ITO Ward 5 (2), v. Mother Dairy Fruit & Vegetables Pvt Ltd,

ITA 397/DEL/2007 | 2003-2004
Pronouncement Date: 28-01-2011 | Result: Dismissed

Appeal Details

RSA Number 39720114 RSA 2007
Assessee PAN AACCM3174A
Bench Delhi
Appeal Number ITA 397/DEL/2007
Duration Of Justice 4 year(s) 4 day(s)
Appellant ITO Ward 5 (2),
Respondent Mother Dairy Fruit & Vegetables Pvt Ltd,
Appeal Type Income Tax Appeal
Pronouncement Date 28-01-2011
Appeal Filed By Department
Order Result Dismissed
Bench Allotted H
Tribunal Order Date 28-01-2011
Date Of Final Hearing 29-09-2010
Next Hearing Date 29-09-2010
Assessment Year 2003-2004
Appeal Filed On 24-01-2007
Judgment Text
IN THE INCOME TAX APPELLATE TRIBUNAL [ DELHI BENCH H DELHI ] BEFORE SHRI A. D. JAIN JM & SHRI K. D. RAN JAN AM I. T. APPEAL NO. 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 397 (DEL) OF 2007. ASSESSMENT YEAR : 2003-04. DY. COMMISSIONER OF INCOME-TAX M/S. MOTHER DAI RY FRUITS & VEG. PVT. LTD. CIRCLE : 5 (1) VS. P A T P A R G A N J N E W D E L H I. D E L H I 110 09 2. P A N / G I R N O. AAC CM 3174 A. A N D I. T. APPEAL NO. 395 (DEL) OF 2007. ASSESSMENT YEAR : 2003-04. THE INCOME-TAX OFFICER M/S. MOTHER DAIRY FOODS PROCESSING LTD. W A R D : 5 (2) VS. P A T P A R G A N J N E W D E L H I. D E L H I 110 0 92. P A N / G I R NO. AAD CM 0501 G. ( APPELLANTS ) ( RESPONDENTS ) ASSESSEE BY : SHRI S. D. KAPILA ADV.; S/SHRI R.R. MAURYA ADV.; KART IK BANSAL CA; & MS. CHARU KAPOOR; DEPARTMENT BY : SHRI AMRENDRA KUMAR SR . D. R.; O R D E R. PER K. D. RANJAN AM : THESE THREE APPEALS BY THE REVENUE IN THE CASE OF T WO DIFFERENT ASSESSEES FOR ASSESSMENT YEAR 2003-04 ARISE OUT OF SEPARATE ORDER S OF THE LD. COMMISSIONER OF INCOME-TAX (APPEALS)VIII NEW DELHI. 2 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . 2. FIRST WE WILL TAKE UP THE REVENUES APPEALS IN I TA. NOS. 395 & 397 (DEL) OF 2007. EXCEPT DIFFERENCE IN FIGURES THE ISSUE INVOLVED IN THESE APPEALS IS IDENTICAL. THE GROUNDS OF APPEAL ARE REPRODUCED AS UNDER:- WHETHER ON THE FACTS AND IN THE CIRCUMSTANCE S OF THE CASE THE LD. CIT (APPEALS) WAS JUSTIFIED IN DELETING DISALLOWANCE OF RS.19 17 202/- BEING SALARY PAID TO NON-RESIDENT STAFF OUTSIDE INDIA UNDER SECT ION 40(A)(III) WITHOUT APPRECIATING THE FACT THAT : (I) SECTION 40(A)(III) CLEARLY SPELLS OUT THAT A NY PAYMENT WHICH IS CHARGEABLE UNDER THE HEAD SALARIES IF PAYABLE OUTSIDE INDIA AND IF THE TAX HAS NOT BEEN PAID THEREON WILL NOT BE ELIGIBLE FOR GETTING DEDU CTION; (II) IN THE INSTANT CASE THE SALARIES HAVE BEEN PAID OUTSIDE INDIA BY THE ASSESSEE BUT THE ASSESSEE HAS NOT DEDUCTED TAX AT S OURCE; (III) THE PERMANENT ESTABLISHMENT OF THE ASSESSEE LIES IN INDIA AND THE BUSINESS OF THE ASSESSEE OVER-WHELMINGLY IS RUN IN INDIA AND THUS SALARY PAID BY THE COMPANY TO THE NON-RESIDENTS OUTSIDE INDIA C AN BE DEEMED TO ARISE AND ACCRUE IN INDIA; (IV) THE FAILURE TO DEDUCT TAX ON INTEREST PAID O UTSIDE INDIA UNDER SIMILAR CIRCUMSTANCES HAS BEEN HELD TO BE COVERED UNDER SEC TION 409A) IN CIT VS. VIJAY SHIP BEAKING CORPN. (2003) 261 ITR 113 (GUJ.) . 3. THE ONLY COMMON ISSUE FOR CONSIDERATION IN THE CASE OF M/S. MOTHER DAIRY FOODS PROCESSING PVT. LTD. AND IN THE CASE OF M/S. MOTHER DAIRY FRUITS AND VEG. PRODUCTS LTD RELATES TO DELETING THE DISALLOWANCE OF RS.19 17 202/- AND RS.4 73 864/- RESPECTIVELY BEING SALARY PAID TO NON-RESIDENT STAFF OUTSIDE INDIA. THE FACTS OF THE CASE STATED IN BRIEF ARE THAT THE ASSESSEES PAID SALARY TO STAFFS AT NETHERLAND WHO WERE RESIDENTS OF NETHERLAND. BOTH THE ASSESSEES DID NOT DEDUCT TAX AT SOURCE ON THE SALARY PAYMENTS MADE TO STAFF AT NETHERLAND. DURING THE COURSE OF ASSESSMENT PROCEEDINGS THE ASSESSEE WAS ASKED TO SH OW CAUSE AS TO WHY THE REMITTANCE OF RS.19 17 202/- AND RS.4 73 864/- SHOULD NOT BE DIS ALLOWED UNDER PROVISIONS OF SECTION 40(A)(III) OF THE ACT AS TDS ON THESE AMOUNTS HAVE NOT BEEN DE DUCTED. IT WAS SUBMITTED BY THE ASSESSEE THAT THE SALARY PAYMENTS WERE NEITHER RECEIVED NOR DEEMED TO HAVE BEEN RECEIVED IN INDIA. THE SALARY WAS ALSO NOT EARNED IN INDIA AS SERVICES HAV E BEEN RENDERED OUTSIDE INDIA. SINCE THE SALARY WAS NOT TAXABLE IN INDIA THE ASSESSEE WAS N OT REQUIRED TO DEDUCT TAX AT SOURCE. HOWEVER 3 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . THE ASSESSING OFFICER HAS TAKEN A VIEW THAT AS PER PROVISIONS OF SECTION 40(A)(III) OF THE ACT WHERE ANY PAYMENT WHICH IS CHARGEABLE UNDER THE HEAD SAL ARIES AND IS PAYABLE OUTSIDE INDIA AND NO TAX HAS BEEN PAID THEREON NOR DEDUCTED THERE-FROM UNDER CHAPTER XVII-B SHALL NOT BE ALLOWED AS DEDUCTION WHILE COMPUTING PROFITS AND GAINS OF B USINESS. THEREFORE THE LD. ASSESSING OFFICER WAS OF THE VIEW THAT ANY SALARIES WHICH WAS PAYABLE IN INDIA AND ON WHICH TDS HAS NOT BEEN MADE WILL NOT BE ELIGIBLE FOR DEDUCTION FOR THE COM PUTATION OF PROFITS OF BUSINESS OF THE ASSESSEE. THE ASSESSING OFFICER THEREFORE DISALLOWED THE CL AIM OF RS.19 17 202/- IN THE CASE OF M/S. MOTHER DAIRY FOODS PROCESSING PVT. LTD. AND RS .4 73 864/- IN THE CASE OF M/S. MOTHER DAIRY FRUITS & VEG. PVT. LTD. 4. ON APPEAL THE LD. CIT (APPEALS) FOLLOWING HIS DE CISION FOR ASSESSMENT YEAR 2002-03 HELD THAT SIMILAR DISALLOWANCE MADE BY THE ASSESSING OFF ICER WAS ALLOWED BY HIM VIDE ORDER DATED 6/12/2005. HE THEREFORE DELETED THE ADDITION MAD E BY THE ASSESSING OFFICER IN THE CASE OF BOTH THE ASSESSEES. 5. BEFORE US THE LD. SR. DR SUBMITTED THAT ITAT IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 IN ITA. NO. 884 (DEL) OF 2007 HAS HELD THAT THE PROVISIONS OF SECTION 40(A)(I) AND 40(A)(III) ARE ANALOGOUS IN VIEW OF THE RATIO OF TH E DECISION OF ITAT DELHI BENCH D IN THE CASE OF VAN OORD ACZ INDIA PVT. LTD. VS. ACIT IN ITA. NO . 2126 (DEL) OF 2007 DATED 30 TH NOVEMBER 2007 FULLY APPLIES TO THE FACTS OF THE ASSESSEES CASE. THEREFORE THE ARGUMENT OF THE ASSESSEE THAT IF THE PAYMENT OF SALARIES MADE OUTSI DE INDIA WERE NOT LIABLE TO TAXATION THE ASSESSEE WAS NOT LIABLE TO DEDUCT TAX AT SOURCE AND NO DISALLOWANCE COULD BE MADE UNDER SECTION 40(A)(III) OF THE ACT IS LIABLE TO BE REJECTED AND THE SAME WAS REJECTED AS SUCH. IN CIT VS. VIJAY SINGH BROKING CORPORATION 261 ITR 113 HONBLE GUJA RAT HIGH COURT ON IDENTICAL ISSUE HAS HELD THAT AS THE ASSESSEE DID NOT DEDUCT TAX AT SOURCE U NDER SECTION 195(1) OF THE ACT ON INTEREST PAYABLE OUTSIDE INDIA OR ON WHICH TAX HAD NOT BEEN PAID THE ASSESSEE WAS NOT ENTITLED TO DEDUCTION UNDER SECTION 40(A)(I) OF THE ACT. IN TH E CASE OF VAN OORD ACZ INDIA PVT. LTD. VS. ACIT (SUPRA) IT HAS BEEN HELD THAT ON A COMBINED RE ADING OF PROVISIONS OF SECTION 40(A)(I) AND 4 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . SECTION 195 OR 197 OF THE ACT IT WAS CLEAR THAT WH ERE DEDUCTION OF TAX WAS REQUIRED TO BE MADE UNDER SECTION 195(1) IT COULD NOT BE AVOIDED UNLES S NIL DEDUCTION OR DEDUCTION AT LOWER RATE WAS AUTHORIZED BY THE ASSESSING OFFICER UNDER SECTI ON 195(3) OR SECTION 197. IF INCOME TAX WAS NOT DEDUCTED AT SOURCE FROM PAYMENTS OF SUCH SUMS T HE AMOUNT WAS NOT DEDUCTIBLE. THE PAYER WAS NOT EXPECTED TO STEP INTO THE SHOES OF THE ASSE SSING OFFICER FOR EXAMINING WHETHER THE RECEIPTS IN THE HANDS OF THE RECIPIENTS WERE INCOME OR NOT AND WHETHER HE WAS LIABLE TO PAY TAX THEREON OR NOT. THE REIMBURSEMENTS OF CHARGES / PA YMENT TO ASSESSEE WERE LIABLE TO TAX IN INDIA. THEREFORE THE ASSESSEE WAS REQUIRED TO DEDUCT TAX AT SOURCE AND SINCE THE ASSESSEE HAD NOT DEDUCTED TAX AT SOURCE THE ASSESSEE WAS NOT ENTITL ED FOR DEDUCTION OF SALARIES PAID OUTSIDE INDIA UNDER SECTION 40(A)(III) OF THE ACT. 6. ON THE OTHER HAND LD. AR OF THE ASSESSEE HAS SU BMITTED THAT THE TRIBUNAL HAD UPSET THE FINDINGS OF THE LD. CIT THAT WHERE PAYME NT INVOLVED WAS NOT CHARGEABLE TO TAX IN INDIA UNDER THE HEAD SALARIES THERE WAS NO NEED F OR THE ASSESSEE COMPANY TO DEDUCT TAX AT SOURCE. HE FURTHER SUBMITTED THAT THE DECISION OF THE TRIBUNAL IN THE CASE OF VAN OORD ACZ INDIA (SUPRA) HAD BEEN OVER-RULED BY HONBLE DE LHI COURT ( 323 ITR 130). HE FURTHER SUBMITTED THAT SPECIAL BENCH OF THE ITAT IN THE CAS E OF PRASAD PRODUCTION [3 ITR TRIB. 58] HAS HELD THAT IT IS ONLY WHEN THE REVENUE ESTABLISH ES THAT THE SUM PAYABLE TO THE NON-RESIDENT IS TAXABLE UNDER THE PROVISIONS OF THE ACT THE PRO VISIONS OF SECTION 40(A)(I) CAN BE INVOKED. THIS PROPOSITION OF LAW HAS BEEN APPROVED BY THE HONBLE SUPREME COURT IN THE CASE OF GE INDIA TECHNOLOGY CENTRE (P) VS. CIT DATED 09.09.2010. S INCE THE DECISION OF THE TRIBUNAL IN THE CASE OF VAN OORD ACZ LTD(SUPRA) HAD BEEN OVER-RULED BY T HE HONBLE DELHI HIGH COURT WHICH WAS RELIED UPON BY THE TRIBUNAL IN ASSESSEES OWN CASE FOR ASSESSMENT YEAR 2002-03 THE SAME CANNOT BE RELIED UPON IN THE YEAR UNDER CONSIDERATION. HE FURTHER SUBMITTED THAT HONBLE SUPREME COURT IN THE CASE OF CIT VS. ELI LILLY & CO. P. LTD . 312 ITR 225 (SC) HAS LAID DOWN THAT THE LIABILITY OF PAYER TO DEDUCT AT SOURCE UNDER SECTIO N 192 OF THE ACT ARISES ONLY IF SUCH PAYMENT IS TAXABLE UNDER THE HEAD SALARIES. HE HAS FURTHER SUBMITTED THAT SECTION 195 CATEGORICALLY EXCLUDES INCOME CHARGEABLE UNDER THE HEAD SALARIES FROM ITS PURVIEW. ON THE OTHER HAND DEDUCTION AT SOURCE ON INCOME CHARGEABLE UNDER THE HEAD SALARIES IS COVERED BY PROVISIONS OF SECTION 192 WHICH ARE QUITE DIFFERENT FRO M SECTION 195. THE TRIBUNAL WHILE 5 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . DECIDING THE ISSUE IN ASSESSMENT YEAR 2002-03 HAD M ADE NO REFERENCE TO THESE PROVISIONS. HE FURTHER SUBMITS THAT PROVISIONS OF SECTION 40(A)(I) OF THE ACT HAS TO BE READ ALONG WITH PROVISIONS OF SECTION 195(1) AND SECTION 9(1)(I). ON THE OTHE R HAND SECTION 40(A)(III) HAS TO BE READ ALONG WITH SECTION 192 AND SECTION 9(1)(II) AND (III) AND EXPLANATION THERETO. HE FURTHER SUBMITTED THAT THE DECISION OF ITAT IN ASSESSMENT YEAR 2002-03 HAS GIVEN ITS DECISION WITHOUT NOTICING THE RELEVANT PROVISIONS OF SECTION 9 WHICH SPECIFICALL Y EXCLUDE FROM ITS PURVIEW PAYMENT OF SALARIES TO NON-RESIDENT EMPLOYEES RENDERING SERVICES OUTSI DE INDIA. AS PER PROVISIONS OF SECTION 9(1)(II) INCOME WHICH FALLS UNDER HEAD SALARIES SHALL BE D EEMED TO ACCRUE OR ARISE IN INDIA IF IT IS EARNED IN INDIA. EXPLANATION TO SECTION 9(1)(II) P ROVIDES THAT THE INCOME OF NATURE REFERRED TO IN CLAUSE (II) OF SECTION 9(1) FOR SERVICES RENDERED I N INDIA AND THE REST PERIOD OR LEAVE PERIOD WHICH IS PRECEDED AND SUCCEEDED BY THE SERVICES RENDERED IN INDIA AND FORMS PART OF THE SERVICE CONTRACT OF EMPLOYMENT SHALL BE REGARDED AS INCOME EARNED IN INDIA. CLAUSE (III) OF 9(1) TAKES INTO AMBIT THE INCOME CHARGEABLE UNDER THE HEAD SA LARIES PAYABLE BY A GOVT. TO A CITIZEN OF INDIA FOR SERVICES RENDERED OUTSIDE INDIA. IT HAS BEEN SUBMITTED THAT THE ADMITTED POSITION IS THAT THE ASSESSEE HAS A BRANCH OFFICE IN NETHERLAND. TH E BRANCH OFFICE RECEIVES REMITTANCE IN INDIA THROUGH BANKING CHANNELS. THE REMITTANCE BEING TO SELF SECTION 195 DOES NOT APPLY. THE BRANCH OFFICE PAYS SALARY TO ITS EMPLOYEES IN NETHERLAND. THE NON-RESIDENT EMPLOYEE RENDER SERVICES OUTSIDE INDIA. THE ASSESSEE IS A PVT. COMPANY AND NOT A GOVT. COMPANY. THEREFORE CLAUSE (III) OF SECTION 9(1) WILL NOT APPLY TO THE CASE OF THE A SSESSEE. HE FURTHER SUBMITTED THAT C.B.D.T.IN CIRCULAR NO. 586 DATED 28-11-1980 STATES THAT IN A CASE WHERE NON-RESIDENT EMPLOYEES RECEIVES SALARY FOR SERVICES RENDERED OUTSIDE INDIA IS NOT T AXABLE IN INDIA AND THEREFORE EMPLOYER NEED NOT DEDUCT TAX AT SOURCE. THEREFORE THE SALARIES P AID TO NON-RESIDENT EMPLOYEES FOR SERVICES RENDERED TO BRANCHES OUTSIDE INDIA ARE NOT CHARGEAB LE TO TAX UNDER THE HEAD SALARIES AND THEREFORE PROVISIONS OF SECTION 40(A)(III) READ WI TH 192 ARE NOT ATTRACTED. HE FURTHER SUBMITTED THAT IT IS ALSO NO ANYBODYS CASE NOR INDEED IT CAN BE THAT MONEYS REMITTED BY ASSESSEE COMPANY TO ITS BRANCH OFFICE IN NETHERLANDS TO MEET ITS OFF ICE EXPENSES WILL BE TAXABLE UNDER PROVISIONS OF THE ACT. BASED ON THESE ARGUMENTS IT HAS BEEN SUB MITTED THAT THE DECISION OF THE TRIBUNAL IN ASSESSEES OWN CASE IS NOT RELEVANT FOR THE YEAR UN DER CONSIDERATION. HE FURTHER RELIED ON THE DECISION OF HONBLE ANDHRA PRADESH HIGH COURT IN TH E CASE OF COROMANDEL FERTILIZERS 187 ITR 6 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . 673 (AP) AND THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF ELLY LILLY CO. (SUPRA). ON THE OTHER HAND THE LD. SR. DR SUPPORTED THE ORDER OF THE ASSESSING OFFICER. 7. WE HAVE HEARD BOTH THE PARTIES AND PERUSED THE M ATERIAL AVAILABLE ON RECORD. UNDER SECTION 40(A)(III) ANY PAYMENT WHICH IS CHARGEABLE UNDER THE HEAD SALARIES IF IT IS PAYABLE OUTSIDE INDIA AND IF THE TAX HAS NOT BEEN PAID THER EON NOR DEDUCTED THERE-FROM UNDER CHAPTER XVII-B SHALL NOT BE ALLOWED AS DEDUCTION IN COMPUTI NG THE PROFIT AND GAINS OF BUSINESS OR PROFESSION. THEREFORE FOR THE APPLICABILITY OF PR OVISIONS OF SECTION SECTION 40(A)(III) OF THE ACT THE PAYMENT SHOULD BE CHARGEABLE TO TAX UNDER THE H EAD SALARIES. ADMITTEDLY THE PAYMENT OF SALARIES HAS BEEN MADE BY THE ASSESSEE FOR THE SERV ICES RENDERED OUTSIDE INDIA TO NON-RESIDENTS. SECTION 192 OF THE ACT PROVIDES THAT ANY PERSON RES PONSIBLE FOR PAYING ANY INCOME CHARGEABLE UNDER THE HEAD SALARIES SHALL AT THE TIME OF PAYM ENT DEDUCT INCOME-TAX ON THE AMOUNT PAYABLE AT THE AVERAGE RATE OF INCOME-TAX COMPUTED ON THE B ASIS OF THE RATES IN FORCE FOR FINANCIAL YEAR IN WHICH THE PAYMENT IS MADE. THE PROVISIONS OF CLAUSE (II) OF SECTION 9(1) DEALS WITH THE INCOME UNDER THE HEAD SALARIES IF IT IS EARNED IN INDIA. ITS IMPORTANCE LIES IN ITS DISCARDING THE TEST OF SOURCE IN FAVOUR OF EARNING TEST IN THE IMPOSITION OF CHARGE OF INCOME UNDER THE HEAD SALARY. THE RESULT OF THIS PROVISION IS THAT THE PLACE OF P AYMENT OR RECEIPT OF SALARY IS IMMATERIAL. IF THE SALARY IS EARNED IN INDIA THAT IS BY DINT OF SERV ICE RENDERED IN INDIA IT IS DEEMED TO ACCRUE OR ARISE IN INDIA AND IS TAXABLE WHERESOEVER THE SALAR Y MAY HAPPEN TO BE PAID OR STIPULATED TO BE PAID BY THE SERVICE CONTRACT. IN THE INSTANT CASE THE SERVICES HAVE NOT BEEN RENDERED IN INDIA BUT IN NETHERLANDS. HONBLE DELHI HIGH COURT IN THE CA SE OF VAN OORD ACZ INDIA P. LTD. (SUPRA) HAS HELD THAT LIABILITY TO DEDUCT TAX AT SOURCE ARI SES ONLY WHEN THE SUM PAID TO THE NON-RESIDENT WAS CHARGEABLE TO TAX IN INDIA. ONCE THAT WAS CHAR GEABLE TO TAX IT WAS NOT FOR THE ASSESSEE TO FIND OUT HOW MUCH AMOUNT OF RECEIPT WAS CHARGEABLE TO TAX BUT IT WAS THE OBLIGATION OF THE ASSESSEE TO DEDUCT THE TAX AT SOURCE ON THE ENTIRE SUM PAID BY HIM TO THE RECIPIENT. UNDER SECTION 195 OF THE ACT THE OBLIGATION TO DEDUCT TA X AT SOURCE WAS ATTRACTED ONLY WHEN THE PAYMENT WAS CHARGEABLE TO TAX IN INDIA. 7 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . 8. HONBLE SUPREME COURT IN THE CASE OF ELLY LILLY CO. P. LTD. (SUPRA) HAS HELD THAT THE PURPOSE OF PROVISIONS FOR DEDUCTION OF TAX AT SOURC E IN CHAPTER XVII-B OF THE INCOME-TAX ACT 1961 IS TO SEE THAT FROM THE SUM WHICH IS CHAR GEABLE UNDER SECTION 4 FOR LEVY AND COLLECTION OF INDIAN TAX THE PAYER SHOULD DEDUCT T AX AT THE RATES IF THE AMOUNT IS TO BE PAID TO NON-RESIDENT. THEY ARE MEANT FOR TENTATIVE DEDUCTI ON OF INCOME-TAX SUBJECT TO REGULAR ASSESSMENT. SECTION 9(1)(II) SPECIFIES THE CATEGO RY OF INCOME IN RESPECT OF WHICH THE AGENT IS VICARIOUSLY LIABLE EVEN IF THE INCOME ACTUALLY ACCR UES IN INDIA OR IS RECEIVED IN INDIA. THE EXPRESSION EARNED IN INDIA HAS BEEN CLARIFIED BY THE EXPLANATION TO MEAN THAT THE SALARY SHOULD BE PAID FOR THE SERVICES RENDERED IN INDIA. 9. IN THE CASES BEFORE US THE SALARIES HAVE BEEN P AID TO RESIDENTS OF NETHERLAND FOR THE SERVICES RENDERED IN NETHERLAND. SERVICES HAVE NOT BEEN RENDERED IN INDIA. HENCE THE PROVISIONS OF EXPLANATION TO SECTION 9(1)(II) ARE NOT APPLICAB LE IN THESE CASES. THEREFORE THE SALARY PAYMENTS ARE NOT CHARGEABLE TO TAX IN INDIA WITHIN THE MEANING OF SECTION 192 OF THE ACT. ACCORDINGLY NO TAX AT SOURCE WAS DEDUCTIBLE. SINC E THE SALARY PAID TO NON-RESIDENTS FOR SERVICES RENDERED IN NETHERLAND IS NOT CHARGEABLE TO TAX IN INDIA PROVISIONS OF SECTION 40(A)(III) OF THE ACT WILL NOT BE APPLICABLE AND ACCORDINGLY DISALLOW ANCE UNDER SECTION 40(A)(III) CANNOT BE MADE IN RESPECT OF SALARY PAID TO NON-RESIDENTS FOR THE SERVICES RENDERED ABROAD. ACCORDINGLY IN OUR CONSIDERED OPINION THE LD. CIT (A) IS JUSTIFIED IN DELETING THE ADDITION. 10. IN THE RESULT THE APPEALS FILED BY THE REVENUE FOR ASSESSMENT YEAR 2003-04 IN BOTH THE CASES STAND DISMISSED. 11. NOW COMING TO THE REVENUES APPEAL IN ITA. NO. 1596 (DEL) OF 2009 THE GROUNDS OF APPEAL ARE REPRODUCED AS UNDER :- 1. THE ORDER OF THE LD. CIT (APPEALS) IS ERRONEO US AND CONTRARY TO FACTS AND LAW; 8 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . 2. ON THE FACTS AND IN THE CIRCUMSTANCES OF THE CAS E THE LD. CIT (APPEALS) HAS ERRED IN DELETING THE ADDITION OF SHORT TERM CA PITAL GAIN OF RS.83 54 694/- IGNORING :- (A) THAT THE FINDING OF CIT (A) THAT SHORT TERM CAPITAL GAIN CAN BE SET OFF AGAINST THE SHORT TERM CAPITAL LOSS IS AGAINST THE PROVISIONS OF I. T. ACT. AS THE CAPITAL GAIN IS TAXABLE BY VIRTUE OF SPECIAL PROVIS IONS FOR COMPUTATION OF CAPITAL GAINS IN CASE OF DEPRECIABLE ASSETS UNDER S ECTION 50 WHICH IS A DEEMING PROVISION; (B) THAT LOSS ON TRANSFER OF CAPITAL ASSET IS NO T A CAPITAL LOSS UNDER SECTION 47(IV) AS IT IS NOT CONSIDERED UNDER THE DEFINITION OF TRANSFER. 12. IN THIS CASE THE FACTS OF THE CASE STATED IN BR IEF ARE THAT ORIGINAL ASSESSMENT WAS COMPLETED ON 27/12/2005 ON TOTAL INCOME OF RS.10 74 25 660/-. SUBSEQUENTLY THE ASSESSMENT WAS RE- OPENED ON THE GROUND THAT LOSS OF RS.4 66 00 609/- WAS ARRIVED AT BY SETTING OFF THE SHORT TERM GAIN OF RS.83 54 694/- AGAINST THE LOSS OF RS.5 59 55 303/-. ON A QUERY DURING THE COURSE OF ASSESSMENT PROCEEDINGS IT WAS EXPLAINED THAT TRANS FER OF ASSETS FROM ASSESSEE TO ITS SUBSIDIARY HAS RESULTED IN CAPITAL LOSS UNDER SECTION 50(1) OF THE INCOME-TAX ACT ON DEPRECIABLE ASSETS AND CAPITAL GAINS ON ASSETS WHICH WERE YET TO BE C APITALIZED. AS THESE ASSETS WERE TRANSFERRED BY THE HOLDING COMPANY TO ITS SUBSIDIARY COMPANY T HE CAPITAL GAIN AND LOSS ARISING ON ACCOUNT OF THE TRANSFER WERE EXEMPT BY VIRTUE OF SECTION 47 (IV) OF THE INCOME TAX ACT. ACCORDINGLY THE ASSESSEE HAD WORKED OUT NET CAPITAL LOSS OF RS. 4 06 00 609/- AND WAS CLAIMED EXEMPT BY VIRTUE OF SECTION 47(IV) OF THE I. T. ACT 1961. T HIS CONTENTION OF THE ASSESSEE WAS NOT ACCEPTED BY THE ASSESSING OFFICER. HE WAS OF THE V IEW THAT PROVISIONS OF SECTION 47(IV) DO NOT PERMIT THE LOSS ON ACCOUNT OF ANY TRANSFER OF CAPIT AL ASSET BY A COMPANY TO ITS SUBSIDIARY COMPANY. THE PROVISIONS OF ACT DO NOT PROVIDE ANY ADJUSTMENT OF PROFIT AGAINST THE LOSS ON ACCOUNT OF TRANSFER OF THE CAPITAL ASSET TO A SUBSI DIARY COMPANY. THEREFORE THE ADJUSTMENT OF LOSS AGAINST THE PROFIT IS NOT ALLOWABLE. ACCORDIN GLY THE SHORT TERM CAPITAL GAIN OF RS.83 54 694/- WAS HELD TO BE LIABLE TO TAX. 13. ON APPEAL IT WAS SUBMITTED THAT THE ASSESSEE CO MPANY M/S. MOTHER DAIRY FRUITS AND VEG. PVT. LTD. [MDFVL] IS A WHOLLY SUBSIDIARY OF NATIONA L DAIRY DEVELOPMENT BOARD [NDBD]. THE 9 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . COMPANY TOOK OVER THE BUSINESS OF MILK FRUITS VEG ETABLES AND MILK PRODUCTS WITH EFFECT FROM 1/04/2000 FROM NDBD. M/S. MDFVL HAD SET UP A WHOLL Y OWNED SUBSIDIARY MOTHER DAIRY FOODS PROCESSING LTD.( MDFPL) ON 24 TH MAY 2002. THE BUSINESS OF MILK FRUITS AND VEGET ABLES AND MILK PRODUCTS WAS TRANSFERRED TO MDFPL. SPECIF IC ASSETS AND LIABILITIES CONNECTED WITH THE BUSINESS WERE ALSO TRANSFERRED WITH EFFECT FROM 1/0 7/2002 PURSUANCE TO BUSINESS TRANSFER AGREEMENT EXECUTED ON 6/06/2002. IT WAS FURTHER S UBMITTED THAT ALL THE ASSETS CONNECTED WITH THE BUSINESS WERE ALSO TRANSFERRED VIDE BUSINESS TRANSF ER AGREEMENT DATED JUNE 6 2002 EFFECTIVE JULY 1 2002. THE TOTAL VALUE OF BUSINESS ASSETS AS ON T HE DATE OF TRANSFER WAS AT RS.78 32 79 108/-. IN ADDITION TO THE ABOVE THE AAASESSEE WAS IN THE PROCESS OF SETTING UP A PLANT IN BANGALORE. THE PLANT HAD NOT BEEN CAPITALIZED AND WAS SHOWN AS CA PITAL WORKS IN PROGRESS. THE TOTAL VALUE OF ASSETS SHOWN AS WORK IN PROGRESS ON THE DATE OF T RANSFER WAS RS.37 93 64 000/-. THE ASSETS MENTIONED IN PARA 2.5 AS PER BTA WERE TRANSFERRED T O MDFPL FOR A TOTAL CONSIDERATION OF RS.72 73 23 805/- AND ASSETS REPRESENTING CAPITAL WORK IN PROGRESS WERE TRANSFERRED AT RS.38 77 18 694/-. THE AASSESSEE THUS INCURRED CAP ITAL LOSS OF RS.5 59 55 303/- [783 279 108 727 323 805] ON TRANSFER OF VARIOUS ASSETS. SIMULT ANEOUSLY CAPITAL GAIN OF RS.83 54 694/- [387 718 694 379 364 000] ON TRANSFER OF CAPITAL WORK IN PROGRESS WAS MADE. SINCE AS MDFPL BEING A 100 PER CENT SUBSIDIARY NEITHER CAP ITAL GAIN WAS DECLARED CHARGEABLE TO TAX NOR CAPITAL LOSS WAS ALLOWABLE AND ACCORDINGLY IN THE RETURN OF INCOME UNDER SECTION 139(1) NET CAPITAL LOSS OF RS.4 76 00 609/- WAS NOT CLAIMED. 14. THE LD. CIT (APPEALS) AFTER EXAMINING THE FACTS OF THE CASE DELETED THE ADDITION BY OBSERVING AS UNDER :- 4.3.1. I HAVE PERUSED THE ASSESSMENT ORDER A ND THE SUBMISSIONS MADE BY THE APPELLANT. THE ISSUE UNDER CONSIDERATION IS ABOUT THE TAXABILITY OF CAPITAL GAINS ON SALE OF CAPITAL WORK-IN-PROGRESS WHICH HAS BEEN NETTED O UT AGAINST THE LOSS INCURRED ON SALE OF ASSETS AND NET CAPITAL LOSS IS STATED TO BE EXEMPT UNDER SECTION 47(IV) OF THE ACT. UNDOUBTEDLY IN TERMS OF INCLUSIVE DEFINITION OF C APITAL ASSETS UNDER SECTION 2(14) THE 10 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . CAPITAL WORK IN PROGRESS IS A CAPITAL ASSET. MOREO VER THERE IS TRANSFER UNDER SECTION 2(14) OF THE CAPITAL ASSETS AND ACCORDINGLY THE PR OVISIONS OF SECTION 50 WOULD BE APPLICABLE. HOWEVER IN THIS CASE THE TRANSFER OF ASSETS BY THE APPELLANT IS TO ITS WHOLLY OWNED SUBSIDIARY COMPANY NAMELY MDFPL AND THEREFOR E PROVISIONS OF SECTION 47(IV} ARE APPLICABLE. THERE IS UNANIMITY BETWEEN THE AO AND THE APPELLANT COMPANY THAT THE PROVISIONS OF SUB CLAUSE (A) & (B) OF SECTION 47(IV ) ARE SATISFIED AND THEREFORE THE PROVISIONS OF SECTION 47(IV) ARE CLEARLY APPLICABLE . 4.3.2. UNDER THESE FACTS THE ONLY ISSUE FOR DETERMINATION IS WHETHER THE SHORT TERM CAPITAL LOSS COMPUTED WOULD BE SET OFF AGAINST THE SHORT TERM CAPITAL GAIN / PROFIT COMPUTED ON THE SAME TRANSACTION EXECUTED BETWEEN T HE PARENT COMPANY AND THE SUBSIDIARY COMPANY OR NOT? UPON PERUSAL OF THE PROV ISIONS OF CHAPTER IV-E CAPITAL GAIN IT IS SEEN THAT THE LEGISLATURE HAS CONSIDER ED THE CAPITAL LOSS IN THE EXPRESSION CAPITAL GAIN. THE TERM CAPITAL LOSS IS NOT MENTI ONED AT ALL IN THE ENTIRE CHAPTER IV-E; BECAUSE CAPITAL GAIN WHEN TURNS NEGATIVE BECOMES CAPITAL LOSS. IF THIS IS NOT SO THERE MAY NEVER BE COMPUTATION OF LOSS UNDER THE HEAD CA PITAL GAINS. EVEN OTHERWISE IT IS A TRITE LAW THAT PROFIT / GAIN INCLUDES LOSS. TH US I SEE NO BASIS IN THE AOS ORDER FOR HOLDING THAT THE SHORT TERM CAPITAL GAIN CAN NOT BE SET OFF AGAINST THE SHORT TERM CAPITAL LOSS FOR A SINGLE TRANSACTION EXECUTED THROUGH THE COMMON AGREEMENT AT THE SAME POINT OF TIME. THE BASIS OF TAXABILITY OF SHORT TERM CA PITAL GAIN GIVEN BY THE AO IS ACTUALLY NOT FOUND SUPPORTED BY THE RELEVANT PROVISIONS OF T HE ACT. IN VIEW OF THE ABOVE I HOLD THAT THE ACTION OF THE AO ON THIS ACCOUNT IS NOT IN ORDER AND APPELLANT SUCCEEDS ON THIS ACCOUNT. THE AO IS DIRECTED TO GIVE RELIEF OF RS.8 3 54 694/- TO THE APPELLANT ON THIS ACCOUNT. 15. WE HAVE HEARD BOTH THE PARTIES. THERE IS NO DI SPUTE THAT THE ASSESSEE COMPANY HAS TRANSFERRED ITS BUSINESS TO M/S. MOTHER DAIRY FOODS PROCESSING LTD. A HUNDRED PER CENT SUBSIDIARY COMPANY. ALL THE ASSETS CONNECTED WITH BUSINESS WERE TRANSFERRED UNDER AN AGREEMENT DATED 6 TH JUNE 2002 EFFECTIVE FROM 1 ST JULY 2002. THE VALUE OF LAND & BUILDING PLANT & MACHINERY ETC. AS ON 30 TH JUNE 2002 WAS AT RS.78 32 79 108/- WHICH WAS TRAN SFERRED FOR A 11 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . CONSIDERATION OF RS.72 73 23 805/-. THIS RESULTED IN CAPITAL LOSS OF RS.5 59 55 303/-. IN ADDITION TO ABOVE THE ASSESSEE WAS IN THE PROCESS OF SETTING UP OF A PLANT IN BANGALORE. THE TOTAL VALUE OF THE PLANT AS ON 30 TH JUNE 2002 WAS RS.37 93 64 000/- WHICH WAS TRANSFE RRED AT RS.38 77 18 694/-RESULTING INTO PROFIT OF RS.83 54 694/-. THE ASSESSEE ADMITTED LOSS OF RS.4 76 00 609/-. THE ASSESSEE NEITHER DECLARED TH E CAPITAL GAINS IN RESPECT OF WORK IN PROGRESS CHARGEABLE TO TAX NOR THE BENEFIT OF CAPITAL LOSS W AS ALLOWABLE. ACCORDINGLY IN THE RETURN OF INCOME NET CAPITAL LOSS OF RS.4 76 00 609/- WAS NOT CLAIMED. THE ASSESSING OFFICER HOWEVER ASSESSED THE CAPITAL GAINS OF RS.83 54 694/- CHARGE ABLE TO TAX UNDER CAPITAL GAINS IGNORING THE LOSS SUFFERED BY THE ASSESSEE ON TRANSFER OF BUSINE SS ASSETS. UNDER SECTION 47(IV) ANY TRANSFER OF A CAPITAL ASSET BY A COMPANY TO A 100% INDIAN SU BSIDIARY COMPANY SHALL NOT BE TREATED AS TRANSFER. THERE IS NO DISPUTE THAT THE ASSESSEE HAS TRANSFERRED BUSINESS AND WORK IN PROGRESS TO HUNDRED PER CENT SUBSIDIARY COMPANY AND THE SUBS IDIARY COMPANY IS AN INDIAN COMPANY. THEREFORE BOTH THE CONDITIONS OF SECTION 47(IV) AR E SATISFIED. THEREFORE ANY CAPITAL GAIN ARISING ON TRANSFER OF A CAPITAL ASSET BY A COMPANY TO ITS WHOLLY SUBSIDIARY COMPANY WILL NOT BE CHARGEABLE TO TAX. THE ASSESSING OFFICER HAD PR EFERRED TO CHARGE THE CAPITAL GAIN ARISING ON TRANSFER OF CAPITAL WORK IN PROGRESS WHEREAS LOS S SUFFERED ON TRANSFER OF LAND AND BUILDING PLANT AND MACHINERY ETC. HAS BEEN COMPLET ELY IGNORED. THIS APPROACH OF THE ASSESSING OFFICER IS CONTRARY TO PROVISIONS OF LAW. THE CAPITAL GAIN ARISING ON TRANSFER OF CAPITAL WORK IN PROGRESS WILL NOT BE CHARGEABLE TO CAPITAL GAINS. AT THE SAME TIME THE LOSS ARISING ON TRANSFER OF BUSINESS ASSETS WILL NOT BE ALLOWABLE AS DEDUCTION. IN VIEW OF LEGAL POSITION BEING CLEAR IN OUR CONSIDERED OPINION TH E LD. CIT (APPEALS) IS JUSTIFIED IN DELETING THE ADDITION. ACCORDINGLY WE DO NOT FIND ANY INFI RMITY IN THE ORDER PASSED BY THE LD. CIT (APPEALS). 16. IN THE RESULT APPEAL FILED BY THE REVENUE IN I TA. NO. 1596 (DEL) OF 2009 IS DISMISSED. 17. TO SUM UP ALL THE THREE APPEALS FILED BY THE RE VENUE IN RESPECT OF BOTH THE ASSESSEES ARE DISMISSED. 12 I. T. A. NOS. 397 (DEL) OF 2007 & 1596 (DEL) OF 2009. A N D I. T. APPEAL NO. 395 (DEL) OF 2007 . THE ORDER PRONOUNCED IN THE OPEN COURT ON : 28 TH JANUARY 2011. SD/- SD/-. [ A. D. JAIN ] [ K. D. RANJAN ] JUDICIAL MEMBER ACCOUNTANT MEMBER DATED : 28 TH JANUARY 2011. *MEHTA * COPY OF THE ORDER FORWARDED TO : - 1. APPELLANTS. 2. RESPONDENTS. 3. CIT 4. CIT (APPEALS) 5. DR ITAT NEW DELHI. TRUE COPY. BY ORDER. ASSISTANT REGISTRAR ITAT.