Lecture Meeting

The Speaker started with Supreme Court decisions, dealing first with the case of Sanjeev Lal vs. CIT 365 ITR 389 wherein exemption u/s. 54F was denied by the AO on the grounds that the final sale was delayed and purchase of new house was more than one year prior to date of actual sale. The Court held that certain rights passed even on agreement for sale, and on a liberal interpretation of the exemption provision, the sale could have been regarded as having taken place at the time of agreement to sell. The circumstances of litigation which caused the delay in completion of sale were beyond the assessee’s control, and could not be the basis for denying the eligibility of exemption u/s. 54F to the assessee if the assessee fulfilled the other conditions specified in section 54F. This principle can also be applied for claiming benefit u/s. 54.

The speaker then threw light on a wealth tax decision in Amrit Banaspati Co. Ltd. vs. CWT 365 ITR 515 (SC). The Assessing Officer (AO) found that the valuation declared by the assessee on the basis of capitalisation of municipal rateable value was very low compared to the market value of the property; so also the sale value as per agreement was much higher than value as per municipal rateable value. The Supreme Court held that it was a case where it was not practicable to apply rule 3, due to the very low valuation as compared to the fair market value. The valuation of property was, therefore, held proper under rule 8(a) i.e. as per fair market value.

In the case of CIT vs. Tip Top Typography 368 ITR 330 (Bom HC) the Assessing Officer (AO) noticed that the rent received by the assessee on letting out commercial premises along with car parking was nominal and the circumstantial evidence indicated that the fair market value was higher. Therefore, AO obtained instances of the rental amount prevailing in the market in the area and confirmed that the property was not covered by the Rent Control Act. On the basis of such comparable instances, the annual letting value as provided u/s. 23(1)(a) was determined at a much higher figure.

The Bombay High Court held that the market rate in the locality is an approved method for determining the fair rental value but it is only when the Assessing Officer is convinced that the case before him is suspicious, determination by the parties is doubtful, that he can resort to enquire about the prevailing rate in the locality. The municipal rateable value may not be binding on the Assessing Officer but that is only in cases of afore-referred nature. AO cannot brush aside the rent control legislation if it is applicable to the premises in question. Accordingly, the AO had to undertake the exercise contemplated by the rent control legislation for fixation of standard rent. Further the court held that if AO desires to undertake the determination himself, he would have to go by the Maharashtra Rent Control Act, 1999. Merely because the rent has not been fixed under that Act does not mean that any other determination and contrary thereto can be made by the AO.

Due to the above two decisions of Amrit Banaspati Co. Ltd. and Tip Top Typography, assessees owning more than one house could face problems in assessment if the assessing officer has reason to believe that the value adopted by assessee is very low or absurd, resulting in the assessing officer adopt the fair market value of the property for the wealth tax or of the rent for income tax purpose.

The Supreme Court in the case of Himatsingka Seide Ltd.,(2014) 266 CTR 141 gave a four liner decision affirming the decision of Karnataka High Court [CIT vs. Himatsingka Seide Ltd. (2006) 286 ITR 255] wherein the High Court held that unabsorbed depreciation should be adjusted against income of export oriented business, and the taxpayer cannot adjust unabsorbed depreciation against other income, so as to take exemption from payment of tax even for other income, as section 10B is an exemption section and not a deduction section.

On a similar issue, the Bombay High Court in the case of CIT vs. Black & Veatch Consulting (P.) Ltd. (2012)348 ITR 72 held that the brought forward unabsorbed depreciation and losses of the unit, the income of which is not eligible for deduction u/s. 10A, cannot be set off against the current profit of the eligible unit for computing the deduction u/s. 10A. It may be noted that the said decision of the Bombay High Court was cited before the apex court in the case of Himatsingka Seide Ltd.,(2014) 266 CTR 141.

However, the department has started taking the view that deduction u/s. 10A or 10B should be availed by the assessee only after setting off unabsorbed depreciation and unabsorbed business loss, if any, incurred by assessee.

In Vodafone India Services Private Limited vs. UOI & Others 368 ITR 1, the Bombay High Court held that issue of shares at a premium by Vodafone India in favour of its AE did not give rise to any “income” from an International Transaction, as income would not include capital receipts unless specifically stated in the income tax act, and therefore, there was no need to invoke Transfer Pricing provisions. A decision has been taken by the Government not to challenge this decision further before the Supreme Court, and this decision has therefore attained finality.

In the case of CIT vs. Nayan Builders 368 ITR 722, Bombay High Court upheld the decision of tribunal wherein tribunal held that since the High Court admitted the appeal filed by assessee, substantial questions of law were involved. Accordingly penalty u/s. 271(1)(c) of the Incometax Act, 1961 imposed by the Assessing Officer was cancelled. Based on the said decision, if an assessee finds any appeal admitted by the high court covering similar issue as that of assessee, then relying on the decision of Nayan Builders, the assessee can plead that penalty u/s. 271(1)(c) cannot be levied.

The next issue was whether a foreign company deductee can claim that since tax was deductible at source, even though no tax was actually deducted at source, no interest u/s 234B can be levied. In the case of DIT (IT) vs. Alcatel Lucent USA, Inc (264 CTR 240), the Delhi High Court held that it seems inequitable that an assessee, who accepted the tax liability at first appellate stage after initially denying it, should be permitted to shift the responsibility to the Indian payers for not deducting the tax at source from the remittances, after leading them to believe that no tax was deductible. Further, it held that the assessee must take responsibility for its volte face and once the liability to tax is accepted, all consequences follow and same cannot be avoided. It also held that the present case is one where equitable considerations should prevail in the interpretation of section 234B otherwise, it would not merely result in injustice and the purpose of the provision would also not have been achieved.

However, in the case of DIT (IT) vs. NGC Network Asia LLC [2009] 313 ITR 187, where the revenue preferred an appeal contending that the assessee was liable to pay advance tax even on the amount which had not been deducted at source u/s. 195. The Bombay High Court relying on the decision of CIT vs. Sedco Forex International Drilling Co. Ltd. [2003] 264 ITR 320 (Uttaranchal) held that where the deductor has failed to deduct tax, the shortfall attributable to non-deduction of tax at source cannot be the deductee’s fault, so as to be the subject matter of interest u/s. 234B.

Given both opposite decisions i.e. favourable and unfa- vourable to assessee, in case the Supreme Court upholds the decision of delhi high Court in case of alcatel Lucent, USA, which was unfavorable to the assessee, then this would result into a large number of litigations, as there are many cases pending with huge amounts involved in similar matters.

The next interesting issue discussed by the speaker was whether there could be disallowance of payments u/s. 40(a)(ia) of the income-tax act on account of short deduction of TDS. In such cases, there are different views, one being that the deduction not being in accordance with law, the entire payment could be disallowed. The second view is that disallowance should be proportionate to short deduction. The third view is that there need be no disallowance when there is short deduction. It was this third view, which was adopted by the high Court in CIT vs. S. K. Tekriwal [2014] 361 ITR 432 (Calcutta high Court). The high Court had not given its detailed reasoning, but reproduced the tribunal order, which took the view that though the short deduction may attract proceedings under section 201, disallowance u/s. 40(a)(ia) is not possible, when there is a bona fide short deduction. However the matter is not free from doubt, and one should probably await finality either from the Supreme Court or by way of clarification on the disallowance in such situations.

In the case of Mitsubishi Corporation India Pvt. Ltd vs. DCIT 166 TTJ 385 (2014), the assessee made certain payments to its associated enterprise. Such payments were disallowed by the ao u/s. 40(a)(i). the delhi tribunal, applying the non-discrimination clause, held that Second proviso to section 40(a)(ia) is also required to be read into section 40(a)(i), in cases where related payments are made to the tax residents of japan, as long as the japanese tax residents have taken into account the payments made to them by indian residents without deduction of tax at source in their computation of income, paid interest thereon and have filed the related income tax returns u/s. 139(1) in india, the payments so made by the indian enterprise cannot be disallowed in the hands of indian enterprise.

W.e.f. a.y. 2015-16, disallowance u/s. 40a(ia) is reduced to only 30% instead of previous 100% disallowance. according to the Speaker, since section 40a(i) has not been amended on similar lines, the non discrimination clause could be invoked as in the case of mitsubishi Corporation.

Dealing with a few tribunal decisions, in the case of Zaveri & Co. (P.) Ltd. vs. CIT 32 ITR (T) 50, ITAT Ahmedabad held that fixed deposit receipts taken for obtaining Letter of Credit for purchases, on which interest was earned by the assessee, an SEZ unit, were business assets of the assessee acquired in the course and for the purposes of its business. Hence, interest income earned on fixed deposit had to be assessed as business income of the assessee while calculating benefit u/s. 10AA of the Income tax act.

The last decision quoted by the speaker was on the current issue of bogus purchases. itat mumbai, in the case of Shri Rajeev G. Kalathil vs. DCIT 67 SOT 52, held that Purchases cannot be termed as bogus by the ao merely because the supplier was listed as a hawala dealer by the VAT authorities. In the said case, CIT(A) held that the transactions were supported by proper documentary evi- dences, that the payments made to the parties by the assessee were in confirmation with bank certificate, and the mere fact that the supplier was shown as defaulter under the Maharashtra VAT Act could not be sufficient evidence to  hold  that  the  purchases  were  non-genuine.  The ao had not brought any independent and reliable evidence against the assessee to prove the non-genuineness of the purchases, and there was no evidence regarding cash received back from the suppliers. The addition made by the ao was deleted by the CIT(a). On further appeal by department, hon’ble mumbai tribunal upheld the order of CIT(a).

The    meeting    ended    with    a    vote    of    thanks    to the Speaker.