department: The tax department is expected to be consistent in its treatment of a particular issue for the same taxpayer over different years, as long as the facts and the law have not changed.
• The Sanctity of the Opening WDV: The Written Down Value (WDV) of a block of assets is carried forward from one year to the next. An AO in a later year cannot arbitrarily disturb the opening WDV by re-evaluating a decision that was taken and had become final in a prior year’s assessment.

The disallowance of expenditure under Section 40(a)(ia) of the Income-tax Act, 1961, is not applicable in cases of a “short deduction” of TDS; it only applies to a complete “non-deduction.”

Issue

Can a disallowance of expenditure be made under Section 40(a)(ia) in a case where the taxpayer has deducted tax at source, but at a rate that is lower than the rate prescribed by law (a “short deduction”)?

Facts

The assessee had deducted TDS on certain payments, but the rate of deduction was lower than what the Assessing Officer (AO) believed was the correct rate. The AO, treating this “short deduction” as a case of default, disallowed the entire corresponding expenditure of ₹86.59 lakhs under Section 40(a)(ia).

Decision

The Tribunal ruled in favour of the assessee.

• It held that the provisions of Section 40(a)(ia) are attracted only in a case of a complete failure to deduct any TDS whatsoever.
• The section does not apply to cases where there has been a short deduction of tax.
• The Tribunal followed the binding decisions of the Calcutta and Delhi High Courts, which had held that while a shortfall in the deduction of tax might attract other consequences (like being treated as an assessee-in-default under Section 201), it cannot result in the disallowance of the entire underlying expenditure under Section 40(a)(ia).

Key Takeways

• A Clear Legal Distinction: There is a crucial legal difference between “non-deduction” of tax (which means deducting zero tax) and “short deduction” of tax (which means deducting some tax, but less than the full required amount).
• The Limited Scope of Section 40(a)(ia): The harsh consequence of disallowing an entire expenditure under Section 40(a)(ia) is a deterrent that is meant to be used only against taxpayers who completely fail to comply with their TDS obligations. It is not intended for situations where the assessee has made an attempt to comply, even if there is a dispute about the correct rate of tax.

A genuine sale-and-lease-back transaction is a permissible form of tax planning, and the lease charges paid are an allowable expenditure unless the transaction is proven to be a sham.

Issue

Can the lease charges that are paid by a company under a “sale-and-lease-back” arrangement be disallowed on the grounds that the transaction is a colorable device designed for tax avoidance?

Facts

The assessee, a telecom company, had paid lease charges of ₹52.52 crores for the use of telecom infrastructure. This was part of a sale-and-lease-back arrangement. The Assessing Officer (AO) disallowed this entire expenditure, likely on the grounds that the transaction was not genuine and was merely a device to claim a deduction.

Decision

The Tribunal ruled in favour of the assessee.

• It relied on the established decisions of the Gauhati and Delhi High Courts, which had held that sale-and-lease-back transactions, if they are genuine commercial transactions, are a permissible part of tax planning and cannot be treated as a “colorable device.”
• The Tribunal noted that the revenue had not brought any cogent evidence on record to prove that the transaction was a sham or that it involved fraud or tax evasion.
• In the absence of such proof, the lease transaction was held to be genuine, and the disallowance of the lease charges was deleted.

Key Takeways

• Tax Planning vs. Tax Evasion: A taxpayer is fully entitled to arrange their financial affairs in a way that minimizes their tax liability, as long as they do so within the framework of the law. A genuine sale-and-lease-back is a legitimate commercial transaction and a form of tax planning. It is completely different from tax evasion, which involves illegal or fraudulent means.
• The Onus is on the Revenue to Prove a Sham: If the tax department wants to disregard a legally valid transaction and treat it as a sham or a colorable device, the burden of proof is heavily on them. They must provide specific and credible evidence to show that the transaction is not what it appears to be.

Depreciation on 3G spectrum rights is allowable as an intangible asset under Section 32 of the Income-tax Act, 1961, for assessment years prior to the introduction of the specific amortization provision in Section 35ABA.

Issue

For assessment years prior to 2017-18, is a telecom company entitled to claim depreciation on the right to use a 3G spectrum as an “intangible asset” under Section 32, or should the expenditure be amortized under the later-introduced Section 35ABA?

Facts

For the Assessment Year 2012-13, the assessee had acquired the right to use a 3G spectrum and claimed depreciation on it, treating it as an intangible asset under Section 32(1)(ii). The Assessing Officer (AO) disallowed this claim. The revenue department argued that with the insertion of Section 35ABA (which specifically provides for the amortization of spectrum fees) by the Finance Act, 2016, this new provision should be applied retrospectively to the assessee’s case.

Decision

The Tribunal ruled in favour of the assessee.

• It examined the explanatory notes to the Finance Act, 2016, which introduced Section 35ABA. These notes specifically provide that the amendment “shall take effect from 1st April, 2017 and will, accordingly, apply from the assessment year 2017-18 onwards.”
• This clearly showed that the insertion of Section 35ABA was prospective and substantive in nature, and was not intended to be applied retrospectively.
• Therefore, for the relevant year (AY 2012-13), the law as it stood at that time was applicable. Under that law, the right to use a spectrum was correctly considered an intangible asset that was eligible for depreciation under Section 32.

Key Takeways

• Amendments are Presumed to be Prospective: A new substantive provision in the tax law is always presumed to apply to future periods only, unless the legislature has explicitly and unambiguously stated that it should be applied retrospectively.
• Explanatory Notes are a Key Aid to Interpretation: The explanatory notes or memorandum that accompany a Finance Bill are a very valuable tool for understanding the legislative intent behind an amendment, including whether it is intended to be prospective or retrospective in its application.
• The Law as it Stood at the Time is What Matters: The taxability of any transaction or the availability of any deduction must always be determined based on the specific provisions of the law as they stood in the relevant assessment year.

The write-back of a liability that was originally incurred for the purchase of a capital asset is not a trading liability, and therefore, it is not taxable as income under Section 41(1) of the Income-tax Act, 1961.

Issue

Does the remission or cessation (write-back) of a liability that was originally incurred for the purchase of a capital asset result in taxable income under Section 41(1)?

Facts

The assessee had written back an amount of ₹2.33 crores in its books of account. This amount related to sundry creditors for the purchase of capital goods. The Assessing Officer (AO) treated this write-back as a cessation of a trading liability and taxed the amount as income under Section 41(1).

Decision

The Tribunal ruled in favour of the assessee.

• It relied on the binding judgment of the Supreme Court in the case of Commissioner v. Mahindra And Mahindra Ltd..
• In that landmark case, the Supreme Court held that the application of Section 41(1) is strictly restricted to the remission of “trading liabilities” only. A “trading liability” is one for which a deduction for an expenditure, loss, or liability was allowed to the taxpayer in a previous year.
• Since the liability in this case was for the purchase of capital goods (the cost of which is capitalized and not claimed as a revenue expense), it was not a trading liability.
• Therefore, the write-back of this capital liability could not be brought to tax under Section 41(1).

Key Takeways

• Section 41(1) Applies Only to Trading Liabilities: This is a settled legal principle. The section is specifically designed to tax an amount that was previously allowed as a business expense but is later found to be no longer payable. It does not apply to the remission of term loans or liabilities that were incurred for the purchase of capital assets.
• The “Deduction Previously Claimed” Test: A key test for the application of Section 41(1) is whether the assessee had obtained a deduction for the liability in a prior year’s computation of their business income. Since the cost of a capital asset is not deducted as a revenue expense (it is capitalized and depreciation is claimed), the essential condition for invoking Section 41(1) is not met.

An expenditure is deductible in the year in which the legal liability to pay it “crystallizes,” even if that expenditure relates to a prior performance period.

Issue

Can a deduction be claimed for a director’s commission that relates to the performance of prior years, if the legal liability to pay that commission only became final and binding on the company in the current assessment year?

Facts

The assessee-company claimed a deduction of ₹10 crores for a Director’s Commission. The Assessing Officer (AO) disallowed this, treating it as a “prior period expenditure” because it was related to the director’s performance in earlier years. The assessee, however, argued that although the commission was related to prior years, the legal liability to pay it only “crystallized” in the current year. This was because the payment required the approval of the company’s shareholders through a special resolution, as per the Companies Act, 2013, and this approval was obtained only in the current year.

Decision

The Tribunal ruled in favour of the assessee.

• It held that, even under the mercantile system of accounting, an expenditure is to be booked for tax purposes not necessarily when the service is rendered, but when the legal liability to pay for that service crystallizes and becomes a definite and enforceable obligation.
• In this case, the liability became a final, binding, and legally enforceable obligation only in the current year, after the shareholders’ approval was obtained.
• Therefore, it was an allowable expense for the current assessment year, and the AO’s disallowance was incorrect.

Key Takeways

• The Crystallization of Liability is the Deciding Factor: For an expense to be deductible under the mercantile system, the liability must “crystallize.” This means it must become a definite, present, and legally enforceable obligation. A contingent or provisional liability is not deductible.
• Conditions Precedent Delay Crystallization: If the payment of an expense is subject to a significant condition precedent, such as obtaining a mandatory shareholder or regulatory approval, the liability does not crystallize for tax purposes until that condition is fulfilled.
• “Prior Period Expenditure” vs. “Crystallization in Current Year”: There is a crucial difference between a true “prior period expense” (an expense that was simply forgotten to be booked in the correct prior year) and an “expense relating to a prior period that crystallizes in the current year.” The latter is a valid deduction in the year of crystallization.