The Hindu Business Line : Blinkers off, and veil pierced in colourable deals

EDWARD Keventer P Ltd vs Dy CIT, that came up before the Kolkata ITAT is about the power of I-T authorities to go after truth. To determine whether a transaction is sham or illusory, a device, ruse or make-believe, the taxing authorities are entitled to penetrate the veil covering it and ascertain the truth, notes the ruling.

"Taxing authorities are not required to put on blinkers while looking at the documents produced before them. They are entitled to look into the surrounding circumstances to find out the reality of the recitals made on the documents."

Also, "It is the duty of the court, in every case, where ingenuity is expended to avoid facing any welfare legislations, to get behind the smokescreen and discover the true state of affairs. The court is not to be satisfied with the form and leave alone the substance of the transactions." The Tribunal defines `colourable transaction' as what is seemingly valid, but a feigned or counterfeit transaction entered into for some ulterior purposes.

The case is important for CAs because the order speaks of how a CA firm's report on valuation of shares was based on "no positive or adequate material" but was `ad hoc'; and that the firm "had not given any objective criteria as to why 25 per cent of the face value of the share could be taken as value of a share." Damningly, "merely because the sale of shares had been made at a price so valued by the CA firm, it could not be said that there was no reason to doubt the bona fides of the said transaction."

A case to study in depth.

Jay-taxing

SECTION 115J was the focus of a recent ruling of the Mumbai ITAT, in the Borosil Glass Works case. Here is an excerpt of interest: "The section is not a deeming or fictional section but after curtailing certain advantages, tax the current income at a flat rate of tax. The calculation of tax at the flat rate is very much subjective and not hypothetical... The income of the computation which is subject to tax under the law has to be taken into account for every purpose and not that computation which has relevance for comparing the two figures."

More explanation, "in other words": "The income computed in the normal other provisions of the Act do not adversely effect a taxpayer as far as levy of tax is concerned and the same is used to work out only to ascertain the higher of the two calculations. Finally, the taxpayer is effected by the income which is subject to tax and not the income which is not subject to tax."

Anything plain? "Therefore, by plain analogy, for all practical purpose, that computation of income should be kept in mind on which tax is levied and not that computation which is not subject to tax."

Movie to account

YOU can get a taste of movie accounting in the Honey Enterprises case taken up by the Delhi ITAT recently. Honey was engaged in the business of distribution of feature films. "The modus operandi of the assessee was to debit the trading account of each film with the minimum guaranteed (MG) amount as well as the cost of prints and credit the same by the amount collected by him on exhibition of such film. If the realisation was less than the total cost debited to trading account, loss was carried forward to the next year by showing such amount in balance sheet on the asset side."

For the movie-minded, there are at least four films that find mention: Lakshman Rekha, Suryavanshi, Insaniyat Ke Devta and Shriman Aashique. And the tax-minded would know that there is Rule 9B in the Income-Tax Rules on `deduction in respect of expenditure on acquisition of distribution rights of feature films'.

A law that belongs to the pre-VCD era, though.

Use spoon when bathing

CHENNAI CESTAT had to deal with a bathers' issue in R. K. Herbals P Ltd case. The company claimed MODVAT credit for the bowl and spoon it supplied with its `herbal sikkakai powder', but the Department felt that these items "were not necessary inputs/accessories for the manufacture of the final product". R. K.'s counsel Mr J. Shankar Raman contended that plastic bowl and spoon are accessories "because they are necessary to avoid contamination from fungus and the said item should not be used with wet hands". But the Revenue's counsel, Ms R. Bhagya Devi, submitted that sikkakai powder could be taken out without a bowl and spoon. She also argued that the cases relied on by R.K. were about pharma industries where correct measurement and sterilised condition were essential. In contrast, "sikkakai powder does not require any measurement, accuracy and does not have sterilisation nature".

However, Mr S. L.Peeran, Tribunal Member, observed: "For use of sikkakai powder, the items are necessary and the powder cannot be taken with bare fingers." So, the next time you go the bathroom, remember not to forget the bowl and spoon.

Tips for a fast meal

LET us now move on to the kitchen, because this case is about instant food mixes. Sonic Biochem Extraction P Ltd manufactures textured soya protein, that is, mealmaker, soya chunks and granules. When the company claimed the benefit of a notification available for `preparations in the nature of instant food mixes for consumption after processing', Excise authorities declined. Reason: "The impugned products do not become ready for consumption merely after cooking, boiling or dissolving in water or milk, but need to be mixed with other ingredients before the same could be consumed. And that the product to be covered by the Notification must in the first place be constituted by two or more ingredients."

At the New Delhi CESTAT, Sonic's advocate, Mr B. L. Narasimhan argued that though `instant food mix' did not mean that the product should necessarily be mixture of two or more ingredients, the soya product had more than one ingredient — "soya flour, caustic soda flaks, sodium bicarbonate, caramel colour and sunset yellow colour".

There are more culinary tips: By mixing other ingredients, characteristics of instant food mixes do not get extinguished. Only through the process of boiling in water it gets perfectly cooked. Mr V. K. Agrawal, Tribunal Member, stated that the Revenue could not show that the product could not be consumed as such after cooking in pressure cooker. "The mere fact that the product after being boiled is garnished with spices and salt will not take away its character of preparation in the nature of instant food mix." A ruling that would have put the Department in a stew.

Tailpiece

"When they pool the cess for universal primary education, should we call it poolcess?"

"?"

Detaxification@TheHindu.co.in

D. Murali

More Stories on : Taxation | Detaxfication

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
Ambitious agenda

Indian entrepreneurship on a high

`Law of the Unenforceable'

Let's save the punishment

The IATA hiatus

Unjust enrichment by rounding off

`Fee' engineering put to test

Blinkers off, and veil pierced in colourable deals

Monetary Policy: Divorced from reality

Babus are not accountable and netas can be ignorant