P&H high court setting aside AO's invalid rejection of low TDS application u/s 197 (Serco BPO) Pending penalty/prosecution vs. Rule 28AA; Thin capitalization Prospective GAAR application vs present law to convert debt to equity: Besix Kier Dabhol SA

[Kapil Goel]

THE HIGH COURT OF PUNJAB AND HARYANA AT
CHANDIGARH CWP No.10258 of 2012(O&M) Date of decision: August 14, 2012
M/s Serco BPO Private Limited  4. Learned counsel for the petitioner submitted that under
Section 197 read with Rule 28AA of the Rules, the respondentdepartment
can decline issuance of TDC in following two eventualities:-
i) in case the Assessing officer was not satisfied that the recipient had justified the deduction of income tax at any lower rates; or
ii)no deduction of income tax was to be made on the income of the recipient.

According to the counsel, any other consideration was legally not permissible and the respondent has tried to justify the rejection of application for issuance of TDC under section 197 of the Act which is legally not justified. Learned counsel has relied upon judgment of the Bombay High Court in Larsen and Toubro Limited and another v.
Assistant Commissioner of Income Tax (TDS) and others, (2010)
326 ITR 514 to substantiate his contention. The perusal of the application filed by the assessee clearly demonstrates that the Assessing officer had rejected the application on twin grounds:- i) the assessee had violated the provisions of TDS;
ii)proceedings under Sections 276B and 271C of the Act were pending.
None of these grounds validly form part of reasons for rejecting an application filed by an assessee under section 197(1) of the Act read with Rule 28AA of the Rules.

The order rejecting the application of the petitioner is patently illegal being contrary to law and the Assessing Officer had faile d to exercise jurisdiction vested in him   under the Act. 14. Accordingly, the order declining issuance of certificate in terms of section 197 of the Act read with Rule 28AA of the Rules cannot be legally sustained

 

Bombay High Court in  M/s. Besix Kier Dabhol SA, INCOME TAX APPEAL NO.776 OF 2011 the Tribunal allowed the respondent-assessee's appeal. During the course of the proceedings before the Tribunal the revenue contended that the borrowings on which the interest has been claimed as a deduction are in fact capital of the assessee and brought only under the nomenclature of loan for tax consideration. It was the case of the appellant-revenue before the Tribunal that debt capital is required to be re-characterized as equity capital. However, the Tribunal held that in India as the law stands there were no rules with regard to
thin capitalization so as to consider debt as an equity. It is only in the
proposed Direct Tax Code Bill of 2010 that as a part of the General Anti
Avoidance Rules it is proposed to introduce a provision by which a
arrangement may be declared as an impermissible avoidance
arrangement and may be determined by recharactersing any equity
into debt or vice versa. 8) We find no fault with the above observations of the
Tribunal. There were at the relevant time and even today no thin capitalization rules in force. Consequently, the interest payment on
debt capital cannot be disallowed. In view of the above, the question
(i) raises no substantial question of law and is therefore, dismissed .

 

Allahabad high court Case :- INCOME TAX APPEAL No. - 68 of 2002
Petitioner :- Commissioner Of Income Tax I Kanpur
Respondent :- M/S Allied Exporter Kanpur 2. The Income Tax Department has preferred this appeal on the
following questions of law as follows:-
"1. Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal was correct in law in holding that the assessee firm and its
sister concern M/s Allied Consultants to which the commission was paid
where separate legal entities and unless the agreement were found to be sham
the validity of the firms could not be questioned, ignoring the fact that there
was no dispute regarding the existence of the firm M/s Allied Consultants.
2. Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal was correct in law in deleting the addition of Rs. 3, 30,
176/- made to the assessee's income by the Assessing Officer on account of
disallowance of purchase

ITAT order being upheld by High COURT: 13. It may be pointed out that in their statements, the partners of the
commission agent firm have been stated that they were selecting hides and
ware making inspections of the hides cold by the other sister concern. Thus,
although it is true that there was a group of firms pertaining to the same
family or group, but these firms having separate legal entity were to be treated
as juridical persons and unless the agreements were found to be sham, the
validity of the firms cannot be questioned. Thus, the mere fact that the
partners were common to various firms or interchanged their position, or a
partner was not capable of rendering services will not be material unless on
facts, it is found that the firm as such was not in existence or the firm as such
was not rendering any services. Since in the present matter, the payee firm
was also assessed to tax and was a registered firm, its legal existence cannot
be doubted.