BCAJ | Bombay Chartered Accountant Journal

Search and seizure – Retention of seized assets – Section 132B – Application for release of seized articles within time and explanation furnished regarding the articles – Department has no authority to retain seized articles if no dispute raised within 120 days – Direction to authorities to immediately release seized articles –

Mul Chand Malu (HUF) vs. ACIT; 384 ITR 46 (Gau):

The assessee’s were members of a HUF. Under searches conducted in different premises of the assesses, jewellery ornaments and bullion amounting to Rs. 13,44,70,018 were seized. The assesses filed application under first proviso to section 132B(1)(i) on 26/11/2014 for release of the assets. Without taking any decision on the application within the stipulated period of 120 days from the date on which the last authorization for search was executed, the assesses were informed that by an order dated 28/01/2015 centralisation of their cases has been done and therefore jurisdiction of the office of the Assistant Commissioner of Income- Tax, Gauhati had ceased and that the application dated 26/11/2014 was treated as disposed of in the light of the order dated 28/01/2015.

The Gauhati High Court allowed the writ petition filed by the assesses for release of the assets and held as under:

“i) When an application is made for the release of the assets under the first proviso to section 132B(1)(i) of the Act explaining the nature and source of the seized assets and if no dispute was raised by the Department during the permissible time of 120 days, it had no authority to retain the seized assets in view of the mandate contained in second proviso to section 132B(1)(ii) of the Act.

ii) The authorities are directed to release the seized assets of the assesses immediately.”

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TDS: Credit for TDS – A. Y. 2009-10 – TDS belonging to sister concern credited to Form 26AS of assessee – TDS deducted from payment to REPL, sister concern of assessee – Deductor mistakenly mentioned PAN of assessee and hence TDS amount appeared in Form 26AS of assessee – REPL paid taxes without claiming adjustment of said TDS and also not objecting to grant of credit of the same to the assessee –

Assessee is entitled to credit of the said amount of TDS: CIT vs. RELCOM; 286 CTR 102 (Del):

In the A.Y. 2009-10, one of the customers, in its TDS return mentioned the PAN of the assessee in respect of the TDS from payment to the sister concern REPL. REPL did not claim the credit of the said TDS and paid tax on its income. REPL did not have objection in giving credit of the said TDS in favour of the asessee. The said TDS reflected in Form 26AS in the case of the assessee and the assessee claimed credit of the same. The Assessing Officer refused to give credit of the said amount to the assessee. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) The Revenue relies on the phrase “shall be treated as a payment of tax on behalf of the person from whose income the deduction was made” in section 199 to contend that the assessee’s TDS claim cannot be based on the receipts of REPL.. However, the assessee fairly admitted throughout the proceedings for its TDS claim of Rs. 1,20,73,097 that the benefit of such claim has not been availed by REPL. Therefore, the Revenue, having assessed, REPL’s income in respect to such TDS claim cannot now deny the assessee’s claim on the mere technical ground that the income in respect of such TDS claim was not that of the assessee, given that the assessee and REPL are sister concerns and REPL has not raised any objection with regard to the assessee’s TDS claim.

ii) Procedure is the handmaid of justice, and it cannot be used to hamper the cause of justice. Therefore, the Revenue’s contention that the assesse, instead of claiming the entire TDS amount, ought to have sought a correction of the vendors mistake, would unnecessarily prolong the entire process of seeking refund based on TDS credit.

iii) The question of law is answered against the Revenue and the appeal is dismissed.”

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Search and seizure – Release of seized assets – Ss. 132A and 132B(1)(i) – Time limit for disposing application – If no decision taken within time department cannot wait for outcome of assessment but bound to release asset –

Nadim Dilipbhai Panjvani vs. ITO; 383 ITR 375 (Guj):

The Department seized cash from the petitioner while he was travelling on March 25, 2014. The petitioner applied for release of cash under petition dated April 14, 2014 which was filed on April 17, 2014. The application was rejected on 20/07/2015 on the ground that the cash could be released only when its source was explained to the satisfaction of the Assessing Officer and release of seized assets could be considered only after the final assessment of the tax and penalty proceedings. The contention of the petitioner that this decision should have been taken within the time envisaged under further proviso to clause (i) of sub-section (10) of section 132B of the Income-tax Act, 1961 was rejected by the Assessing Officer.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“i) The second proviso to clause (i) of sub-section (1) of section 132B puts a time limit within which a seized asset must be released. The question of not releasing the asset would arise only upon the decision on an application that may have been made by the person concerned being taken by the Assessing Officer. If no decision is taken, necessarily, the option of the Assessing Officer to adjust such seized assets would be confined to the existing liabilities.

ii) It is in this context the legislature requires the Assessing Officer to follow the time limit scrupulously. In other words if the person concerned has made an application for release of the assets within the prescribed time, the authority can refuse such request on the ground of not being satisfied about the source of acquisition. But if no such decision is taken within the time envisaged in the further proviso, releasing of the asset becomes imminent.

iii) The action of the Assessing Officer was not sustainable. The impugned order dated July 20,2015 is set aside. The seized cash shall be released in favour of the petitioner with interest as per the statute.”

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Before Saktijit Dey (J. M.) and Ramit Kochar (A. M.) ITA no.7297/Mum./2013 A.Y.: 2010–11. Date of order: 27.05.2016 Counsel for Revenue / Assessee: K. Mohan Das / Jignesh R. Shah

Section 40(a)(ia) – Assessee not liable to deduct tax at source when the payment made is on behalf of the client.

FACTS
The assessee, a partnership firm, is engaged in the business of providing logistic services relating to export/ import viz. transportation, warehousing, packaging, custom clearance, organizing of container with the shipping lines, arrangement of labour for unloading cargo, etc. During the assessment proceedings the AO noticed that during the year, the assessee had paid an amount of Rs. 3.29 crore to Container Freight Station (CFS) and Inland Container depots (ICD) for/on behalf of importer/ exporter. The AO was of the view that as the assessee was dealing with the CFS for and on behalf of its client, it was the liability of the assessee to deduct tax u/s 194C while making payments to CFS. On account of its failure to deduct tax at source, the AO disallowed the sum of Rs. 3.29 crore by invoking the provisions of section 40(a)(ia).

On appeal, the CIT(A) deleted the addition as the assessee had made payments on behalf of the importer/ exporter. According to him, the payments so made were deemed to be the expenditure of the importer/exporter and not an expenditure by the assessee. Since the assessee had never claimed these payments as expenditure in the Profit & Loss account, the provisions of section 40(a)(ia) cannot be invoked to disallow the same.

HELD
According to the Tribunal, when the AO himself admitted the fact that the assessee had made payments to CFS/ ICD on behalf of importer as a custom house agent and the documentary evidence produced by the assessee also proved such fact, the AO cannot disallow the payments under section 40(a)(ia) alleging non–deduction of tax by the assessee, especially when the expenditure / payment does not relate to the assessee. Merely because the assessee made payments on behalf of its client the liability of deduction of tax on the assessee would not get attracted. More so, when the assessee has not claimed such payments as expenditure by debiting to its Profit & Loss account. In coming to the conclusion, the Tribunal also found support from the Mumbai Tribunal decisions in the case of DCIT v/s Rank Shipping Agency Pvt. Ltd. (ITA no. 5946/Mum./2008 dated 21.11.2012) and in the case of ITO v/s M/s. Universal Traffic Co. (ITA no.1426 to 1429/Mum./2013 dated 17.12.2014). With the result, the Tribunal dismissed the appeal filed by the revenue.

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Mutual benefit company – Principle of mutuality – Income from sale of shares and the occupancy rights – cannot be assessed in the hands of the assessee – Land continues to be owned by the assessee – No transfer of any FSI attached to the land – Tax under the head ‘capital gain’ in the hands of the shareholder not company:

CIT- 6 vs. M/s. Calico Dyeing and Printing Mills Pvt. Ltd. [ Income tax Appeal no 14 of 2014 dt – 04/07/2016 (Bombay High Court)].

[The ITO 6(2)(1) vs. M/s. Calico Dyeing and Printing Mills Pvt.Ltd . [ITA No. 4297/MUM/2009 ; Bench : C ; dated 05/06/2013 ; A Y: 2006- 2007. Mum. ITAT]

The assessee was engaged in the business of construction and started construction of 15 storied building consisting of 85 dwellings units in the year 2002-03. The assessee had finished major construction activity in early 2005 and had received the “Occupation Certificate” from BMC authorities upto the 13th floor on 31st May, 2005. As per the details, totally 67 flats weresold 67.

It was the claim of the assessee that it was a mutual benefit company therefore it had not made any profit from the construction activity as it had only collected the construction cost from the flat owner. The company has entered into a tripartite agreement with the flat owners. The parties to the sale agreement being the flat purchaser, the assessee company and a partnership firm Viz., M/s. Calico Associates who held 12,100 shares of the assessee company.

After considering these facts, the AO issued show cause asking the assessee why the activity of construction and sale of residential units should not be considered as a business of the assessee company and the profits arising out of the same not be taxed in its hands as business income. The assessee explained to the AO that the activity of construction and allotment of residential flat cannot be treated as business venture because it was a Non Trading Company doing activities of construction of residential buildings for the benefit of its members. Therefore, there was no motive of earning any profits or gains from the activity. It was explained that the assessee was working solely for the benefit of its members/share holders. The AO did not accept the contention of the assessee and was of the firm belief that the flat owners at the time of booking of the premises were not share holders of the company. The AO further observed that the flat owners had no right other than the flats occupied by them. The AO further observed that principle of mutuality did not apply on the facts of the case because there is no reciprocity or mutual dependence which are necessary conditions in the case of mutuality. The AO was of the view that the claim of the assessee is nothing but a sham and a colourable device used by it to divert and avoid taxable income in its own hands.

Being aggrieved by this finding of the AO, the assessee carried the matter before the Ld. CIT(A). Before the Ld. CIT(A), the assessee explained the entire nature of transaction and contended that only the share holders are liable to tax on the income arising from such transfer and the share holders have already offered the income to tax. If the income was taxed in the hands of the assessee, it would amount to double taxation. The Ld. CIT(A) was convinced that what was attached to the shares and subject matter of transfer were the occupancy rights of the constructed flats in the building Kamal Darshan and not the land. Such rights did not belong to the assessee since before rights came into existence, they were attached to the shares of the company.

CIT(A) held that in terms of Section 27(iii) of the Act, the shareholder was the owner of the flat. It found that in fact what had been sold were its shares held by its shareholder one M/s.Calico Associates. The sale of shares by its shareholder – M/s. Calico Associates was brought to tax under the head ‘capital gain’ in the hands of the shareholder for the subject Assessment Year. It also held that there was no sale of the land by the asseseee nor any sale of FSI available on the land which continued to be owned by the asseseee. In these circumstances, it allowed the asseseee’s appeal.

Aggrieved by the above finding of the Ld. CIT(A), Revenue carried the matter before ITAT . This ground of appeal was dismissed by the ITAT .

The Revenue filed an appeal before the High court challenging the order of ITAT . The High Court held that the question as raised was in respect of impairment of land (use of FSI) was not canvassed before the Tribunal. Therefore, the question raised does not arise out of the Tribunal’s order. In any case, the finding of fact rendered by the CIT(A) that land continued to be owned by the assessee and there was no transfer of any FSI attached to the land was not shown to be perverse and/or arbitrary. In the above view, the Appeal was dismissed.

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Non-resident: Fees for technical services- Section 9(1)(vii) Expl. 2 and 44BB(1)- A. Y. 2008-09- Geophysical services- Activity of two dimensional and three dimensional seismic survey carried on in connection with exploration of oil on land and off-shore- Consideration for services rendered cannot be construed as ”fees for technical services” Assessee was assessable u/s. 44BB(1) of the Act-

PGS Exploration (Norway)AS; 383 ITR 178 (Del):

The assessee a company incorporated under the laws of Norway, was principally engaged in the business of providing geophysical services world wide. These services included the services of acquiring and processing two dimensional and three dimensional seismic data both on land and offshore. In the A. Y. 2008-09, the assessee opted to be taxed on presumptive basis u/s. 44BB(1) of the Act at the rate of 10% of the gross revenue. The Assessing Officer rejected the contention of the assessee that its income was liable to be taxed u/s. 44BB(1) of the Act and held that the services provided by the assessee were technical in nature and the consideration payable to the assessee for rendering services in terms of the contract was ”fees for technical services” within the scope of section 9(1)(vii) of the Act and that the tax on such income was to be computed u/s. 115A of the Act and not u/s. 44BB(1). The Tribunal upheld the decision of the Assessing Officer.

On appeal by the assessee, the Delhi High Court reversed the decision of the Tribunal and held as under:

“i) The Tribunal was not justified in holding that the activity of two dimensional and three dimensional seismic survey carried on by the assessee in connection with the exploration of oil was in the nature of “fees for technical services” in terms of Explanation 2 to section 9(1)(vii) of the Act.

ii) Since the A. Y. 2008-09 fell within the period from April 1, 2004 to April 1, 2011, the Income of the assessee to the extent it fell within the scope of section 44DA(1) of the Act and excluded from section 115A(1)(b) of the Act, would be computed in accordance with section 44BB(1) of the Act.”

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GENERAL ANTI-AVOI DANCE RULE (GAAR)

1. Background:

1.1 General Anti-Avoidance Rule (GAAR) was first introduced in sections 95 to 102 and 144BA of the Income tax Act by the Finance Act, 2012, w.e.f. A.Y. 2014-15. In view of large scale opposition by Trade and Industry Associations, these provisions were replaced by new sections 95 to 102 and 144BA by the Finance Act, 2013, w.e.f. AY . 2016-17.

1.2 In Para 150 of the Budget Speech while introducing the Finance Bill, 2013, the Finance Minister has stated as follows:

“150. Hon’ble Members are aware that the Finance Act, 2012 introduced the General Anti Avoidance Rules, for short, GAAR. A number of representations were received against the new provisions. An expert committee was constituted to consult stakeholders and finalise the GAAR guidelines. After careful consideration of the report, Government announced certain decisions on 14-1-2013 which were widely welcomed. I propose to incorporate those decisions in the Income tax Act. The modified provisions preserve the basic thrust and purpose of GAAR. Impermissible tax avoidance arrangements will be subjected to tax after a determination is made through a well laid out procedure involving an assessing officer and an Approving Panel headed by the judge. I propose to bring the modified provisions into effect from 1-4-2016.”

1.3 In the Explanatory Statement presented with the Finance Bill, 2013, the reasons for introducing the new provisions are explained as under:

“The General Anti Avoidance Rule (GAAR) was introduced in the Income tax Act by the Finance Act, 2012. The substantive provisions relating to GAAR are contained in Chapter X-A (consisting of sections 95 to 102) of the Income tax Act. The procedural provisions relating to mechanism for invocation of GAAR and passing of the assessment order in consequence thereof are contained to section 144 BA. The provisions of Chapter X-A as well as section 144BA would have come into force with effect from 1st April, 2014.

A number of representations were received against the provisions relating to GAAR. An Expert Committee was constituted by the Government with broad terms of reference including consultation with stakeholders and finalising the GAAR guidelines and a road map for implementation. The Expert Committee’s recommendations included suggestions for legislative amendments, formulation of rules and prescribing guidelines for implementations of GAAR. The major recommendations of the Expert Committee have been accepted by the Government, with some modifications. Some of the recommendations accepted by the Government require amendment in the provisions of Chapter X-A and section 144BA”.

1.4 In 2015 the Finance Minister, in Para 109 of his Budget Speech, stated as under:

“109 Implementation of the General Anti- Avoidance Rule (GAAR) has been a matter of public debate. The investment sentiment in the country has now turned positive and we need to accelerate this momentum. There are also certain issues relating to GAAR which need to be resolved. It has therefore been decided to defer the applicability of GAAR by two more years. Further, it has also been decided that when implemented GAAR would apply prospectively to investments made on or after 1-4-2017”

Accordingly, section 95 was amended to provide that the GAAR provisions contained in sections 95 to 102 will apply from A. Y. 2018-19 ( i.e. accounting year 1-4-2017 to 31.03.2018) and onwards.

1.5 Since the provisions relating to GAAR will come into form on 1.4.2017, the tax provisions which will affect some economic decisions by tax payers are discussed in this Article

2. GAAR Provisions:

2.1 Section 95: This section provides that an arrangement entered into by an assesse may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step or a part of the arrangement as they are applicable to the entire arrangement. Section 95(2) provides that Sections 95 to 102 shall apply from A/Y:2018-19 and onwards. Rule 10U of the Income tax Rules provides that Sections 95 to 102 shall not apply to an arrangement where the tax benefit in the relevant assessment year, to all parties to the arrangement, does not exceed Rs.3 Crore.

2.2 Impermissible Avoidance Arrangement (Section 96):

i) Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose of which is to obtain a tax benefit and it –

a) Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.

b) Results, directly or indirectly, in misuse or abuse of the provisions of the Income tax Act.

c) Lacks commercial substance, or is deemed to lack commercial substance u/s. 97, in whole or in part, or

d) is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bonafide purposes.

ii) An arrangement whereby there is any tax benefit to the assesse shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assesse proves otherwise. It will be noticed that this is a very heavy burden cast on the assesse. The Finance Minister has, however, declared on 7/5/2012 that the onus of proof will be on the department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.

2.3 Lack of Commercial Substance (Section 97):

(i) Section 97 explains the concept of Lack of Commercial Substance in an arrangement entered into by the assesse. It states that an arrangement shall be deemed to lack commercial substance if :

a) The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps.

b) It involves or includes

• Round Trip Financing
• An accommodating party.
• Elements that have the effect of offsetting Or canceling each other or A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction.

c) It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party, or

d) It does not have a significant effect upon the business risks or net cash flows of any party to the arrangement apart from any effect attributable to the tax benefit that would be obtained.

ii) For the above purpose, it is provided that round trip financing includes any arrangement in which through a series of transactions :

a) Funds are transferred among the parties to the arrangement, and,

b) Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.

iii) It is further stated that the above view will be taken by the tax authorities without having regard to the following:

a) Whether or not the funds involved in the round trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement.

b) The time or sequence in which the funds involved in the round trip financing are transferred or received, or

c) The means by, manner in, or mode through which funds involved in the round trip financing are transferred or received.

iv) The party to such an arrangement shall be treated as “Accommodating Party” whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect, tax benefit under the Income tax Act.

v) It is clarified in the section that the following factors may be relevant but shall not be sufficient for determining whether the arrangement Lacks commercial substance.

a) The period or time for which the arrangement exists

b) The fact of payment of taxes, directly or indirectly, under the arrangement.

c) The fact that exit route, including transfer of any activity, business or operations, is provided by the arrangement.

3. Consequence of Impermissible Avoidance Arrangement (Section 98):

3.1 Under section 144 BA, the Commissioner has been empowered to declare any arrangement as an impermissible arrangement. Section 98 states that if an arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable Tax Treaty. The following is the illustrative list of consequences and it is provided that the same will not be limited to this list.

i) Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement.

ii) Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;

iii) Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

iv) Deeming persons who are connected persons in relation to each other to be one and the same person;

v) Re-allocating between the parties to the arrangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;

vi) Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.

vii) Considering or looking through any arrangement by disregarding any corporate structure.

viii) It is also clarified that for the above purpose the tax authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of Capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be re-characterised.

3.2 It may be noted that if only a part of the arrangement is declared to be impermissible under this section, Rule 10UA provides that the consequences in relation to tax shall be determined with reference to such part only.

4. Section 99: This section provides for treatment of connected persons and accommodating party. The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists –

i) The parties who are connected persons, in relation to each other, may be treated as one and same person.

ii) Any accommodating party may be disregarded.

iii) Such accommodating party and any other party may be treated as one and the same person.

iv) The arrangement may be considered or looked through be disregarding any corporate structure.

5. Section 102 : Some Definitions

i) “Arrangement” means any step in, a part or whole of any transaction, operations, scheme, agreement or understanding, whether enforceable or not, and includes the alienation of any property in such transaction, operation, scheme, agreement or understanding.

ii) “Benefit” includes a payment of any kind whether in tangible or intangible form.

iii) “Connected Person”, in relation to a person who is an Individual, Company, HUF, Firm, LLP, AOP or BOI is defined in more or less the same manner as the term “Related Person” is defined in Section 40A(2). It may be noted that, for this purpose, the definition of the word “Relative” is wider in as much as the definition of “Relative” given in Explanation to Section 56(2) (vi) is adopted, whereas in section 40A(2) the narrower definition of “Relative” given in Section 2(41) is adopted.

iv) “Fund” includes (a) any cash, (b) cash equivalents and (c ) any right or obligation to receive or pay in cash or cash equivalent.

v) “Party” means any person, including Permanent Establishment which participates or takes part in an arrangement.

vi) “Relative” has the same meaning as given in section 56(2) (vi) – Explanation. It may be noted that this definition is very wide as compared to the definition given in section 2 (41) which is adopted for the purpose of explaining related person in section 40A (2).

vii) The definition of a person having substantial interest in the company and other non- corporate body is the same as given in section 40A(2).

viii) “Step” includes a measure or an action, particularly one of a series taken in order to deal with or achieve a particular thing or object in the arrangement.

ix) “Tax Benefit” includes (a) a reduction, avoidance or deferral of tax or other amount payable under the Income tax Act, (b) an increase in a refund of tax or other amount under the Act, (c) a reduction, avoidance or deferral of tax or other amount that would be payable under the Act, as a result of tax treaty, (d) an increase in a refund of tax or other amounts under the Act as a result of tax treaty, (e) a reduction in total income or (f) increase in loss in the relevant accounting year or any other accounting year.

x) “Tax Treaty” means Agreements entered into by the Government with any foreign county, territory or Association u/s 90 or 90A.

6. Section 144 BA: Procedure for declaring an arrangement as impressible under sections 95 to 102 is given in this section. This section will come into force from A.Y. 2018-19

i) The Assessing Officer can, at any stage of assessment or reassessment, make a reference to the Commissioner for invoking GAAR. On receipt of reference the Commissioner has to issue a notice to the assesse to make his submissions and give a hearing within such period not exceeding 60 days. If he is not satisfied by the submissions of taxpayer and is of the opinion that GAAR provisions are to be invoked, he has to refer the matter to an “Approving Panel”. In case the assesse does not object or reply, the Commissioner can issue such directions as he deems fit in respect of declaration as to whether the arrangement is an impermissible avoidance arrangement or not. Under Rule 10UC (1)(i) no such direction can be issued after expiry of one month from the end of the month in which the date of compliance of the notice to the assesse u/s 144BA(2) is given.

ii) The Approving Panel has to dispose of the reference within a period of six months from the end of the month in which the reference was received from the Commissioner.

iii) The Approving Panel can either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry made. It can issue such directions as it thanks fit. It can also decide the year or years for which such an arrangement will be considered as impermissible. It has to give hearing to the assesse before taking any decision in the matter.

iv) The Assessing Officer (AO) can determine consequences of such a declaration of arrangement as impermissible avoidance arrangement.

v) The final order, in case any consequence of GAAR is determined, shall be passed by the AO only after approval by Commissioner.

vi) The period taken by the proceedings before Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.

vii) The Central Government has to constitute one or more Approving Panels. Each Panel shall consist of 3 members, including a chairperson. The constitution of the Panel shall be as under.

a) Chairperson – He shall be a sitting or retired judge of a High Court

b) Members – One member shall be IRS of the rank of CCIT or above. One member shall be an academic or scholar having special knowledge of matters such as direct taxes, business accounts and international trade practices.

The term of the Panel shall ordinarily be for one year and may be extended from time to time upto 3 years. The Panel shall have power similar to those vested in AAR u/s 245U. CBDT has to provide office infrastructure, manpower and other facilities to the Approving Panel’s members. The remuneration payable to Panel members shall be decided by the Central Government.

viii) In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the reference made to it. No such scheme has been prescribed by CBDT so far.

ix) Appeal against the order of assessment passed under the GAAR provisions, is to be filed directly with the ITA Tribunal and not before CIT (A). Section 144 C relating to reference before DRT does not apply to this assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked. No appeal can be filed by the AO against the directions given by the Approving Panel.

7. Procedure (Rules 10U to 10UC)

7.1 It is provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis of determination of tax liability. Section 101 gives power to CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to General Anti- Avoidance Rule (GAAR). It may be noted that for this purpose Rules 10U to 10UC and Forms 3CEG to 3CEI have been inserted in the Income tax Rules.

7.2 Rule 10U provides that the GAAR provisions of chapter X-A (Sections 95 to 102) shall not apply in respect of the following:

a) To an arrangement where the tax benefit in the relevant assessment year arising to all the parties to the arrangement does not exceed, in the aggregate, Rs. 3 Crore.

b) To a Foreign Institutional Investor (FII) who is assesse under the Income tax Act and has not taken benefit of DTTA u/s 90 or 90A. Further, such FII should have made investment in listed or un-listed securities with prior permission of SEBI under the applicable Regulations.

c) To a Non-resident, in relation to investment made by him by way of offshore derivative instruments or otherwise, directly or indirectly in a FII.

d) To any income accruing, arising or received by any person from transfer of Investments made before 1-4-2017 by such person.

e) Without prejudice to (d) above, it is clarified in the Rule that GAAR Provisions will apply to any arrangement, irrespective of the date on which it has been entered into, in respect of the tax benefit obtained from the arrangement on or after 1-4-2017. This will mean that if any impermissible arrangement is entered into prior to 1/4/2017, GAAR provisions will apply to the tax benefit obtained after 1/4/2017.

f) The term (a) FII, (b) offshore derivative instrument, (c) SEBI and (d) tax benefit are defined in the Rule.

7.3 Rule 10 UB provides for Forms and Notice for reference u/s. 144BA. If the Assessing Office is of the view that GAAR provisions are to be invoked to a particular arrangement or transaction he has to issue a notice to the assesse seeking his objections, if any, to the applicability of the provisions of Chapter X-A (i.e. Sections 95 to 102). In this notice A.O. has to state

a) Details of the arrangement to which provisions of Chapter X-A are proposed to be applied.

b) The tax benefit arising under the arrangement

c) The basis and reasons for considering that the main purpose of the arrangement is to obtain tax benefit.

d) The basis and reasons as to why conditions provided in Section 96(1) are satisfied.

e) The A.O. has to give a list of the documents and evidence relied upon by him supporting his reasons stated under (c ) and (d) above.

7.4 After receiving the objections from the assesse, the A.O., if not satisfied with the objections, can make a reference to the CIT u/s 144BA (1) in Form No. 3 CEG. If the CIT, after considering the reference by the A.O. and the objections filed by the assesse is satisfied that provisions of chapter X-A are not applicable to the facts of the case, he shall issue directions to A.O. in Form No. 3CEH. Such directions are to be given within a period of 2 months from the end of the month in which the final submissions of the assesse in response to notice issued u/s 144BA (2) are made.

7.5 If the commissioner decides to refer the matter to the Approving panel u/s 144BA(4), he shall record his satisfaction regarding the applicability of the provisions of Chapter X-A in Form No.3CEI and enclose the same with the reference. Rule 10UC provides that no reference shall be made to the Approving panel u/s 144 BA (4) after the expiry of 2 months from the end of the month in which final submissions of the assesse in response to notice u/s 144BA(2) is received.

8. To Sum Up:

8.1 The above GAAR provisions will have far reaching consequences for assesses engaged in the business with Indian or Foreign parties. GAAR is not restricted to only business transactions. Therefore, all assesses who are engaged in business or profession or who have no income from business or profession but have income from some source will be affected by these provisions. It appears that any assesse having any arrangement, agreement, or transaction with a connected person will have to take care that the same is at Arm’s Length Consideration. In particular, an assesse will have to consider the implications of GAAR while (a) executing a WILL or Trust, (b) entering into partnership or forming LLP, (c) taking controlling interest in a company, (f) entering into amalgamation of two or more companies, (c ) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, (h) acquiring an Indian or Foreign company or (i) making a Gift. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.

8.2 From the wording of the above provisions of sections 95 to 102, 144BA and Rules it appears that the provisions of GAAR can be invoked even in respect of an arrangement made prior to 1-4- 2017. The CIT or the Approving Panel can hold any such arrangement entered into prior to 1-4- 2017 as impermissible and direct the AO to make adjustments in the computation of income or tax in the assessment year 2018-19 or any year thereafter. As suggested in Para 15.15 of the report of the Standing Committee on Finance on DTC Bill, 2010 GAAR provisions should have been applied prospectively so that they are not made applicable to existing arrangements / transactions. Even in the Press Note issued by the Central Government on 14-1-2013 it was stated that transactions entered into prior to 30-8-2010 will not be made subject to GAAR provisions. This has not been provided in the above sections and, therefore, the above GAAR provisions may have retroactive effect. The only exception made in Rule 10U is with reference to income from transfer of certain investments made prior to 1-4-2017.

8.3 The Government has not yet issued notification for constitution of Approving Panel u/s 144BA. Moreover, the CBDT has not yet issued the scheme for efficient functioning of the Approving Panel and expeditious disposal of the reference made to it.

8.4 The provisions in Rule 10U that GAAR Provisions will not apply where the aggregate tax benefit does not exceed Rs.3 crore, is welcome. Let us hope that in other cases the tax department will take a reasonable view while dealing with commercial arrangements made by tax payers while conducting their economic activities.

8.5 The Concept of GAAR is new in our Country. Therefore, it is necessary to educate the tax payers about the nature of arrangements and transactions which will be considered by the tax department as impermissible arrangements. For this purpose the CBDT should issue detailed guidelines giving illustrations of different types of arrangements which may be considered as impermissible. This can be given in question answer form. Such guidelines will enable tax payers to take care while entering into any arrangement or transaction. This will also reduce litigation.

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Non-compete fees- Income or capital- Discontinuation of business pursuant to noncompete agreement- A. Y. 2000-01- Section 28(va) inserted w.e.f. 01/04/2003 is not retrospective- Amount received pursuant to negative covenant is capital receipt-

CIT vs. TTK Healthcare Ltd.; 385 ITR 326 (Mad):

The assessee was manufacturing condoms and gloves and the LI group was in the business of manufacturing rubber contraceptives all over the world on its own and through its subsidiaries. Assessee entered into a non compete agreement with the LI group for discontinuing its condom business. LI group paid 4,99,000 pounds as noncompete fees to assessee. The assessee claimed the noncompete fees to be capital receipt. The Assessing Officer treated the amount as revenue receipt. The Tribunal held that the amount was capital receipt.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) The litmus test whether a compensation received by the assessee towards a negative covenant of noncompete clause is whether or not the impairment is one of the assessee’s sources of income and if the answer is that the injury has been caused to one of its sources of income, then it is enough to render the compensation received in that process a capital receipt. At any rate, w.e.f. April 1, 2003, by virtue of introduction of section 28(va) in the Income-tax Act, 1961 all monies received pursuant to a negative covenant become liable for the incidence of taxation, thus obliterating the distinction between the two that was available till then.

ii) The amount of 4,99,000 pounds paid by LI group was liable to be treated as a measure of compensation towards the negative covenant between the assessee and the LI group. It was not necessary that the assessee shelves all its other sources of income as well, for the receipt of compensation to amount to capital receipt.”

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Charitable purpose- Cancellation of registration- Section 2(15) and 12AA(3) of I. T. Act, 1961- A. Y. 2009-10- Disqualification for exemption where receipts from commercial activities exceed Rs. 25 lakhs- No change in nature of activities- Assessee entitled to continued registration-

DIT(Exem) vs. Khar Gymkhana; 385 ITR 162 (Bom):

The assessee is a charitable trust covered by the last limb in the definition u/s. 2(15) of the Income-tax Act, 1961 “general public utility”. In the A. Y. 2009-10, the assessee was not eligible for the exemption in view of the fact that receipts from commercial activities exceeded Rs. 25 lakh. There was no change in the nature of activities. DIT(Exemption) cancelled the registration on this ground. The Tribunal restored the registration.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) CBDT circular No. 21 of 2016 dated 27/05/2016 clarified that it shall not be mandatory to cancel the registration already granted u/s. 12AA to a charitable institution merely on the ground that the cut off specified in proviso to section 2(15) is exceeded in a particular year without there being any change in the nature of activities of the institution.

ii) The Tribunal was right in law in holding that the assessee was entitled to continued registration u/s. 12A of the Act and in setting aside the cancellation of its registration on the ground that its receipts from commercial activities exceeded Rs. 25 lakh in the year.”

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Business expenditure: Section 37(1) of I. T. Act, 1961- A. Y. 2003-04- Assessee paid stamp duty for a contract executed with State Road Transport corporation in course of business- Since stamp duty paid by appellant during year under consideration was a compulsory statutory levy and it would not restrict profits of future years and was incurred wholly and exclusively for purpose of business- It must be allowed in its entirety in year in which it was incurred and it could not be spread over a number of years-

Prithvi Associates vs. ACIT; [2016] 71 taxmann.com 163 (Guj):

The assessee paid stamp duty in relation to contract executed with Maharashtra State Road Transport corporation. The Assessing Officer disallowed the claim for deduction of the said expenditure. CIT(A) allowed the claim but the Tribunal upheld the order of the Assessing Officer.

On appeal by the assessee the Gujarat High Court reversed the decision of the Tribunal and held as under:

“i) The payment of stamp duty is not for business expediency but it is in the nature of a compulsory levy under the Bombay Stamp Act. It is legally settled that accounting practice cannot over ride the provisions of the Income-tax Act, 1961. Stamp duty paid by the appellant during the year under consideration is a compulsory statutory levy and would not restrict the profits of the future years and ordinarily revenue expenditure incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred and it cannot be spread over a number of years.

ii) If any statutory expense is required to be paid, in view of decision of the Apex Court in India Cements Ltd. vs. CIT [1966] 60 ITR 52, such expense is required to be allowed in the same year. The Apex Court in the case of Taparia Tools Ltd. vs. Jt. CIT [2015] 372 ITR 605/231 Taxman 5/55 taxmann.com 361 also observed that as per the ordinary rule revenue expenditure incurred in a particular year is to be allowed in that year.

iii) Thus, if the assessee claims that expenditure in that year, the department cannot deny it. However, in a case where the assessee himself wants to spread the expenditure over a period of ensuing years, it can be allowed only if the principle of ‘matching concept’ is satisfied, which upto now has been restricted to cases of debentures. Therefore, it is rightly observed by the Commissioner (Appeals) that the expense is required to be allowed in the same year.

iv) In view of above, the Tribunal has committed an error in law in confirming the disallowance of Rs. 12,28,560 towards stamp duty expenses actually incurred by the appellant for executing contract with Maharashtra State Road Transport Corporation. Accordingly, this appeal is allowed.”

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Cash credit- Section 68 of I. T. Act, 1961- A. Y. 1983-84- The assessee is bound to be provided with the material used against him apart from being permitted to cross examine the deponents- The denial of such opportunity goes to root of the matter and strikes at the very foundation of the assessment order and renders it vulnerable-

H. R. Mehta vs. ACIT(Bom); ITA No. 58 of 2001 dated 30/06/2016 (www.itatonline.org)

In the A. Y. 1983-84, the assessee had taken loan of Rs. 1,45,000/- which the Assessing Officer treated as non genuine and made addition of the amount as unexplained cash credit u/s. 68 of the Income-tax Act, 1961. The Tribunal upheld the addition.

On appeal by the assessee, the Bombay High Court held as under:

“i) On a very fundamental aspect, the revenue was not justified in making addition at the time of reassessment without having first given the assessee an opportunity to cross examine the deponent on the statements relied upon by the ACIT. Quite apart from denial of an opportunity of cross examination, the revenue did not even provide the material on the basis of which the department sought to conclude that the loan was a bogus transaction.

ii) In the light of the fact that the monies were advanced apparently by the account payee cheque and was repaid vide account payee cheque the least that the revenue should have done was to grant an opportunity to the assessee to meet the case against him by providing the material sought to be used against assessee in arriving before passing the order of reassessment. This not having been done, the denial of such opportunity goes to root of the matter and strikes at the very foundation of the reassessment and therefore renders the orders passed by the CIT (A) and the Tribunal vulnerable.

iii) In our view the assessee was bound to be provided with the material used against him apart from being permitting him to cross examine the deponents. Despite the request dated 15th February, 1996 seeking an opportunity to cross examine the deponent and furnish the assessee with copies of statement and disclose material, these were denied to him. In this view of the matter we are inclined to allow the appeal.”

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Book profits- Section 115JB of I. T. Act, 1961- A. Y. 2008-09- Mesne profits (amount received from a person in wrongful possession of property) is a capital receipt and not chargeable to tax either as income or as “book profits” u/s 115JB- As the department has implicitly accepted Narang Overseas vs. ACIT 100 ITD (Mum) (SB), it cannot file an appeal on the issue in the case of other assesses-

CIT vs. Goodwill Theatres Pvt. Ltd. (Bom); ITA No. 2356 of 2013 dated 06/06/2016 (www.itatonline.org)

The Bombay High Court had to consider two questions in an appeal filed by the Department:

(a) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits are capital receipts in the hands of the assessee and not revenue receipts chargeable to tax?

(b) Whether on the facts and in the circumstance of the case and in law, the Tribunal was correct in holding that mesne profits, can not be part of book profit u/s. 115JB, as it was held as capital assets?”.

The High Court upheld the decision of the Tribunal and held as under:

“(i) The Tribunal has held that the mesne profits received by the Assessee for the unauthorized occupation of its premises from Central Bank of India is a receipt of capital nature and thus not taxable. To reach the above conclusion, the impugned order placed reliance upon the decision of Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., vs. ACIT 100 ITD (Mum) S.B. The issue before the Special Bench in Narang Overseas Pvt. Ltd. (supra) was whether the mesne profits received by an assessee is revenue or capital in nature. The Special Bench, in its order placed reliance upon the definition of mesne profits in Section 2(12) of the Code of Civil Procedure, 1908 which reads as under: “Mesne profits of property means those profits which the person in wrongful possession of such property actually received or might with ordinary diligence have received therefrom, together with interest on such profits, but shall not include profits due to improvements made by the person in wrongful possession.”

ii) On the basis of above, it held that any amount received from a person in wrongful possession of its property, would be mesne profits and it is capital in nature.

iii) We find that the issue before the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd was to determine the character of mesne profits being either capital or revenue in nature. The Special Bench of the Tribunal in Narang Overseas Pvt. Ltd held that the same is capital in nature. There is no doubt that the issue arising herein is also with regard to the character of mesne profits received by the Assessee. In this case also, the amounts are received by the Assessee from a person in wrongful possession of its property i.e. after the relationship of landlord and tenant has come to an end. Once the Special Bench order of the Tribunal in Narang Overseas Pvt. Ltd has taken a view on the character of mesne profits, then unless the Revenue challenges the order of the Special Bench of the Tribunal it would be unfair of the Revenue to pick and choose assessees where it would follow the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. The least that is expected of the State which prides itself on Rule of Law is that it would equally apply the law to all assessees’s.

(iv) We make it clear that we have not examined the merits of the question raised for our consideration. We are not entertaining the present appeal on the limited ground that the Revenue must adopt an uniform stand in respect of all assessees. This is more so as the issue of law is settled by the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd., (supra). The fact that even after the dismissal of its Appeal (L) No.1791 of 2008 for non-removal of office objections on 25th June, 2009, no steps have been taken by the Revenue to have the appeal restored, is evidence enough of the Revenue having accepted the decision of the Special Bench of the Tribunal in Narang Overseas Pvt. Ltd. Thus, the question as framed in the present facts does not give rise to any substantial question of law.”

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Business Expenditure- Capital or revenue- A. Y. 1997-98- Test of enduring benefit not to be mechanically applied- Expenses incurred for software development- Rapid advancement and changes in software industry- Difficult to attribute endurability- Expenditure to be treated as revenue

Indian Aluminium Co. Ltd. vs. CIT; 384 ITR 386 (Cal):

The assessee was engaged in the manufacture and production of aluminium and related products. Bauxite was a basic raw material for manufacturing aluminium. The assessee claimed deduction of expenditure incurred on development of application software to help the assessee in planning the production and bauxite grade control in mines treating it as differed revenue expenditure and amortised a part of it debiting it to the profit and loss account. The Assessing Officer disallowed the deduction on the ground that the expenditure was capital in nature incurred with a view to obtain an asset or advantage of a permanent nature. The Tribunal upheld the disallowance.

On appeal by the assessee Calcutta High Court reversed the decision of the Tribunal and held as under:

“The software industry was one such field where advancements and changes happened at a lightening pace and it was difficult to attribute any degree of endurability. The software used by the assesee was a application software which needed to be updated due to the rapid advancements in technology and increasing complexity of the features. Disallowance of the expenditure incurred on software development was erroneous.”

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Advance ruling- Application for advance ruling- A. Y. 2012-13- Bar of application where matter is pending consideration before Income-tax Authorities- Mere notice u/s. 143(2) without any specific queries would not mean matter was pending before Income-tax Authorities- Such notice would not bar an application for advance ruling-

LS Cable and System Ltd vs. CIT; 385 ITR 99 (Del):

Assessee’s application for advance Ruling for the A. Y. 2012-13, was rejected on the ground that the matter was pending before the Assessing Officer at the time of application in view of the fact that the notice u/s. 143(2)(ii) was issued by the Assessing Officer.

The Delhi High Court allowed the assessee’s writ petition and held as under:

“i) Mere issuance of a notice u/s. 143(2) of the Act, by merely stating that “there are certain points in connection with the return of income on which I would like some other information” did not amount to the issues raised in the application filed by the assessee before the Authority for Advance Ruling being already pending before the Assessing Officer.

ii) There was no statutory bar to the Authority for Advance Rulings considering the application.”

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Appeal to High Court- Section 260A of I. T. Act, 1961- A. Y. 1996-97- Plea urged for first time in appeal before High Court- Not permissible- Capital vs. revenue receipt- Income from other sources- Casual and non-recurring receipts- Auction sale of property mortgaged with bank set aside by Supreme Court- Auction purchasers and judgment debtors compromising in execution proceedings- Amount received by auction purchaser not casual and non-recurring receipt but capital receipt not taxable-

Girish Bansal vs. UOI; 284 ITR 161 (Del):

Auction sale of property mortgaged with bank was set side by the Supreme Court. Auction purchaser(assessee) and judgment debtors compromised the execution proceedings wherein the assessee purchaser received Rs. 10 lakhs as a settlement amount. For the A. Y. 1996-97, the assessee claimed the amount as the non-taxable capital receipt. The Assessing Officer treated the amount as the casual and non-recurring receipt u/s. 10(3) of the Income-tax Act, 1961 and assessed it as income. The Tribunal upheld the order of the Assessing Officer.

On appeal by the assessee before the Delhi High Court the Department sought consideration of the amount received by the assessee as revenue receipt. The High Court reversed the decision of the Tribunal and held as under:

“i) The Department could not be permitted to shift its stand from one forum to another. The consistent case of the Department was to be tested at various levels for its correctness. It was possible that in the interregnum there might be decisions of the Supreme Court which might support or negate the case of the Department. That would then have to be taken to its logical end. Under these circumstances the Court was not prepared to permit the Department to urge a new plea for the first time in the High Court.

ii) The Assessing Officer was in error in proceeding on the basis that a sum of Rs. 10 lakhs received by the assessee was in the nature of a casual and nonrecurring receipt which could be brought to tax u/s. 10(3) of the Act. The Assessing Officer having held that it could not be in the nature of capital gains it was not open to the Department to seek to bring it to tax under the heading revenue receipt. What was in the nature of a capital receipt could not be sought to be brought to tax resorting to section 10(3) read with section 56 of the Act.

iii) The question is accordingly answered in favour of the assessee and against the Revenue.”

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Deduction of tax at source- The contract of employment not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act and hence outside section 192.

ITC Ltd. vs. CIT. (2016) 384 ITR 14 (SC) The assessees are engaged in the business of owning, operating, and managing hotels. Surveys conducted at the business premises of the assesses allegedly revealed that the assessees had been paying tips to its employees but not deducting taxes thereon. The Assessing Officer treated the receipt of the tips as income under the head “Salary” in the hands of the various employees and held that the assessees were liable to deduct tax at source from such payment u/s. 192 of the Income tax Act, 1961. The assessees were treated by the Assessing Officer as assessees-in-default under section 201(1) of the Act. The Assessing Officers in various assessment orders worked out the different amounts of tax to be paid by all the aforesaid assessees u/s. 201(1), as also interest u/s. 201(1A) of the said Act for the assessment years 2003-04, 2004-05 and 2005-06.

The Commissioner of Income –tax (Appeals) vide his common order dated November 28, 2008 allowed the various appeals of the assessees holding that the assessees could not be treated as assesses-in-default u/s. 201(1) of the Act for non-deduction of tax on tips collected by them and distributed to their employees. Appeals filed by the Revenue to the Income-tax Appellate Tribunal came to be dismissed by the Tribunal by relying upon its own order for the assessment year 1986-87 in the case of ITC and the case of Nehru Palace Hotels Limited. Against the said orders of the Tribunal, appeals were preferred by the Revenue to the High Court.

The High Court held, after considering sections 15, 17 and 192 of the Income-Tax Act, that tips would amount to “ profit in addition to salary or wages” and would fall u/s. 15(b) read with section 17(1)(iv) and 17(3)(ii). Even so, the High Court held that when tips are received by employee directly in cash, the employer has no role to play and would therefore be outside the purview of section 192 of the Act. However, the moment a tip is included and paid by way of a credit card by a customer, since such tip goes into the account of the employer after which it is distributed to the employees, the receipt of such money from the employer would, according to the High Court, amount to “salary” within the extended definition contained in section 17 of the Act. The High Court concluded that the receipt of the tips constituted income at the hands of the recipients and were chargeable to the income-tax under the head “Salary” u/s. 15 of the Act. That being so it was obligatory upon the assessees to deduct taxes at source from such payment u/s. 192 of the Act.

Further, since the assessees were declared to be assessees-in-default u/s. 201 of the Act, the High Court found that despite the fact that the assessees did not deduct the said amount based on a bone fide belief and no dishonest intention could be attributed to any of them, yet the High Court held that levy of interest u/s. 201(1A) would follow, as the payment of simple interest under the said provision was mandatory.

The Supreme Court, on appeal by the assessees, observed that on the facts of the present case, it was clear that there was no vested right in the employee to claim any amount of tips from his employers. Tips being purely voluntary amounts that may or may or may not be paid by customers for services rendered to them would not, therefore, fall within section 15(b) at all. Also, it was clear that salary must be paid or allowed to an employee in the previous year “by or on behalf of” an employer. Even assuming that the expression “allowed” is an expression of width, the salary must be paid by or on behalf of an employer. Section 15(b) necessarily has reference to the contract of employment between employer and employee, and salary paid or allowed must therefore have reference to such contract of employment. On the facts of the present case, it was clear that the amount of tips paid by the employer to the employees had no reference to the contract of employment at all. Tips were received by the employer in a fiduciary capacity as trustee for payment that were received from customer. There was, therefore, no reference to the contract of employment when these amount were paid by the employer to the employee.

The Supreme Court noted that it was nobody’s case that the amount of tips received by the employees in the present cases were not taxable in their hands. The learned counsel for the assessees had stated that they were so taxable as income from other sources. The question that it had to determine was therefore somewhat different, namely whether the person responsible for paying salary income to his employee is liable to deduct the tax of the employee and pay it over on an estimated basis u/s. 192 of the Income-tax Act.

The Supreme Court held that contract of employment in the present cases, not being the proximate cause for the receipt of tips by the employee from a customer, the same would be outside the dragnet of sections 15 and 17 of the Income-tax Act.

The Supreme court further held that interest u/s. 201(1A) could only be levied when a person is declared as an assessee-in-default. Having found that the appellants in the present cases were outside section 192 of the Act, the appellant could not be stated to be assessees-in-default and hence no question of interest therefore arose.

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University – Exemption – Conditions Precedent – University must exist solely for education and must be wholly or substantially financed by Government

Visvesvraya Technological University vs. ACIT (2016) 384 ITR 37 (SC)

The appellant University, namely, Visvesvaraya Technological University (VTU) had been constituted under the Visvesvaraya Technological University Act, 1994. It discharged functions earlier performed by the Department of Technical Education, Government of Karnataka. The University exercised control over all Government and Private Engineering Colleges within Karnataka.

For the assessment year 2004-05 to 2009-10 notices u/s. 148 of the Income-tax Act, 1961 were issued to the appellant-University assessee. Eventually returns were filed for the assessment years in question declaring “nil” income and claiming exemption u/s. 10(23C)(iiiab) of the Act. The aforesaid claim of exemption was negated by the Assessing Officer who proceeded to make the assessments. The same view has been by all the authorities under the Act and also by the High Court.

The question, therefore, that arose before the Supreme Court in the present appeals was the entitlement of the appellant-University-assessee to exemption from payment of tax under the provisions of section 10(23C) (iiiab) of the Act.

The Supreme Court observed that the entitlement for exemption u/s. 10(23C)(iiiab) was subject to two conditions. Firstly the educational institution or the university must be solely for the purpose of education and without any profit motive. Secondly, it must be wholly or substantially financed by the Government. Both conditions would have to be satisfied before exemption could be granted under the aforesaid provision of the Act.

The Supreme Court noted that the relevant principles of law which governed the first issue, i.e., whether an educational institution or a university, as may be, exists only for educational purpose and not for profit was no longer res integra and was decided by it in Queen’s Educational Society vs. CIT(372 ITR 699).

The Supreme Court, in the present case, found that during a short period of a decade, i.e., from the year 1999 to 2010 the appellant University had generated a surplus of about Rs.500 crore. There was no doubt that the huge surplus had been collected/accumulated by realising fees under different heads in consonance with the powers vested in the University u/s. 23 of the VTU Act. The difference between the fees collected and the actual expenditure incurred for the purposes for which fees were collected is significant. In fact the expenditure incurred represented only a minuscule part of the fees collected. No remission, rebate or concession in the amount of fees charged under the different heads for the next academic year(s) had been granted to the students.

As against the above, the amount of direct grant from the Government has been meagre. The University nevertheless had grown and the number of private engineering colleges affiliated to it had increased from about 64 to presently about 194. The infrastructure of the University has also increased offering educational avenues to an increasing number of students in different and varied subjects.

Between 1994 and 2009 the University had actually spent about Rs.504 crore on infrastructure and the available surplus in the year 2010 which was in the range of Rs. 440 crore was also intended to be applied for different infrastructural work.

Even in a situation where direct Government grants had not been forthcoming and allocation against permissible heads like salary, etc. had not been made the University had thrived and prospered. There could, however, be no manner of doubt that the surplus accumulated over the years had been ploughed back for educational purpose. In such a situation, following the principles laid down in Queen’s Educational Society (supra), the Supreme Court held that the first requirement of section 10(23C)(iiiab), namely, that the appellant University existed “solely for educational purposes and not for purposes of profits” was satisfied.

As to the further question as to whether the appellant University was wholly or substantially financed by the Government which was an additional requirement for claiming benefit u/s. 10(23C)(iiiab) of the Act, it was not in dispute that grants/direct financing by the Governtment during the six (06) assessment years in question, i.e., 2004-05 to 2009-10 had never exceeded 1 per cent of the total receipts of the appellantuniversity assessee.

The argument advanced before the Supreme Court by the University that fees of all kinds collected within the four corners of the provisions of section 23 of the VTU Act must be taken to be receipts from sources of finance provided by the Government. The rates of such fees are fixed by the Fee Committee of the University or by authorized Government Agencies (in case of Common Entrance Test). It was , therefore, contended that such receipts must be understood to be funds made available by the Government as contemplated by the provisions of section 10(23C)(iiiab) of the Act.

The Supreme Court held that receipts by way of fee collection of different kinds continued to be a major source of income for all universities including private universities. Levy and collection of fees was invariably an exercise under the provisions of the statute constituting the University. In such a situation, if collection of fees was to be understood to be amounting to funding by the Government merely because collection of such fees was empowered by the statue, all such receipts by way of fees may become eligible to claim exemption u/s. 10(23C) (iiiab). Such a result would virtually render the provisions of the other two sub-sections, namely, 10(23c)(iiiad) and 10(23c)(vi) nugatory and could not be understood to have been intended by the Legislature and must, therefore, be avoided.

According to the Supreme Court, it would therefore, be more appropriate to hold that funds received from the Government contemplated u/s. 10(23C)(iiiab) of the Act must be direct grants/contributions from government sources and not fees collected under the statute.

Before the Supreme Court , reliance had been placed on the judgment of the High Court of Karnataka in CIT vs. Indian Institute of Management [370 ITR 81], particularly, the view expressed that the expression “wholly or substantially financed by the Government” as appearing in section 10(23C) could not be confined to annual grants and must include the value of the land made available by the Government. The Supreme Court noted that in the present case, the High Court in paragraph 53 of the impugned judgment has recorded that even if the value of the land allotted to the University (114 acres) was taken into account the total funding of the University by the Government would be around 4 per cent to 5 per cent of its total receipt. That apart what was held by the High Court in the above case, while repelling the contention of the Revenue that the exemption u/s. 10(23C)(iiiab) of the Act for a particular assessment year must be judged in the context of receipt of annual grants from the Government in that particular year, is that apart from annual grants the value of the land made available; the investment by the Government in the buildings and other infrastructure and the expenses incurred in running the institution must all be taken together while deciding whether the institution is wholly or substantially financed by the Government. The Supreme Court held that situation before it, on facts, was different leading to the irresistible conclusion that the appellant university did not satisfy the second requirement spelt out by section 10(23C)(iiiab) of the Act. The appellants University was neither directly nor even substantially financed by the Government so as to be entitled to exemption from payment of tax under the Act.

The Supreme Court for the aforesaid reasons dismissed the appeals.

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Wealth Tax – Asset – Definition – Urban Land – Exclusions –Land occupied by any building which has been constructed with the approval of the appropriate authority would not include land occupied by any building which is still under construction.

Girdhar G. Yadalam vs. CWT (2016) 384 ITR 52 (SC)

The assessee, a Hindu undivided family which was the coowner of a land measuring 30,663.04 sq. metres, situated at survey No.67/2, 67/3, 67/4 and 67/5 of Adugodi Village and a portion of survey No.151 of Kornamangala Village of Begur Hobli of Bangalore South Taluq, Bangalore District, bearing City Survey No.CTS/2. The assessee entered into various development agreements with one M/s. Prestige Estates Properties Private Ltd. for construction of residential flats. The assessee claimed that it had retained ownership of the land until flats are fully constructed and possession of the assessee’s share was handed over to it. The development agreement constituted only permissive possession according to the assessee for the limited purpose of construction of flats. The assessee contended that the assessee continued to be the owner of the land for the financial years 1995-96 and subsequent years till the sale of flats. Notice u/s. 17 of the Act was issued to the assessee and he filed return of wealth of Rs.8,48,000 on August 20, 2003. After considering the contention to not to treat the property as urban land, the Assessing Officer brought it to tax under an order dated March 31, 2005. An appeal was filed before the Assistant Commissioner of Income Tax (Appeals), Bangalore. The appeal stood allowed in the light of an earlier order of the Tribunal. The Revenue thereafter filed an appeal to the Tribunal. The Tribunal following its earlier decision dismissed the appeal filed by the Revenue. The Revenue took up the matter in further appeals before the High Court of Karnataka. The High Court upset the order of the Income-tax Appellate Tribunal holding that the assessee was not entitled to the benefit of clause (ii) of Explanation 1(b) to section 2 (ea)(v) of the Act, as the building had not been constructed and was still under construction during the assessment year.

The Supreme Court at the outset noted that in the present case it was concerned with the interpretation that is to be accorded to the provisions of Explanation 1(b) to section 2(ea)(v) of the Wealth-tax Act, 1957. This Explanation defines “urban land”.

The Supreme Court observed that it was not in dispute that “urban land” is to be included to calculate “net wealth” for the purpose of wealth tax under the Act. However, certain lands are not to be treated as “urban land” which are mentioned in Explanation 1(b). But section 2(ea) of the Act was inserted by the Finance Act 1992 (Act No.18 of 1992), with effect from April 1, 1993. The purpose was to exempt some of the lands from wealth-tax with the objective of stimulating investment in productive assets. It is in that context that the land occupied by any building which has been constructed with the approval of the appropriate authority is excluded from the definition of urban land. On a plain reading of the said clause it becomes clear that in order to avail of the benefit, the following conditions have to be satisfied:

(a) The land is occupied by any building;
(b) Such a building has been constructed;
(c) The construction is done with the approval of the appropriate authority.

The Supreme Court noted that notwithstanding the aforesaid plain language; an endeavour of the Counsel for the assessee was to impress upon the Court to read the said clause to include even that land where the construction of building activity has been started. He, thus, wanted that the words “has been constructed” is to be read as “is being constructed”.

The Supreme Court held that on the plain language of the provision in question, the benefit of the said clause would be applicable only in respect of the building “which has been constructed”. The expression “has been constructed” obviously cannot include within its sweep a building which is not fully constructed or in the process of construction. The opening words of clause (ii) also become important in this behalf, where it is stated that “the land occupied by any building”. The land cannot be treated to be occupied by a building where it is still under construction.

No doubt, the purpose and objective of introducing section 2(ea) in the Act was to stimulate productive assets. However, the event when such a provision is to be attracted is also mentioned in Explanation 1(b) itself carving out those situations when the land is not to be treated urban land. The Legislature in its wisdom conferred the benefit of exemption in respect of urban vacant land only when the building is fully constructed and not when the construction activity has merely started.

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Business loss/speculation loss – 37(1)/43(5) – A. Y. 2009-10 – Loss suffered in foreign exchange transactions entered into for hedging business transactions cannot be disallowed as being “notional” or “speculative” in nature. S. Vinodkumar Diamonds is not good law as it lost sight of Badridas Gauridas 261 ITR 256 (Bom)

CIT vs. M/s. D. Chetan & Co. (Bom); ITA No. 278 of 2014 dated 01/10/2016:
www.itatonline.org:

The assessee is engaged in the
business of import and export of diamonds. during the assessment proceedings,
the Officer found that Respondent assessee explained that the amount of
rs.78.10 lakhs claimed as loss was on account of having entered into hedging
transactions to safeguard variation in exchange rates affecting its
transactions of import and export by entering into forward contracts. The
Assessing Officer by order of assessment dated 27th december 2011 disallowed the
claim on the ground that it is a notional loss of a contingent liability debited
to Profit and Loss Account. Resultantly,
the same was added to the assessee’s total income. The Cit (appeals) allowed
the assessee’s appeal inter alia relying upon the decisions of tribunal in
Bhavani Gems vs. ACIT (ITA No.2855/Mum/2010 dt.30.3.2011) and the Special Bench
decision in the case of DCIT vs. Bank of Bahrain and Kuwait ((2010) 132 TTJ
(Mumbai) (SB) 505). The Cit (appeals) on facts found that the transaction of forward
contract was entered into during the course of its business. It held that it
was not speculative in nature nor was it the case of the Assessing Officer that
it was so. Thus the loss incurred as forward contract was allowed as a business
loss. The Tribunal upheld the finding of the Cit (appeals). The tribunal found
that the transaction of forward contract had been entered into for the purpose
of hedging in the course of its normal business activities of import and export
of diamonds.

On appeal by the revenue, the
high Bombay Court upheld the decision of the tribunal and held as under:

“i) The Tribunal has, while
upholding the finding of the Cit (appeals), independently come to the
conclusion that the
transaction entered into
by the assessee is not in the nature of speculative activities. Further, the hedging transactions were entered into so
as to cover variation in foreign exchange rate which would impact its business
of import and export of diamonds. These concurrent finding of facts are not
shown to be perverse in any manner. In fact, the Assessing Officer also in the
Assessment Order does not find that the transaction entered into by the
assessee was speculative in nature.

ii) The reliance placed on the decision in S.
Vinodkumar Diamonds Pvt. Ltd. vs. Addl.CIT ITA 506/MUM/2013 rendered on 3rd may
2013 in the revenue’s favour would not by itself govern the issues arising
herein. This is so as every decision is rendered in the context of the facts
which arise before the authority for adjudication. Mere conclusion in favour of
the revenue in another case by itself would not entitle a party to have an
identical relief in this case. In fact, if the revenue was of the view that the
facts in S. vinodkumar are identical/similar to the present facts, then
reliance would have been placed by the revenue upon it at the hearing before
the tribunal. The impugned order does not indicate any such reliance. It
appears that in S. vinodkumar, the tribunal held the forward contract on facts
before it to be speculative in nature in view of section 43(5) of the act. However,
it appears that the decision of this court in CIT vs. Badridas Gauridas (P) Ltd.
261 ITR 256 (Bom) was not brought to the notice of the tribunal when it
rendered its decision in S. vinodkumar (supra). in the above case, this court
has held that forward contract in foreign exchange when incidental to carrying
on business of cotton exporter and done to cover up losses on account of
differences in foreign exchange valuations, would not be speculative activity
but a business activity.”

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Business expenditure – TDS – Disallowance u/s. 40(a)(ia) – A. Y. 2006-07 – Professional services- Subscription to e-magazines – No rendering of professional services – Tax not deductible at source on subscription – Disallowance of subscription not justified

CIT vs. India Capital Markets P. Ltd.; 387 ITR 510 (Bom):

For the A. Y. 2006-07, the
Assessing Officer disallowed the payment made to Bloomberg being data services
charges of Rs. 4.74 lakh on account of non-deduction of tax at source u/s
40(a)(ia) of the income-tax act, 1961. The Assessing Officer was of the view
that the payment made by the assessee to Bloomberg was in the nature of
consultative services and so the assessee was liable to deduct tax at source. The
Commissioner (appeals) found that the payment made to Bloomberg was essentially
a subscription for a financial e-magazine and was not liable to deduction of
tax at source and accordingly there would be no occasion to invoke section
40(a)(ia) of the act. He therefore deleted the addition. The tribunal upheld
the decision of the Commissioner (appeals).

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i) The
Commissioner (appeals) and the tribunal had reached a concurrent finding
of fact that payments made to Bloomberg
were for subscription
to e-magazines and therefore, there was no occasion to deduct tax under
the act. Thus, section 40(a)(ia) could
not have been invoked.

ii) The
submission on behalf of the revenue that B’s magazines/information was
backed by solid research carried out by its employees and made available on the
website would not by itself result in B rendering any consultative services. It
was not the case of the Revenue that specific queries raised by the asessee
were answered by B as part of the consideration of rs. 4.34 lakh. The
information was made available to all subscribers to e-magazines/journal of B.
therefore, in no way could the payments made to B be considered to be in the
nature of any consultative/professional services rendered by B to the assessee.

iii) The Tribunal was justified
in deleting the disallowance made by the Assessing Officer u/s. 40(a)(ia) of
the act.”

shailesh.kwebmaker

Business expenditure – A. Y. 1985-86 – Accrued or contingent liability – Mercantile system of accounting- Customs duty – Seller challenging increase in payment of customs duty before Supreme Court – Mere challenge to demand would not by itself lead to cessation of liability- Assessee cannot be denied deduction of amounts paid for purchase of goods

CIT vs. Monica India (No. 1); 386 ITR 608 (Bom):

The assessee was following
mercantile system of accounting. For the A. Y. 1985-86, the assessee had
claimed expenditure on accrual basis which included customs duty of Rs. 1.78
crore. The same was allowed by the Assessing Officer. The Commissioner in
exercise of his powers u/s. 263 of the income-tax act, 1961 held that the
amount of rs. 1.78 crore was a contingent liability as the assessee had
challenged it in the Supreme Court and the payment of it to the customs
department was postponed and thus could not be allowed as an expenditure for the subject
assessment year. The tribunal
held that the assessee was following the mercantile system of accounting and
therefore, the liability was to be allowed as deduction on accrual basis and
further held that the liability to pay the customs duty by the assesee was a
part of the sale price to the two sellers, and consequently, ought to be
allowed as an expenditure for purchase of goods.

On appeal by the revenue, the
Bombay high Court upheld the decision of the tribunal and held as under:

“i) The
agreements between the
parties provided that the consideration
payable for the purchase of goods included within it, the duty of customspayable
on the imported goods as a part of the cost incurred by the
seller. Therefore, the cost of
purchase of goods was not only the expenses incurred by the seller from the
opening of the letter of credit but continued to run till the execution of the
contract. The mere fact that the seller of the goods had obtained a stay, would
not by itself result in an unascertained or unqualified liability.

ii) Moreover, since the assessee was following
the mercantile system of accounting mere challenge to the demand by the seller
might not by itself lead to the liability ceasing. Although the seller of the
goods might not be able to claim deduction since it was paid in terms of
section 43B of the act, this would not deprive the assessee of the deduction of
amounts paid by it for purchase of goods. Thus, the assessee would be entitled
to deduct the amount of rs 1.78 crore
as consideration paid for the goods in the assessment year.”

shailesh.kwebmaker

Appellate Tribunal – Power to admit additional grounds/evidence – Section 254, read with Rules 11 and 29 of Income-tax (Appellate Tribunal) Rules, 1963 – A. Y. 2007-08 – In terms of section 254(1), Tribunal while exercising its appellate jurisdiction, has discretion to allow to be raised before it new or additional questions of law arising out of record after giving a reasonable opportunity of being heard to other party

VMT Spinning Co. Ltd. Vs. CIT; [2016] 74 taxmann.com 33
(P&H):

For
the A. Y. 2007-08, the assessee challenged assessment order before the
Commissioner (appeals) which was partly allowed. This led to filing of cross-
appeals before the tribunal i.e., one by the revenue and the other by the
assessee. In the memorandum of appeal filed before the Tribunal, the assessee
raised an additional ground with regard to calculation of minimum alternate tax
to be carried forward to the subsequent year. According to the assessee, in the
assessment order, the same had not been correctly calculated. As said ground
had not been raised before the Commissioner, the tribunal refused to adjudicate
upon the same as according to the tribunal prior leave of the tribunal through
an application in writing should have been obtained before raising the
additional ground. An oral request made by the assessee to raise said
additional ground was not considered enough.

On
appeal by the assessee, the Punjab and Harayana High Court held as under:

“i)
Appeals to the tribunal are preferred u/s. 254(1) which provides that after hearing
the contesting parties, the tribunal may
pass such orders that it thinks fit. In section 254(1) the usage of the words
‘pass such orders thereon as it thinks fit’ gives very wide powers to the
tribunal and such powers are not limited to adjudicate upon only the issues
arising from the order appealed from. Any interpretation to the contrary would
go against the basic purpose for which the appellate powers are given to the
tribunal u/s. 254 which is to determine the correct tax liability of the assessee.

ii)
Rules 11 and 29 of the income-tax (appellate tribunal) rules, 1963 are also
indicative that the powers of the
tribunal, while considering an appeal
u/s. 254(1) are not restricted only to the issues raised before it. Rule 11 of
the 1963 rules provides that the appellant, with the leave of the tribunal can
urge before it any ground not taken in the memorandum of appeal and that the
tribunal while deciding the appeal is not confined only to the grounds taken in
the memorandum of appeal or taken by leave of the tribunal under rule 11.

iii)
Rule 29, is to the effect that though parties to the appeal before the
tribunal shall not be entitled to
produce additional evidence but if the tribunal desires the production of any
document or examination of any witness or any affidavit to be filed, it can,
for reasons to be recorded, do so.

iv)
A harmonious reading of section 254(1) of the act and rules 11 and 29 of the
rules coupled with basic purpose underlying the appellate powers of the
tribunal which is to ascertain the correct tax liability of the assessee leaves
no manner of doubt that the tribunal while exercising its appellate
jurisdiction, has discretion to allow to be raised before it knew or additional
questions of law arising out of the record before it. What cannot be done, is
examination of new sources of income for which separate remedies are provided
to the revenue under the act.

v)
Rule 11 in fact confers wide powers on the tribunal, although it requires a
party to seek the leave of the tribunal. It does not require the same to be in
writing. It merely states that the appellant shall not, except by leave of the
tribunal, urge or be heard in support of any ground not set forth in the
memorandum of appeal. In a fit case it is always open to the tribunal to permit
an appellant to raise an additional ground not set forth in the memorandum of
appeal. The safeguard
is in the proviso to rule 11
itself. The proviso states that the tribunal
shall not rest its decision on any other ground unless the party who may
be affected thereby has had a sufficient opportunity of being heard on that
ground. Thus, even if it is a pure
question of law, the tribunal cannot consider an additional ground without
affording the other side an opportunity of being heard. even in the absence of
the proviso, it would be incumbent upon the tribunal to afford a party an
opportunity of meeting an additional point raised before it.

vi)
Moreover, even though
rule 11 requires
an appellant to seek the leave of the tribunal, it does not confine the Tribunal to a
consideration of the grounds set forth in the memorandum of appeal or even the
grounds taken by the leave of the tribunal. In other words, the tribunal can
decide the appeal on a ground neither taken in the memorandum
of appeal nor
by its leave. The only requirement is that the
tribunal cannot rest its decision on any other ground unless the party who may
be affected has had sufficient opportunity of being heard on that ground.

vii) in the present case, the tribunal ought to have exercised its
discretion especially in view of the fact
that the assessee
intends raising only a
legal argument without reference to any disputed questions of
fact. The matter is remanded
to the tribunal for adjudicating upon the additional ground on merits.”

shailesh.kwebmaker

Appellate Tribunal – Power to grant stay – Section 254(2A) – A. Y. 2009-10- Tribunal has power to grant stay for a period exceeding three hundred and sixty five days

Principal CIT vs. Carrier Air Conditioning and Refrigeration
Ltd.; 387 ITR 441 (P&H):

In
the appeal filed by the Revenue before the Punjab and haryana high Court, the
following questions were raised:

“i) Whether the hon’ble income-tax appellate
tribunal has acted in contravention of the second proviso to section 254(2a) of
the income-tax act, 1961 as the combined period of stay has exceeded 365 days?

ii) Whether the order of the income-tax tribunal
be treated as void ab initio in the light of the third proviso to section
254(2a) of the income-tax act, 1961, which provides that stay of demand stands
vacated after expiry of 365 days even if delay in disposal of appeal is not
attributable to the assessee?”

The
high Court held as under:

“Where the delay in disposing of the appeal is not attributable to the
assessee, the tribunal has the power to grant extension of stay beyond 365 days
in deserving cases.”

shailesh.kwebmaker

Shipping Companies – Computation of income – Tonnage Tax Scheme – Income generated from slot charter could be computed in accordance with the provisions of Chapter-XII-G and requirement of producing certificate referred to in section 115 VX would not apply.

CIT vs. Trans Asian Shipping Services (P) Ltd. (2016) 385
ITR 637 (SC)

The question that arose before the Supreme Court
for consideration pertained to “slot charter”, i.e. should the “slot charter”
operations of “tonnage tax company” be carried on only in “qualifying ships” to
include the income from such operations to determine the “tonnage income” under
“tonnage tax scheme” in terms of the provisions of Chapter XII-G of the act? in
other words, is the income derived from “slot charter” operations of a “tonnage
tax company” liable to be excluded while determining the “tonnage income”
under the “tonnage
tax scheme” if such operations are carried on in ships
which are not “qualifying ships” in terms of the provisions of that Chapter of
the act and the relevant provisions of the income-tax rules, 1962?

The
Supreme Court noted the tonnage tax Scheme, namely, Chapter XII-G of the
income-tax act, 1961 (the “act”) which contains special provisions for assessments
relating to income of shipping companies. under this Chapter, shipping
companies are given a
choice to either get income from
the shipping business computed in accordance with the provisions contained in
the act meant for computation of income in respect of business or profession or
opt for methodology of computing income as per the special formula provided in
that Chapter which accords a different treatment and different manner of
computation of income for the shipping business.

U/s.115VA
option is given to the shipping
company, which is operating “qualifying ships”, as defined in certain
115 VD, to get its income computed in
accordance with the provisions of Chapter XII-G, irrespective of those
stipulations otherwise contained in sections 28 to 43C for computation of
business income. once such an option is exercised and income is computed in
accordance with the provisions of the said Chapter, a fiction is created by
deeming the said income to be the profits and gains of such business chargeable
to tax under the head “Profits and gains of business or profession”.

For
a shipping company to be eligible to exercise such an option, there are certain
conditions to be fulfilled, which are as under:

(i)
In the first place, the assessee has to be a “company”. The word “company” is
defined in section 2(17) of the act.
Such a company may have various business and one such business may be
the business of operating qualifying ships. However, it is only that income which
is generated from “the business of operating qualifying ships” that will be
computed as per the special provisions in Chapter XII-G. Income from other
business will be computed in the same manner as provided in sections 28 to 43C.
In case the business of the company is to operate qualifying ships only, then
the income from that sole business will be under this Chapter.

(ii)
Income from the business of operating
qualifying ships shall be computed under Chapter XII-G only if such an option is specifically
exercised by the assessee-company. This requirements is particularly mentioned
in section 115VP of the act. Such an option, when given, is to remain in force
for a period of ten years from the date on which the said option is exercised,
and this period is prescribed in section 115VQ
of the act. However, it can be renewed within one year from the end of the
previous year in which the option ceases to have effect (section 115VR). in
certain circumstances stipulated in section 115VS of the act, there is a
prohibition to opt for the scheme.

The
scheme that is to be opted for computation of income under this Chapter is
known as “tonnage tax scheme” (for short “TTS”) as defined in clause (m) of
section 115V of the act.

(iii)
Though these special provisions relate to income of shipping companies, it is
only that income which is received from business of “operating qualifying
ships” that is eligible for computation under this Chapter.

The
Supreme Court observed that it is only income from the business of operating
qualifying ship that has to be computed in accordance with the provisions of
Chapter XII-G. as per section 115VB of the act,
a company is regarded as operating a ship if it operates any ship which
is owned by it or a ship which is chartered by it and it also includes a case
where even a part of the ship has been chartered by it in an arrangement such
as slot charter, space charter joint charter, etc.

The
Supreme Court further noted that the respondent assessee owned a qualifying
ship and fulfilled all other conditions as well as to make it a qualifying
company u/s. 115VC. The income that was
generated from the said qualifying ship was exigible to tax as per the special
provisions contained in Chapter XII-G, as the assessee had exercised the
requisite option in this behalf. However, in addition to operating its
qualifying ship, in the relevant assessment years, i.e., 2005-06 and 2008-09 it
had also “slot charter” arrangements in other ships. In the relevant income-tax
return filed by the assessee, the assessee- had also included the income earned
from such slot charter arrangements for the purpose of computation thereof
under Chapter XII-G. it was in this context the question had arisen as to
whether the assessee was eligible to include the income derived from activities
through “slot charter” arrangements as relevant shipping income to determine
the deemed tonnage in terms of rule 11Q of the Income-tax Rules.

The
Assessing Officer was of the view that the income earned under slot charter
arrangement did not qualify for coverage to be given special treatment in
Chapter XII-G as this income was not generated by the assessee from its own
ship, i.e, it is neither from the ship owned by the assessee nor from the
entire ship chartered by the assessee. he took the view that in order to avail
of the benefit of Chapter XII-G, the assessee was supposed to show that the
ship operated by it was qualifying ship and for this purpose it was incumbent
upon the assessee to produce a “valid certificate indicating its net tonnage”
as provided in section 115VX(1)(b) of the act. However, the assessee had
submitted such valid certificate only in respect of its own ship and did not
submit the same in respect of ship chartered by the assessee under the slot
charter arrangement. The contention of the assessee was that the requirement of
producing “valid certificate” is to be insisted only for assessee’s own ships
and for the ships hired fully. This contention was not accepted by the
Assessing Officer. The assessee had also argued that as per the method of
computation provided u/s. 115VG of the act read with rule 11Q of the rules,
income for full ship is to be computed on the basis of “net tonnage” shown in
the valid certificate, whereas income of part of the ship is computed as
“deemed tonnage”. This argument was also rejected by the Assessing Officer on
the ground that there was a requirement of producing valid certificate even for
part of the ship and in the absence thereof income from slot charter
arrangement could not be included for the purpose of computation of tonnage
income under the tonnage tax scheme.

The
order of the Assessing Officer was upheld by the Commissioner of income-tax
(appeals) resulting into dismissal of appeal filed by the assessee. Even the
income-tax appellate tribunal accepted
the view taken by the Assessing Officer and dismissed the appeal filed before
it by the assessee thereby upholding the order of the Assessing Officer.
However, in further appeal that was preferred by the assessee to the high Court u/s. 260a of the act, the assessee has
succeeded in getting its way through as the high Court has found merit in its
contention. thus, the high Court had
allowed the appeal of the assessee holding that the income earned by the
assessee under slot charter arrangement comes under the definition of “deemed
tonnage tax” as per Explanation to
sub-section (4) of
section 115VG of the
act, and, therefore, exclusion of this
while assessing the same under the said special provisions was not appropriate.
in other words, the high Court held that the assessee was eligible for tonnage
on slot charter related income also.

On
appeal by the revenue, the Supreme Court noted that the assessee was a company
as defined u/s. 2(17) of the act and was also in the business of operating
qualifying ship(s). it was also not in dispute that it owned a qualifying ship
and fulfillment of this condition permitted the assessee to exercise its option
for computation of income from the business of operating qualifying ships under
Chapter XII-G of the act. The assessee exercised the option in this behalf, as
per section 115VP of the act in respect of assessment years in question.
Therefore, the assessee was a qualifying
company u/s. 115VC of the act. In fact, the income that was generated from the
qualifying ship owned by the assessee was also assessed under the special
provisions contained in Chapter XII-G of the act. The dispute, however,
pertained to the income from the slot charter arrangements which the assessee
had made in other ships during the concerned assessment years. The ships where
slot charter were arranged were obviously not owned by the assessee.
Further, as only some slots were
chartered, full ships were not chartered.

According
to the
Supreme Court, in
this context, the first question
would be as to whether such a slot charter could be treated as “operating
ships” within the meaning of section 115VB of the Act? This provision
specifically provides that for the purpose of Charter XII-G, a company would be
regarded as operating a ship “if it operates any ship whether owned or
chartered by it and includes a case where even a part of the ship has been
chartered by it in an arrangement such as slot charter, space charter or joint
charter”. The Supreme Court held that it was clear from the above that slot
charter was specifically included as an instance of a ship chartered by the
company.

Further, the Supreme Court observed that
section 115VG(4) was in two parts
in so far as computation of tonnage was concerned. When it came to tonnage of a
ship, a certificate as mentioned in 115VX was to be produced. The second part
of this provision talks about “deemed tonnage” in contradistinction to the
“actual tonnage” mentioned in the
certificate. The Supreme Court
held that thus, it was not only the actual tonnage that was mentioned in the
certificate referred to in 115VX of the act which this provision dealt with. In
addition, deemed tonnage was also to be included if there was such a deemed
tonnage, and that deemed tonnage was to be added to the actual tonnage which is
indicated in the certificate. Explanation to s/s. (4), inter alia, mentions
that in so far as slot charter arrangements are concerned, purchase of such
slot charter should be treated as deemed tonnage. according to the Supreme
Court the legislature had, thus, clearly
visualied that in so far as deemed tonnage was concerned, there would not be
any possibility of producing a certificate referred to in section 115VX of the
act. When the provision is read in this manner, it becomes amply clear that section
115Vd of the act which talks of a qualifying ship, contemplates the situation
in which the entire ship is either owned or chartered. Similar is the position
which inheres in section 115VX of the act as it refers to “the tonnage of a
ship”. Therefore, whenever the question of a tonnage of a ship crops up and the
said tonnage is to be determined, it has to be in accordance with the valid
certificate indicating its tonnage and it is a compulsory obligation of the
assessee to produce such a certificate. However, this requirement of producing
a certificate would not apply when entire ship is not chartered and the
arrangement pertains only to purchase of slots, slot charter and an arrangement
of sharing of break-bulk vessel.

The
Supreme Court further held that calculation of income arising from carriage of
goods on slot basis has, in the wisdom of the legislature, been disconnected
from the capacity of a ship, on account of impossibility of getting such
information in relation to ships on which slot charter is undertaken. This
aspect has due recognition in note 3 of the form 66. Thus, the act and the
rules for computation on tonnage tax specifically and categorically
differentiate the requirement of the certificate with regard to owned ship and
slot charter. In law, the said rule also recognises that identification of the
vessel for slot charter cannot be done. Also, note 3 below form no.66, in terms
of rule 11T, recognises the reason for prescribing a separate formula for slot
charter.

The
Supreme Court agreed with the decision of the high Court and dismissed the
appeal of the revenue.

shailesh.kwebmaker

Business Loss – A licensee/assessee may be entitled to claim the forfeited amount of licence fees paid on cancellation of license by Excise Department as business loss but in a case where the licensee/ assessee transfers his licence and forfeiture of licence take place thereafter the loss cannot be allowed.

CIT vs. Preetam Singh Luthra (2016) 386 ITR 408 (SC)

The Assessing Officer (AO) denied
to set off the loss on account of forfeiture of licence fee of Rs.3,93,67,000,
against income as claimed by the assessee and added the said amount of Rs.3,93,67,000
as unexplained investment.

In appeal preferred by the assessee,
the Commissioner (appeals) held that the addition made by the assessing Officer
at Rs.3,93,67,000, which was actually Rs.2,32,33,500 was not sustainable on
account of later confiscation of the amount so deposited and accordingly, the
entire addition was directed to be deleted.

Dissatisfied with the order of
the Commissioner (Appeals), the Revenue filed appeal before the Tribunal. The
Tribunal, after considering the arguments of for the parties, placing reliance
on the judgment passed by the madras high Court in the case of CIT vs. Chensing
Ventures [2007] 291 ITR 258 (Mad) held that since the assessee was allotted the
licence by the excise department, which was later on transferred to one Shankar
lal Patidar but the said licence was cancelled by the excise department and the
amount of licence fees deposited by the petitioner was forfeited by the excise
department, the assessee was entitled to set off on account of such forfeiture.

The High Court dismissed the
appeal filed by the Revenue holding that no question of law arose in the
matter.

On further appeal by the revenue, the Supreme
Court held that if the licence fee stood forfeited, the licensee/ assessee may
be entitled to claim the forfeited amount as a business loss. However in the
present case, from the grounds urged before the high Court which facts had not
been controverterd by the assessee, it appeared that the respondent had transferred
the licence on 25th june, 2005 to one Shankarlal Patidar and the forfeiture of
the said licence took place thereafter on 1st august, 2005. According to the
Supreme Court, if that be so, the loss, if any, on account of forfeiture was
sustained not by the respondent-assessee but by the transferee-Shankarlal
Patidar.

The Supreme Court therefore
concluded that the tribunal and the high Court had overlooked the aforesaid
vital fact, and therefore the orders passed by the learned tribunal and the
high Court were required to be reversed. Consequently, the Supreme Court set
aside the order of the High Court affirming the order of the Tribunal and the
Commissioner of income-tax (appeals) passed in favour of the assessee and
affirmed the order of the Assessing Officer disallowing the aforesaid claims of
the assessee.

shailesh.kwebmaker

Business Income or Income from House Property – Assessee having one business of leasing its property and earning rent therefrom – Rent received from property should be treated as business income-

Rayala Corporation Pvt. Ltd. vs. ACIT [2016] 386 ITR 500 (SC)

The appellant-assessee, a private
limited company, was having house property, which had been rented. The issue that arose before the Supreme Court
was whether the income so received should be taxed under the head “Income from
house property” or “Profit and gains of business or profession”. the reason for which the aforestated issue had
arisen was that though the assessee was having the house property and was
receiving income by way of rent, the case of the assessee was that the assessee
company was in business of renting its properties and was receiving rent as its
business income, the said income should be taxed under the head “Profits and
gains of business or profession” whereas the case of the revenue was that as
the income was arising from house property, the said income should be taxed
under the head “income from house property”.

According to the Supreme Court,
the law laid down by it in the case of Chennai Properties and Investments Ltd.
vs. CIT (2015) 373 ITR 673 (SC) showed the correct position of law and looking
at the facts of the case in question, the case on hand was squarely covered by
the said judgment.

The Supreme Court noted the
submissions made by the counsel appearing for the revenue which were to the
effect that the rent should be the main source of income or the purpose for
which the company was incorporated should be to earn income from rent, so as to
make the rental income to be the income taxable under the head “Profits and gains
of business or profession”.

The Supreme Court observed that
it was an admitted fact in the instant case that the assessee company had only
one business and that was of leasing its property and earning rent therefrom. Thus,
even on the factual aspect, the Supreme Court did not find any substance in
what had been submitted by the learned counsel appearing for the revenue.

The Supreme Court held that the business
of the company was to lease its property and to earn rent and
therefore, the income so earned should be treated as its business income
and that the high Court was not correct while deciding that the income
of the assessee should be treated as income from house property,

shailesh.kwebmaker

Rate of Taxation and Deemed Short-term Capital Gains

Issue for consideration

Any
profits or gains arising from the transfer of a property, held as a capital
asset, is liable to be taxed under the head “capital gains”. Such gains are
classified into short term capital gains and long term capital gains, where the
former is subjected to tax at the ordinary rates, while the later qualifies for
concessional rate of taxation, besides being eligible for the benefit of
reinvestment related exemptions from tax.

Ordinarily,
a short term capital gains arises on transfer of a short term capital asset and
long term capital gain arises on transfer of a long term capital asset. An
asset held for a period exceeding 36 months is usually treated as a long term
capital asset. Under a fiction of section 50 however, the act provides for a
separate treatment for an asset on which depreciation has been claimed, even
where such an asset is otherwise held for a period exceeding 36 months.

Section
50 has been the subject matter of two important controversies; one relating to
the eligibility of the deemed short term capital gains to the benefit of
sections 54E, 54f, 54EC, etc. and the other relating to the eligibility of such
gains for the concessional rate of taxation. While the former has now been
settled with the recent decision of the Supreme Court in the case of CIT vs.
V.S. Dempo Co. Ltd. 387 ITR 354, the later continues to be debatable as is
confirmed by conflicting decisions of the courts on the subject. While the Pune
and the Kolkata Tribunal are against conferring the benefit of concessional
rate on the deemed short term capital gains, a series of decisions of the
Mumbai Tribunal favour the grant of the benefit of concessional rate of
taxation for such gains.

Reckitt Benckiser (India)
Ltd.’s case

The issue recently arose in the case of Reckitt
Benckiser (India) Ltd. vs. ACIT, 181 TTJ 384(Kol.) before the Kolkata Tribunal
involving the determination of rate of tax payable by the assessee on capital
gains arising from the sale of flats on which depreciation was claimed. In the
year under consideration, flats owned by the assessee were sold and since the
sold flats were held by the assessee for more than 36 months, the capital gains
arising from the sale thereof was offered to tax by the assessee at the
concessional rate applicable to long-term capital gains. Since the flats sold
by assessee were depreciable assets, the AO invoked the provisions of section
50 and brought to tax the capital gains arising from the sale thereof at normal
rate applicable to short-term capital gains.

On
appeal, the CIT(A) upheld the action of the AO on the issue, by observing that
the provisions of section 50 were clearly applicable to the capital gains
arising on account of sale of depreciable assets not only for computation but
also for the rate of tax.

The
Tribunal, on hearing the arguments from both the sides on the issue and perusal
of the relevant material available on record, held that the relevant provisions
of section 50 as applicable in the context were very clear and specific, as
rightly held by the learned CIT (A). As per the said provisions, which were
overriding in nature, the capital gains arising from the sale of depreciable
assets was chargeable to tax at the rate applicable to short-term capital
gains, irrespective of the holding period. Certain judicial pronouncements,
relied upon by the appellant, were found to be not applicable in the context,
involving the issue relating to rate of tax applicable to the capital gains
arising from sale of depreciable assets. The Tribunal did not find merit in
ground raised by the assessee and dismissed the same.

Smita Conductors Ltd.’s case, 152 ITD 417 (Mum.)

The issue arose before the Tribunal in the case
of Smita Conductors Ltd. vs. DCIT, 152 ITD 417(Mum.) wherein the assessee had
filed an additional ground for contesting the tax rate applied in case of
capital gains computed u/s 50 r.w.s 50C of the income-tax act. In that case,
the assessee had sold a flat after holding the same for more than 36 months. It
had claimed depreciation on the flat and had claimed that the gains arising
thereon be taxed at the concessional rate u/s. 112.

In
the appeal to the Tribunal, it was
submitted that the flat sold by the assessee had been held for a long time
exceeding more than three years and, therefore, the capital gains, though
required to be computed u/s. 50 of the it act, had to be treated as long term
capital gain in view of the judgment of the high Court of Bombay in case of Ace
Builders Ltd.,281 ITR 410, in which it had been held that the factum of deemed
short term capital gains u/s. 50 of the it act was applicable only to
computation of capital gains, and for the purpose of other provisions of the
act, such as section 54EC, the capital gains had to be treated as long term
capital gains, if the asset was held for more than three years. it was
contended that section 50(1) made it quite clear that the capital gains in
respect of depreciable asset was deemed as short term capital gains for the
purposes of sections 48 and 49 of the it act, which related to computation of capital gains. Therefore, the deeming
provision was only limited to the provisions for computation of capital gains.

Reference
was made to the decision of the mumbai bench of the Tribunal in case of
Mahindra Freight Carriers vs. DCIT, 139 TTJ 422, in which it had been held that
prescriptions of section 50 were to be extended only to stage of computation of
capital gains and, therefore, capital gain resulting from transfer of depreciable
asset which was held for more than period of three years would retain the
character of long term capital gains for all other provisions of the act and
consequently qualify for set off against brought forward loss of long term
capital gains. reference was also made to another decision of mumbai bench of
the Tribunal in case of Prabodh Investment & Trading Company Vs. ITO in
(ITA No. 6557/Mum/2008), in which following the judgment of the high Court of
Bombay in case of Ace Builders P. Ltd. (Supra), the Tribunal held that section
50 created a legal fiction only for a limited purpose i.e. for the purpose of
sections 48 and 49 and for the purposes of section 54E, the gains had to be
treated as long term capital gains. the Tribunal in that case also accepted the
arguments of the assessee that in case capital gains was assessed as long term
capital gain the rate of tax as provided in section 112 of the it act would
apply.

It
was explained that provisions of section 50, deeming the capital gains as short
term capital gains was only for the purposes of section 48 and 49, which
related to computation of capital gains. The deeming provisions therefore was
to be restricted only to computation of capital gain and for the purpose of
other provisions of the act, the capital gain has to be treated as long term
capital gain. it was, therefore, argued that in the case of the assessee, rate
of tax applicable to long term capital gain had to be applied as per the
provisions of section 112 of the IT act.

The
same view had been taken by the mumbai bench of Tribunal in case of Manali
Investments vs. Assistant CIT, 139 TTJ 411, in which it had been held that the
prescriptions of section 50 were to be extended only to the stage of
computation of capital gain and, therefore, capital gain resulting from
transfer of depreciable asset, which was held for more than three years would
retain the character of long term capital gain for the purpose of all other
provisions of the act.

It
was highlighted that the flat had been held for 15 to 20 years, which was
supported by the fact that cost of the flat as shown in the balance sheet was
only Rs.1, 30,000/-, and if the flat was held for more than three years, the
tax rate as provided in section 112 of the it act applicable in respect of capital
gains arising from transfer of long term capital asset, had to be applied.

The Tribunal held that, for the purpose of
computation of capital gains, the flat had to be treated as short term capital
gains u/s. 50 of the it act, but for the purpose of applicability of tax rate,
it had to be treated as long term capital gains if held for more than three
years. It accordingly directed the AO to compute the capital gains from the
sale of flat and apply the appropriate tax rate, after necessary verification
in the light of observations made in the order.

Observations

The
basis of the claim for the benefit of concessional rate of taxation for the
deemed gains, besides being founded in law, has largely been founded on the
decisions of the high Courts delivered in the context of the eligibility of
such deemed gains for the benefit of exemption u/s. 54E, 54EC, etc. the high Courts have consistently held that such
gains are eligible for the benefit of exemption u/s. 54E, 54EC, etc. CIT vs.
Assam Petroleum 263 ITR 587 (Gau), CIT vs. Ace Builders 281 ITR 240 (Bom), CIT
vs. Pole Star Industries, 41taxmann.com 237 (Guj), Aditya Media Sales Ltd.,
38taxmann 244 (Guj), Rajiv Shukla 334 ITR 0138 (Del) and CIT vs. Delite Tin
Industries in ITA no. 118 of 2008 dated 26/09/2008. The Bombay high Court is
deciding the case of delite tin industries (supra), had followed its own
decision in the case of ace Builders (supra). The Special leave Petition of the
income tax department against the said decision has been rejected by the Supreme
Court vide order dated 20/10/2009 in SlP. (c) no. 21450 of 2009, 322 itr (st)
8. The delhi high Court in the case of rajiv Shukla (supra) has taken note of
the said dismissal of SLP by the apex court. The issue has recently been
settled in favour of allowability of the benefit in the case of CIT vs. V.
S.Dempo Co. Ltd. (supra).

The issue under consideration had also arisen
before the Pune bench of the Tribunal in the case of Rathi Bros. Madras Ltd.
vs. ACIT in ITA No. 787/PN/2813. In a decision dated 30/10/2014, the Tribunal
decided the issue against the assesssee, interestingly, by holding that the
issue on hand has been decided by the decision of the Bombay high Court in the
case of ace Builders (supra). the Tribunal noted that the Bombay high Court in
para 23 of the order while confirming the grant of benefit of exemption u/s.54,
had observed that the deemed short term capital gains, though taxable at the
ordinary rates would nonetheless be eligible for the tax exemption. It is
respectfully submitted that such observations, not made in the context of the
case, should not have been the guiding force in adjudicating an issue that was
otherwise decided by the co-ordinate bench in favour of the assessee. The issue
before the high Court was about the eligibility of an assessee for the benefit
of section 54E and not for the concessional rate of taxation u/s. 112 of the
Act. In any case, the final findings of the Court on the issue before it are
clearly placed in para 25 of the order, which has no observations on the
subject of rate of taxation.

In
Rathi Bros.’ case (supra), the Tribunal, under an error, did not follow the
decision of the co-ordinate bench in the case of P.D. Kunte and Co., by observing that in the
said case the issue though raised, had remained to be adjudicated by the Tribunal.
The fact of the matter, as was noted by the AO, is that the said assessee had
filed an MA on the ground that the issue had remained to be adjudicated by the Tribunal
and the Tribunal had rectified the error by adjudicating the issue and deciding
the issue in favour of the assessee. The Tribunal had followed the decision of
the Bombay high Court in the case of Ace Builders (supra). Accordingly, it was
the decision in the case of Rathi Bros. that requires rectification. It seems
that the order in the MA was lost sight of while adjudicating the issue.

On
a comprehensive reading of the various provisions of the income-tax act,
namely, sections 2(14), 2(29A), 2(42A), 45, 48, 49, 50 and section 112, all of
which are relevant to the issue under consideration, the following things
emerge:

A distinction is made in the scheme of taxation of
capital gains by classifying such gains into short term capital gains and
long term capital gains. Such a classification is primarily based on the
nature of capital asset, namely short-term capital asset and long-term
capital asset which distinction is founded on the period of holding of a
capital asset.
An exception has been made, where under the deeming
fiction of section 50 treats even a long-term capital asset as a
short-term capital asset.
The deeming fiction of section 50 however has a limited
application in as much as the fiction created there under has the effect
of qualifying the application of only sections 48 and 49 and no other provisions
of the act.
The said deeming
fiction of section
50 has been introduced as
a special provision with
effect from 01/04/1988 by
the taxation laws (A&MP) act,1986 with the objective of providing
a working solution to the problems of identifying the cost of acquisition
and indexing such cost in cases of depreciable assets whose cost kept on
varying year after year.
No parallel amendments have been carried out in any of
the other provisions of the act, clearly conveying the legislative intent
that the other provisions continued to operate with full force.
Even otherwise there is nothing in section 50 which has
the effect of overriding the other provisions of the act, including
section112, but for the provisions of section 2(42A), which override has a
very limited application. The said override cannot convert a long-term
capital asset into a short-term capital asset, as has been now recently
confirmed by the Supreme Court. In our considered opinion, section 50 will
apply and operate even without the said override.
Section 50 is a special provision for computation of
capital gains in case of depreciable assets and it is incorrect to apply
the same fiction in deciding the rate of tax at which the income so
computed is to be taxed.
There is no provision, implied or express, in
section112, to indicate that the benefit of the concessional rate of tax
thereunder would be denied to the gains computed under the deeming fiction
of section 50 of the Act.
The logic and the rationale applied by the Supreme
Court for granting the benefit of sections 54E, 54EC, etc. shall equally
apply in conferring the benefit u/s.112 of the concessional rate of
taxation.

shailesh.kwebmaker

Taxability of Foreign Salary Credited to NRE Bank Account

ISSUE FOR CONSIDERATION

Section 5 of the Income Tax Act, 1961 (“the Act”) lays down the scope of total income. Sub-section (2) of that section lays down the scope of the total income of a nonresident. It provides as under:

“(2) Subject to the provisions of this Act, the total income of any previous year of a person who is a non-resident includes all income from whatever source derived, which:
(a) is received or is deemed to be received in India in such year by or on behalf of such person; or
(b) which accrues or arises or is deemed to accrue or arise to him in India during such year.”

Explanation 2 to this section clarifies that income, which has been included in the total income of a person on the basis that it has accrued or arisen or is deemed to have accrued or arisen to him, shall not again be so included on the basis that it is received or deemed to be received by him in India.

It is usual to come across cases where a person, not resident under the Act, receives some money in India, the income whereof has accrued outside India; for example, Indian citizens employed abroad, regarded as non-residents for the purposes of the Act, depositing their salary in India for the services rendered out of India . Similarly, crew of a foreign ship or an Indian ship who leave India on account of their employment on the ship, non-residents under the Act, depositing the salary In India, is another example.

Many such persons, may request their foreign employers to credit their salaries to their Non-Resident (External) bank accounts (“NRE accounts”) maintained with banks in India. An issue has arisen before different benches of the Income Tax Appellate Tribunal regarding the taxability in India of such foreign salaries credited to NRE accounts. While the Agra bench of the tribunal has taken the view that such salaries are not taxable in India, the Kolkata bench of the tribunal has recently taken a contrary view, holding that such salaries are taxable in India.

Arvind Singh Chauhan’s case
The issue first came up before the Agra bench of the tribunal in the case of Arvind Singh Chauhan vs. ITO 147 ITD 509.

In this case, the assessee was a crew member of a ship, who was employed with a Singapore company. His employment letter was issued by the foreign employer’s agent in India. He worked on merchant vessels and tankers plying on international routes. His salary was directly credited by his employer to his NRE account with HSBC Bank in Mumbai.

His stay in India during the relevant previous year was less than 182 days, and hence his residential status was nonresident. In the income tax return filed by the assessee, the salary received from the Singapore company was not offered to tax. However, his income from pension received from Government of India and interest were offered for taxation.

During the course of assessment proceedings, when the assessee was asked to show cause as to why the salaries received from the Singapore company for services rendered as a crew member of a ship should not be taxed in India, the assessee argued that since such salary was accruing and arising outside India, it was outside the scope of section 5(2).

As regards the fact that the salary was directly credited to a bank account in India, the assessee argued that salary income deposited in a bank account in India directly from the bank account of his employer outside India and as such was not taxable in India. Reliance was placed on the decisions in the cases of DIT vs. Prahlad Vijendra Rao 198 Taxmann 551 (Kar), DIT vs. Diglan George Smith 40(1) ITCL 419 and ITO vs. Lohitakshan Nambiar (ITA No 1045/Bang/09 dated 12.4.2010).

The AO did not accept the assessee’s explanation, on the ground that since the assessee’s status for income from pension and interest was that of resident, as a result his status for all sources of income was to be taken as a resident. In addition the AO held that the salary income accrued in India by relying on the Supreme Court decision in the case of CIT vs. Shri Govardhan Ltd 69 ITR 675, for the proposition that if an assessee acquires a right to receive income, the income is said to have accrued to him, even though it may be received later on its being ascertained. According to the AO by receiving the appointment letter in India from the agent of the foreign employer and details of salary to be paid, the assessee got the right to receive the salary. Importantly, the AO relied on the fact that the salary cheques were credited to the assessee’s account with HSBC bank in India and hence the income was received in India.

The Commissioner (Appeals) upheld the order of the AO, holding that the salary income accrued in India as well as was received in India, and was therefore taxable in India.

The Tribunal noted the fact that the AO had himself noted the number of days of the assessee’s stay outside India as per his passport, and categorically found that his status u/s. 6 was that of a non-resident. The tribunal held that the AO was wrong in holding that the assessee was a resident in India on account of the fact that he had offered interest and pension income in his taxable income, given the fact that both the pension and interest accrued and were received in India, the pension being payable by a former employer in India. The mere taxability of such pension and interest in India would not result in the inference that the assessee was a resident of India, since such incomes were taxable in India even in the case of a non-resident.

Examining the scope of total income in the case of a nonresident, the tribunal noted that it was only when one of the 2 conditions – i.e. income was received or was deemed to be received in India by or on behalf of the nonresident or income accrued or arose or was deemed to accrue or arise to the non-resident in India – was fulfilled, that the income of a non-resident could be brought to tax in India. The tribunal held that salary was compensation for services rendered by an employee, and therefore situs of its accrual was the situs of services being rendered, for which salary was paid. It noted that in the case of CIT vs. Avtar Singh Wadhwan 247 ITR 260, the Bombay High Court had held that income from salary, even in the case of crew of an Indian vessel operating in international waters, was to be treated as having accrued outside India. According to the tribunal, it was incorrect to assume that an employee got a right to receive the salary just by getting an appointment letter, because unless services were rendered, no right to receive salary accrued to an employee. Therefore, according to the tribunal, the assessee got the right to receive salary income when he rendered the services, and not when he received the appointment letter.

The tribunal next considered the aspect of whether the income was received in India, since the salary cheques were credited to the assessee’s account with HSBC, Mumbai. According to the tribunal, the law was clear that receipt of income for this purpose referred to the first occasion when the assessee got the money in his own control, real or constructive. What was material was the receipt of income in its character as income, and not what happened subsequently, once the income, in its character as such, was received by the assessee or his agent. An income could not be received twice or on multiple occasions. The bank statement of the assessee clearly revealed that these were US dollar denominated receipts from the foreign employer credited to the NRE account of the assessee with HSBC, Mumbai.

The tribunal noted that the assessee was in lawful right to receive those monies as an employee at the place of employment, i.e. at the location of his foreign employer. It was a matter of convenience that the monies were thereafter transferred to India. According to the tribunal, these monies were at the disposal of the assessee outside India, and it was in exercise of his rights to so dispose of the money, that monies were transferred to India. The tribunal referred to the decision of the Madras High Court in the case of CIT vs. A P Kalyanakrishnan 195 ITR 534, where the assessee’s pension from the Malaysian government was remitted by the Accountant General of Malaysia to the Accountant General, Madras, for onward payment to the assessee. While rejecting the contention of the revenue that the pension was to be regarded as having been received in India, the court in that case had observed that the pension payable to the assessee had accrued in Malaya, and only thereafter by an arrangement embodied in the letter…………, the pension had been remitted to the assessee in India and been made available to him. The Madras High Court had therefore held that the assessee had to be regarded as having received the income outside India and that the pension had been remitted or transmitted to the place where the assessee was living, as a matter of convenience, which would not constitute receipt of pension in India by the assessee.

According to the tribunal, once an income was received outside India, whether in reality or on constructive basis, the mere fact that it had been remitted to India would not be decisive on the question as to whether the income was to be treated as having been received in India. The tribunal observed that the connotation of an income, having been received and an amount having been received were qualitatively different. The salary amount was received in India in this case, but the salary income was received outside India. The tribunal further noted that it was elementary that an income could not be taxed more than once, but, if at each point of receipt, the income was to be taxed, it may have to be taxed on multiple occasions. The tribunal therefore held that in a situation in which the salary had accrued outside India, and thereafter, by an arrangement, salary was remitted to India and made available to the employee, it would not constitute receipt of salary in India by the assessee, so as to trigger taxability under section 5(2)(a). The tribunal therefore deleted the addition of the salary amount credited to the NRE bank account in India.

Tapas Kr Bandopadhyay’s case
The issue again came up recently before the Kolkata bench of the tribunal in the case of Tapas Kr Bandopadhyay vs. DyDIT 70 taxmann.com 50.

In this case, the assessee was a marine engineer, who was a non-resident. During the year, he was engaged with an Indian company and a Singapore company as a marine engineer, working in international waters, and received remuneration from both the companies. His contract of service with the Indian/foreign shipping company was executed in India with an agent, before joining the ship. His residential status was non-resident, on account of the fact that he was outside India for more than 182 days, sailing in international waters. The salary incomes were received by credit to the assessee’s NRE accounts with banks in India.

The assessee claimed that the salary incomes were exempt from tax, being received from outside India in foreign currency. The assessing officer accepted the residential status of the assessee as a non-resident, after verification of the passport and other details. He, however, asked the assessee to show cause as to why the incomes received in India by way of credit to the NRE accounts maintained in India should not be taxable, since the income received in India was taxable in case of nonresidents. The assessee responded by stating that the entire amount was received in foreign currency outside India and were credited to his NRE accounts in India, and that the amounts received in foreign currency could not be deemed to be received in India. It was also pointed out that only foreign currency could be deposited in NRE account, and hence the amounts credited to the NRE account were received outside India. The assessing officer rejected the assessee’s contention that amounts received in foreign currency were not taxable in India, and observed that any income received or deemed to be received in India was taxable in India, irrespective of the currency in which such amounts were received.

The assessing officer observed that income received in India was taxable in all cases (whether accrued in India or elsewhere), irrespective of residential status of the assessee. According to the assessing officer, the meaning of the term “income received in India” was significant. If the place where the recipient got the money on the first occasion under his control was in India, it would be income received in India. In the case before him, since the income was remitted by the employer to the bank accounts of the assessee maintained in India, the assessee got the money under his control for the first time in India. The assessing officer, therefore, taxed the salaries for the services rendered overseas, received by the assessee by credit to his bank accounts from his employers.

Before the Commissioner (Appeals), on behalf of the assessee, it was argued that:

(a) The assessee was a non-resident rendering services outside India.

(b) The payments were being made by a foreign company outside India and the foreign company did not have any permanent establishment in India.

(c) The point of payment was to be taken into consideration for determining the provisions of section 5(2)(a) of the Income Tax Act and the point of payment should be considered as the point of receipt.

(d) It was immaterial that the payment was being transferred by the foreign company or remitted by the foreign company to the NRE accounts in foreign exchange in India, because payments had been made by the foreign company outside India and the point of payment was to be taken as the point of receipt.

(e) The amount which was received by the assessee from the foreign company was in foreign exchange and therefore income could not be said to have been received in India, where payment had been received in foreign currency.

(f) The provisions of section 5(2)(a) had to be interpreted in a manner that it did not render the section meaningless. If interpretation as made out by the Department was adopted, then definitely the section would be otiose and meaningless, because no benefit would be given to non-residents, even if all the conditions had been satisfied.

(g) The true interpretation of the provisions of section 5(2)(a) to be adopted for income received or deemed to be received in India, was that the payments had been made in India in Indian currency and the recipient of the payments had received payments in Indian currency.

The Commissioner (Appeals) rejected the assessee’s arguments, and upheld the order of the assessing officer.

Before the tribunal, on behalf of the assessee, reliance was placed on the decisions of the Karnataka High Court in the case of Prahlad Vijendra Rao (supra) and of the Bombay High Court in the case of Avtar Singh Wadhwan (supra). Reliance was also placed on the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra).

On behalf of the revenue, it was argued that income will get included in the total income of a non-resident through any of the four modes prescribed in section 5(2). All the four modes stood on their own legs, or else the enactment would be rendered redundant. There was no specific section in the Act, which dealt with income accruing or arising to any person only in India, though section 5(2) (b) used the term “accrues or arises to him in India”. The context of this term was provided by section 5(1)(c), which mentioned that total income of a person resident in India included all income from whatever source, which accrued or arose to him outside India. This was the reason that the main charging section, section 4, did not make any reference to the words “in India”, as it had to provide a basis of charge for both – income accruing or arising to a person in India as well as income accruing and arising to a person outside India. The charging section did not have a territorial bias. Similarly, section 15(a) also did not reflect any locational preference, as salary could become due to an assessee anywhere in the world. Salary due from an employer was taxable, whether paid or not.

Reliance was placed on the observations of the Supreme Court in the case of CIT vs. L W Russell 53 ITR 91, where the Supreme Court had held as under:

“the expression ‘due’ followed by the qualifying clause ‘whether paid or not’ shows that there shall be an obligation on the part of the employer to pay that amount, and a right on the employee to claim the same.”

Therefore, it was argued that taxation of salary was on the basis of the contractual right of the employee to receive his salary, and nothing else, and it had no relation with location or place of services rendered or to where the amount had become due. The place where it had become due and the place where service was rendered did not form a basis of charge u/s. 15.

It was further argued on behalf of the revenue that though the assessee had rendered services outside India, he had received salary in India by way of fund transfer from the foreign company directly to the NRE account of the assessee in India. It was argued that the receipt contemplated u/s. 5(2)(a) was actual receipt. Hence, such income was actually received in India and was taxable in India. Reliance was placed on the Third Member decision of the Mumbai bench of the tribunal in the case of Capt A L Fernandez vs. ITO 81 ITD 203, which was claimed to be directly on the point. The Bombay and Karnataka High Court decisions relied upon by the assessee were sought to be distinguished by the revenue, on the ground that they were rendered in the context of taxability u/s. 5(2)(b), and not section 5(2)(a), and that they did not frame any question of law.

The tribunal noted that the scheme of the Act was such that the charge of tax was made independent of territoriality, residency and currency. According to the tribunal, the assessee was only trying to introduce one more layer to the entire transaction, that the assessee had the control over his money in the form of salary income in international waters, and for the sake of convenience, he had instructed the foreign employer to send the monies to his NRE account in India. The assessee’s argument was that what was brought into India was not the salary income, but only the salary amount. The tribunal, however, held that there was no evidence brought on record to prove that the assessee had control over his salary income in international waters.

The tribunal further observed that if this argument of the assessee were to be accepted, then the assessee went scot-free, not paying tax anywhere in the world on this salary income. According to the tribunal, the provisions of section 5(2)(a) were probably enacted keeping in mind that income has to suffer tax in some tax jurisdiction. The tribunal observed that it believed that such provisions would exist in tax legislation of all countries.

The tribunal held that if the argument of the assessee were to be accepted, it would make the provisions of section 5(2)(a) redundant. A statutory provision was to be interpreted to make it workable rather than redundant. In case of non-residents, the scope of total income had four modes, one of which was receipt in India from whatever source derived. If this was construed to mean that income from whatever source should first accrue or arise in India, and then it should be received in India to be included u/s. 5(2)(a), then section 5(2)(a) would lose its independence and would become a subset of section 5(2)(b). There would then not be any need for having section 5(2)(a) on the statute.

The tribunal noted that the issue before the Bombay High Court in the case of Avtar Singh Wadhwan (supra) was about the place of accrual of income, and the court held that income accrued in the place where the services were rendered, which in that case, was admittedly outside India. According to the tribunal, the Bombay High Court did not deliberate upon the fact whether the receipt of the income was in India, as the issue was only about the place of accrual of income in the context of section 5(2) (b). This decision was followed by the Karnataka High Court in case of Prahlad Vijendra Rao (supra).

Addressing the argument of the assessee that salary was received on the high seas, and by way of convenient arrangement, was directed to be deposited in the NRE account of the assessee in India, the tribunal raised the question whether a person could receive salary on high seas. According to the tribunal, the only possibility of receiving salary on board a ship on high seas was to receive it in physical currency. The tribunal observed that it was not the assessee’s case that the physical currency got deposited in the NRE account. The money was transferred from the employers account outside India to the assessee’s NRE account in India.

Referring to the decision of the Agra bench of the tribunal in the case of Arvind Singh Chauhan (supra), the Kolkata tribunal observed that this decision was based on the decision of the Madras High Court in the case of Kalyanakrishnan (supra). In that case, the facts were distinguishable from the facts of the case before it, as the income in that case was taxable in Malaysia. In the case before the Kolkata tribunal, the income did not suffer tax in any other jurisdiction nor was it received in any other tax jurisdiction. The receipt in the NRE account in India was the first point of receipt by the assessee, and according to the tribunal, prior to that, it could not be said that the assessee had control over the funds that had been deposited in the NRE account by the employer. Based on the Madras High Court decision, the Agra bench had held that the assessee had a lawful right to receive the salary as an employee at the place of employment, i.e. at the location of his foreign employer, and it was a matter of convenience that the monies were thereafter transfer to India. The Kolkata tribunal observed that in section 5(2) (a), right to receive salary was not the relevant criterion, but the relevant criterion was the receipt of payment, which was admittedly in India. The Kolkata tribunal therefore expressed its doubts as to the applicability of the Madras High Court decision in Kalyanakrishnan’s case to the facts before it.

Finally, the Kolkata tribunal placed reliance on the Third Member decision of the Mumbai tribunal in the case of Capt A L Fernandes (supra), where the Mumbai tribunal held that there was a clear finding and there was no dispute that the salary was received in India. Since the ships were not regarded as part of India, the services were rendered outside India. However, since the salary was received in India, it was held to be taxable in India u/s. 5(2)(a). According to the Kolkatta tribunal, this decision clearly laid down that receipt in India of salary for services rendered on board a ship outside the territorial waters of any country would be sufficient to give the country where it was received, the right to tax the income on a receipt basis. The Kolkatta tribunal also noted that the Third Member decision was not brought to the notice of the Agra tribunal, when it decided the issue.

Since a Third Member decision was equivalent to a Special Bench decision, the Kolkata tribunal followed the Third Member decision, holding that salary was received in India by credit to the NRE account of the employee was taxable in India by virtue of the provisions of section 5(2)(a).

Observations
The issue really is whether the assessee can be said to have obtained control over his salary at the place where his employer is located, and therefore whether the receipt of the salary is outside India. While the Agra bench of the tribunal was of the view that the assessee obtained control over his salary at the place where his employer was located, as he had a right to receive the salary at that location, the Kolkatta bench was of the view that the assessee had not obtained control over his salary at the location of the foreign employer merely on account of the contract of employment.

Interestingly, the Supreme Court in the cases of Raghava Reddi vs. CIT 44 ITR 720 and Standard Triumph Motor Co Ltd v CIT 201 ITR 391, has held that crediting the account of the assessee in the books of the payer Indian company amounted to a receipt by the foreign company in India.

In Raghava Reddi’s case, the Supreme Court observed:
“This leaves over the question which was earnestly argued, namely, whether the amounts in the two account years can be said to be received by the Japanese company in the taxable territories. The argument is that the money was not actually received, but the assessee firm was a debtor in respect of that amount and unless the entry can be deemed to be a payment or receipt, clause (a) cannot apply. We need not consider the fiction, for it is not necessary to go to the fiction at all. The agreement, from which we have quoted the relevant term, provided that the Japanese company desired that the assessee firm should open an account in the name of the Japanese company in their books of account, credit the amounts in that account, and deal with those amounts according to the instructions of the Japanese company. Till the money was so credited, there might be a relation of debtor and creditor; but after the amounts were credited, the money was held by the assessee firm as a depositee. The money then belonged to the Japanese company and was held for and on behalf of the company and was at its disposal. The character of the money changed from a debt to a deposit in much the same way as if it was credited in bank to the account of the company. Thus, the amount must be held, on the terms of the agreement, to have been received by the Japanese company, and this attracts the application of section 4(1)(a). Indeed, the Japanese company did dispose of a part of those amounts by instructing the assessee firm that they be applied in a particular way. In our opinion, the High Court was right in answering the question against the assessee.”

In Standard Triumph Motor Co Ltd’s case, royalty income payable to the assessee was credited by the Indian company to the account of the assessee in its books of account at the end of each year. The Supreme Court observed:

“the credit entry to the account of the assessee in the books of the Indian company does amount to its receipt by the assessee and is accordingly taxable and it is immaterial when did it actually receive it in the UK.”

Therefore, where the foreign employer were to credit the account of the employee in its books of account in respect of the liability to pay salary, and were then to remit the money to India, it would amount to receipt of the salary income outside India in the first place on credit of the salary to the employee’s account.

One of the aspects, which needs to be borne in mind, is the issue of non-taxability of such income in any country, if it is not taxed on a receipt basis in India. Today, one of the major issues which countries are seeking to tackle is the issue of double non-taxation, through amendment of tax treaties. The Kolkata tribunal, in a way, seeks to address this aspect through its decision, though no tax treaties were involved in this case.

In the case of Capt A. L. Fernandes, the other issue which was decided by the Mumbai tribunal was that the salary income actually accrued or arose in India, on account of the contract of employment being signed in India, and all rights flowing from that also being enforceable in India, and therefore the concept of deemed accrual u/s 9(1) was irrelevant for the purpose. Therefore, the corollary of sections 9(1)(ii) and 9(1)(iii) could not be applied for the purpose. Interestingly, the Kolkata tribunal did not refer to or follow this aspect of the decision, when deciding the case before it, though in the facts of the case before it, the contracts of employment were signed in India.

Possibly, this is on account of the fact that the Bombay High Court had clearly held in the case of Avtar Singh Wadhwan (supra) that the relevant test to be applied to decide if income accrued to a non- resident in India or outside India, is where services are rendered, and not where the contract is signed. The Karnataka High Court also, in the case of Prahlad Vijendra Rao (supra), held that u/s. 15 of the Act, even on accrual basis, salary income is taxable i.e., it becomes taxable irrespective of the fact whether it is actually received or not; only when services are rendered in India it becomes taxable by implication. However, if services are rendered outside India, such income would not be taxable in India.

Lastly, while perhaps the view of the Kolkata Tribunal does seem to be the better position based on a strict reading of the provisions, one also needs to consider the fact that in both the cases, the salaries were credited to an NRE account with a bank in India. For all practical purposes, under the Foreign Exchange Management Act, such an account is treated as the equivalent of a foreign bank account of the depositor outside India – transfers from Non-Resident Ordinary accounts (which are nonrepatriable) to such NRE accounts are governed by the procedures applicable to repatriation of funds overseas, transfer of funds from such accounts overseas is freely permissible, interest on such accounts is not taxable, etc. Given this situation, should amounts received in such NRE bank accounts not be regarded as having been received outside India? What purpose would be served by having Indian citizens open overseas bank accounts to receive their foreign salaries in the first instance, just to save on tax on such salaries?

The CDBT has come out with clarifications in the past, regarding the residential status of seafarers operating on ships in international waters, and taxability of their salary. In order to avoid further litigation, and unnecessary reduction of inflows into NRE accounts, it would be better for the CBDT to clarify that such foreign salaries credited to NRE accounts of seafarers or other NRIs would not be regarded as having been received in India.

shailesh.kwebmaker

9 Sections 32, 43(3) – The benefit of additional depreciation is available to the assessees who are manufacturers and is not restricted to plant and machinery used for manufacture or which has first degree nexus with manufacture of article or thing.

9. [2017] 87 taxmann.com 103 (Kolkata)

DCIT vs. Bengal
Beverages (P.) Ltd.

ITA No. :
1218/KOL/2015

A.Y.: 2010-11

Date of
Order: 6^th October, 2017

Sections 32,
43(3) – The benefit of additional depreciation is available to the assessees
who are manufacturers and is not restricted to plant and machinery used for
manufacture or which has first degree nexus with manufacture of article or
thing.

A manufacturer of soft drinks is entitled to claim additional
depreciation on `Visicooler’ installed at the distributor’s or retailer’s
premises so as to ensure that the cold drink is served chilled to the ultimate
customer. Such installation at the
premises of the distributor or the retailer would tantamount to use of the
`visicooler’ for the purpose of business.

FACTS

During the
previous year under consideration, the assessee company was engaged in the
business of manufacture of soft drinks, generation of electricity through wind
mill and manufacture of pet bottles for packing of beverages. The assessee
claimed additional depreciation on Visicooler amounting to Rs. 90,56,200 (Rs.
41,67,159 + Rs. 48,89,004). The Visicoolers were kept at the premises of the
distributors/retailers and not at the factory premises of the assessee. The
assessee submitted to the Assessing Officer (AO) that the Visicoolers were
required to be installed at the delivery point to deliver the product to the
ultimate consumer in the chilled form, therefore these Visicoolers are part of
assessee’s plant entitling the assessee to claim additional depreciation.

The AO was of
the view that the assessee is not carrying out manufacturing activity on the
product of the retailer at the retailer’s premises and merely chilling of
aerated water cannot be termed as manufacturing activity and even that chilling
job is the activity of the retailer and not of the assessee. The AO, disallowed
the assessees claim of additional depreciation of Rs. 90,56,200.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who observed that the twin reasons
for which the AO disallowed claim for additional depreciation on visi coolers
was –

(i) visi cooler
was not used by the assessee at its own premises but at the premises of the
distributor; and

(ii) the
visi cooler cannot be said to be used for manufacture of cold drinks.

The CIT(A) held
that depreciation is allowed to an assessee if he owns the asset and the asset
is used for the purposes of his business.
Save and except these two conditions, no further or additional conditions
are required to be fulfilled by an assessee to claim depreciation. In order to
prove that an asset is used “for the purpose of business”, it is not necessary
to prove the first degree nexus between the “use of asset” and its use by the
assessee himself. So long as the use of
the asset, directly or indirectly, benefits or enables an assessee to carry on
its business, it will be sufficient to satisfy the criteria of “use for the
purpose of business”. The Apex Court has
in the case of ICDS Ltd. vs. CIT [2013] 29 taxmann.com 129, while
interpreting this condition held that language of section 32 did not mandate
usage of the asset by the assessee itself.
So long as the asset is used or utilised for the purposes of business,
the requirement of section 32 stands satisfied notwithstanding non usage of the
asset itself by the assessee. The contention of the assessee that the usage of
visicooler at the distributor’s premises so as to ensure that the “cold drink”
is served “cold” to the ultimate consumer tantamount to usage in the course and
for the purpose of business. The CIT(A)
deleted the addition made by the AO.

HELD

The Tribunal
noted that the Apex Court has in the case of Scientifc Eng. House (P.) Ltd.
vs. CIT [1986] 1257 ITR 86 (SC) laid down a test viz. Did the article
fulfill the function of a plant in the assessee’s trading activity? Was it a
tool of his trade with which he carried on his business? If the answer was in
the affirmative it would be a plant.

The Tribunal
held that applying the said test to the Visicooler came to a conclusion that
the answer is in the affirmative. It
held that visicooler is a tool which is necessary for carrying out, the
business of the assessee. The Tribunal upheld the order passed by CIT(A).

The appeal filed by the Revenue was dismissed.

shailesh.kwebmaker

5 Sections 220(2) and 221(1) – Penalty – Default in payment of tax – Penalty should not exceed the amount of tax in arrears – Tax in arrears does not include interest payable u/s. 220(2)

CIT vs. Oryx Finance and Investment P.
Ltd.; 395 ITR 745 (Bom):

The return of income was processed u/s.
143(1) Act, 1961 and a demand was raised. The Assessing Officer also imposed
penalty of Rs. 1,19,30,677 u/s. 221(1) of the Act for default by the assessee
in the payment of demand. The Commissioner (Appeals) and the Tribunal held that
the penalty should not exceed the amount of tax in arrears and that tax in
arrears does not include interest payable u/s. 220(2).

On appeal by the Revenue, the Bombay High
Court upheld the decision of the Tribunal and held as under:

“i) On reading the provisions
of section 221 conjointly with the definition of “tax” as detailed u/s. 2(43)
of the Act, the irresistible conclusion that would be drawn was that the
phraseology “tax in arrears” as envisaged in section 221 of the Act would not
take within its realm the interest component.

ii) The Assessing Officer
could impose penalty for default in making the payment of tax, but it should
not exceed the amount of tax in arrears. Tax in arrears would not include the
interest payable u/s. 220(2) of the Act.”

shailesh.kwebmaker

4 Sections 9 – DTAA between India and U.K – Arbitration – r.w.s. 195, and article 5 of DTAA – Income – Deemed to accrue or arise in India (Capital gains) – Whether arbitration proceedings against retrospective tax imposed by Finance Act, 2012 brought by Vodafone Group, UK under the Indo-UK BIPA (Bilateral Investment and Promotion Agreement) are liable to be stayed when on same issue an arbitration proceeding brought by Vodafone International Holdings BV is pending? – Multiple foreign corporate entities of same group cannot bring multiple arbitration proceedings under multiple investment protection treaties against a host State in relation to same investment, same economic harm and same measures especially when reliefs sought are same

UOI vs. Vodafone Group PLC UK; [2017] 84
taxmann.com 224 (Delhi):

Hutchinson Telecommunications International
Limited (HTIL) earned capital gains on the sale of stakes to Vodafone
International Holdings B.V. (VIHBV) in an Indian company by the name of
Hutchinson Essar Limited (HEL) for a certain consideration. The acquisition of
stake in HEL by VIHBV was held liable for tax deduction at source u/s. 195 and
since VIHBV failed to honour its tax liability, a demand u/s. 201(1)(1A)/220(2)
for non-deduction of tax was raised on VIHBV. However, the Apex Court quashed
the said demand. Subsequently, a retrospective amendment to section 9(1) and
section 195 read with section 119 of the Finance Act, 2012 re-fastened the
liability on VIHBV.

It was stated in the plaint that aggrieved
by the imposition of tax, VIHBV, the subsidiary of defendants invoked the
arbitration clause provided under the Bilateral Investment Promotion and
Protection Agreement (BIPA) between the Republic of India and the Kingdom of
Netherlands for the promotion and protection of investments through a notice of
dispute and subsequent notice of arbitration. While the said arbitration
proceedings were pending, the defendants served a notice of dispute and notice
of arbitration upon the plaintiff for resolution of an alleged dispute under
the India-UK BIPA primarily in respect of the same income tax demand that VIHBV
had identified as protected investment under the India-Netherlands BIPA and
which was already under adjudication before the Arbitral Tribunal constituted
under BIPA. It was stated in the plaint that though the plaintiff had raised
preliminary objections to the jurisdiction of the arbitral tribunal constituted
under the India-Netherlands BIPA yet the tribunal ruled that the issue of
jurisdiction and merits should be heard together.

On an application made by the Union of India
challenging the jurisdiction of the Arbitral Tribunal, the Delhi High Court
held as under:

“i) This Court is of the prima
facie view that in the present case, there is duplication of the parties
and the issues. Prima facie, this Court is also of the view that India
constitutes the natural forum for the litigation of the defendants’ claim
against the plaintiff. In fact, the reliefs sought by the defendants under the
India-UK BIPA and by the VIHBV the subsidiary of defendants under the
India-Netherlands BIPA are virtually identical.

ii) This Court in Pankaj
Aluminium Industries (P.) Ltd. vs. Bharat Aluminium Company Ltd., 2011 IV AD
(Delhi) 212 after relying upon DHN Food Distributors Ltd. vs. London
Borough of Tower Hamlets [1976] 3 ALL ER 462 at Page 467 has recognised the
doctrine of single economic entity. Consequently, the defendants as well as
their subsidiary VIHBV, prima facie, seem to be one single economic
entity.

iii) This Court is of the prima
facie opinion that as the claimants in the two arbitral proceedings form
part of the same corporate group being run, governed and managed by the same
set of shareholders, they cannot file two independent arbitral proceedings as
that amounts to abuse of process of law. This Court is further of the prima
facie view that there is a risk of parallel proceedings and inconsistent
decisions by two separate arbitral Tribunals in the present case. In the prima
facie opinion of this Court, it would be inequitable, unfair and unjust to
permit the defendants to prosecute the foreign arbitration.

iv) Consequently, defendant,
their servants, agents, attorneys, assigns are restrained from taking any
action in furtherance of the notice of dispute and the notice of arbitration
and from initiating arbitration proceedings under India-UK Bilateral Investment
Protection Agreement or continuing with it as regards the dispute mentioned by
the defendants.”

shailesh.kwebmaker

16 Return of income – Revised return – Due date u/s. 139(1) – Delay in filing return – Condonation of delay – Where assessee-company could not file return of income u/s. 139(1) before due date on account of some misunderstanding between erstwhile auditor and assessee and, assessee could not even obtain NOC from said erstwhile auditor immediately for appointment of an alternative auditor, in such circumstances, delay of 37 days in filing return of income alongwith audit report was to be condoned

REGEN
Powertech (P) Ltd. vs. CBDT; [2018] 91 taxmann.com 458 (Mad);

Date
of Order 28/03/2018: A. Y. 2014-15:

Sections
139(1) and 119(2)(b); Art. 226 of Constitution of India

For the A.
Y. 2014-15, the assessee-company could not file the return of income u/s.
139(1) of the Income-tax Act, 1961 before due date on account of some
misunderstanding between erstwhile auditor M/s. S. R.Batliboi & Associates,
Chartered Accountant and assesee and, the assessee could not even obtain NOC
from erstwhile auditor immediately for appointment of an alternative auditor.
The erstwhile auditors gave NOC on 15/12/2014. The new Auditor viz., M/s.CNGSN
Associates had completed the audit work and issued a Tax Audit Report dated
29/12/2014 and the petitioner Company, based on this, uploaded the Return Of
Income on 07/01/2015 along with the Tax Audit Report.

The
petitioner Company wished to file a revised return of income, after making
certain modifications to the earlier one, which is uploaded on 07/01/2015. Such
filing of the revised return is possible only if the original return had been
filed within the time prescribed u/s. 139 (1) of the Act. Therefore, the
petitioner company made an application to CBDT u/s. 119(2)(b) of the Act for
condonation of delay of 37 days in filing the return of income and accepting
the return of income filed on 07/01/2015 as filed u/s. 139(1). By an order
dated 01/06/2016, CBDT refused to condone the delay. The petitioner company
filed a writ petition before the Madras High Court and challenged the said
order of CBDT.

The Madras
High Court allowed the writ petition and held as under:

“i) It
is pertinent to note that without the Tax Audit Report u/s. 44 AB, the return
of income cannot be filed and the same will not be accepted by the System as a
correct return. According to the petitioner, the Auditors were delaying the
process of audit completion without proper reasons inspite of the petitioner
providing expert valuation report from other professional firm to satisfy their
concerns. The petitioner, left with no other alternative, but to look for an
alternative Auditor, after getting the NOC from M/s. S. R. Batliboi &
Associates. Thereafter, the petitioner Company appointed M/s.CNGSN Associates,
LLP, Chartered Accountant, Chennai as their Tax Auditor and requested them to
prepare the Tax Audit Report. The assignment was accepted by M/s. CNGSN
Associates on 29/11/2014, subject to NOC from the existing auditors viz.,
M/s.S.R.Batliboi & Associates. M/s.CNGSN Associates, by their letter dated
29/11/2014, also requested M/s. S. R. Batliboi & Associates to issue NOC.
However, no such NOC was given by the erstwhile Auditors. After repeated
requests made by the petitioner, M/s. S. R. Batliboi & Associates gave
their written communication dated 15/12/2014 expressing their inability to
carry out their audit and to issue a report.

ii) It is pertinent to note that the petitioner
cannot appoint an alternative Auditor without getting the written letter/NOC
from the existing Auditor. Thereafter, after getting NOC from the erstwhile
Auditor, the petitioner uploaded the return of income along with the Tax Audit
Report on 07/01/2015, hence, there was a delay of 37 days in filing the Return
Of Income. By delaying the submission of the return of income, the petitioner
did not stand to benefit in any manner whatsoever.

iii) When the petitioner had satisfactorily
explained the reasons for the delay in filing the return of income, the
approach of the 1st respondent should be justice oriented so as to advance the
cause of justice. The delay of 37 days in filing the return of income should
not defeat the claim of the petitioner. In the case of the petitioner failing
to explain the reasons for the delay in a proper manner, in such circumstances,
the delay should not be condoned. But, when the petitioner has satisfactorily
explained the reasons for the delay of 37 days in filing the return of income,
the delay should be condoned.

iv) Since the petitioner has satisfactorily
explained the reasons for the delay in a proper manner, I am of the considered
view that the 1^st respondent should have condoned the delay of 37
days in filing the Return Of Income along with the Audit Report.

v) In these circumstances, the impugned order
passed by the 1st respondent dated 01/06/2016 is liable to be set aside.
Accordingly, the same is set aside. The Writ Petition is allowed. No costs.”

shailesh.kwebmaker

15 Penalty – Concealment of income – Assessment u/s. 115JB – Assessment of income determined by legal fiction – Penalty for concealment of income cannot be imposed

Princ.
CIT vs. International Institute of Neuro Sciences and Oncology Ltd.; 402 ITR
188 (P&H); Date of Order: 23/10/2017:

A.
Y. 2005-06:

Sections
115JB and 271(1)(c)

The
assessee is a company. For the A. Y. 2005-06, the income of the assessee was
assessed u/s. 115JB of the Income-tax Act, 1961. The Assessing Officer also
imposed penalty u/s. 271(1)(c) of the Act for concealment of income.

The
Tribunal deleted the penalty holding that when the income is assessed u/s.
115JB penalty for concealment of income cannot be imposed.

On appeal
by the Revenue, the Punjab and Haryana High Court upheld the decision of the
Tribunal and held as under:

“i) Under the scheme of the Income-tax Act, 1961,
the total income of the assessee is first computed under the normal provisions
of the Act and tax payable on such total income is computed with the prescribed
percentage of the book profits computed u/s. 115JB of the Act. The higher of
the two amounts is regarded as total income and tax payable with reference to
such total income. If the tax payable under the normal provisions is higher,
such amount is the total income of the assessee, otherwise the book profits are
deemed as the total income of the assessee in terms of section 115JB of the
Act.

ii) Where the income computed in accordance with
the normal procedure is less than the income determined by legal fiction namely
the book profits u/s. 115JB and income of the assessee is assessed u/s. 115JB
and not under the normal provision, the tax is paid on the income assessed u/s.
115JB of the Act, and concealment of income would have no role to play and
would not lead to tax evasion.

iii) Therefore, penalty cannot be imposed on the
basis of disallowance or additions made under the regular provisions. Appeal
stands dismissed.”

shailesh.kwebmaker

14 Princ. CIT vs. Swapna Enterprise; 401 ITR 488 (Guj); Date of Order: 22/01/2018: A. Y. 2011-12: Sections 132, 132(4) and 271AAA(2)(i), (ii), (iii)

Penalty – Presumption of
concealment in case of search – Condition precedent – Finding that statement
specified manner in which such income earned – No evidence to show that such
income earned from any other source – Payment of tax with interest before
assessment made – Conditions satisfied – Deletion of penalty justified

The
assessee-firm was in the business of development of housing projects. Search
and seizure operations were conducted, u/s. 132 of the Income-tax Act, 1961, at
the business and residential premises of the assessee. In the course of search,
a statement of one of the partners of the firm, AGK, was recorded u/s. 132(4)
wherein he had admitted Rs. 15 crore as undisclosed income. The said income was
offered in the return filed pursuant to search. The Assessing
Officer levied penalty,
u/s. 271AAA of Rs. 15
lakh at the rate of 10% of the admitted undisclosed income on the ground that
the assessee failed to substantiate the source of such undisclosed income.

The
Commissioner (Appeals) found that AGK, during the course of recording his
statement, had explained that the unaccounted income represented net taxable
income of the project undertaken by the assessee and that the details mentioned
in the seized diary represented the net taxable income for the projects and
during the course of assessment proceedings, the assessee had filed relevant
details in that regard. He also found that no evidence was found to show that
the assessee had earned the undisclosed income from any other source instead of
the project income. On the basis of such finding, he held that the first
condition as prescribed under clause (2)(i) of section 271AAA was fulfilled in
the case of the assessee. As regards second condition u/s. 271AAA(2)(ii), the
Commissioner (Appeals) found that the undisclosed income of Rs. 8.10 crore was
admitted by AGK in his statement u/s. 132(4), the basis of which was a diary
found and seized during the course of search. The diary contained the entries
of the unaccounted/undisclosed income of Rs. 8.10 crore belonging to the
assessee firm, which had been explained by AGK, while recording his statement.
Therefore, he held that the second condition also was satisfied since such
undisclosed income had been accepted by the Assessing Officer in the assessment
proceedings. As regards the third condition u/s. 271AAA(2)(iii) the
Commissioner (Appeals) noted that the tax together with interest, if any, in
respect of undisclosed income should have been paid by the assessee for getting
immunity from the penalty and the Assessing Officer had stated in the penalty
order itself that full tax including interest on the undisclosed income had
been paid by way of adjustment out of the seized cash or otherwise in response
to the notice of demand but before conclusion of the penalty proceedings. In
the light of the fact that the assessee had satisfied all the three conditions
set out in sub-section (2) of section 271AAA, the Commissioner (Appeals)
deleted the penalty. The Tribunal upheld the decision of the Commissioner
(Appeals).

On appeal
by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and
held as under:

“i) Both the Commissioner (Appeals) as well as
the Tribunal had recorded concurrent findings of fact that the partner of the
firm, AGK, during the course of recording of his statement at the time of the
search, had stated that the income was earned by accepting on-money in its
building project. Therefore, the manner in which income has been derived has
been clearly specified in his statement.

ii) It was not the case of the Department that
during the course of recording of the statement of AGK any specific questions
had been asked to substantiate the manner in which the income was derived. Thus
the findings recorded by the Commissioner (Appeals) and the Tribunal regarding
the satisfaction of clause (i) and (ii) of sub-section (2) of section 271AAA
did not suffer from any legal infirmity.

iii) In so far as the satisfaction of clause (iii)
of sub-section (2) of section 271AAA was concerned, the penalty order revealed
that the entire amount of tax and interest had been paid, prior to making the
assessment order.

iv) In the light of the above discussion, there
being no infirmity in the impugned order passed by the Tribunal, no question of
law, as proposed or otherwise, can be said to arise. The appeal, therefore,
fails and is, accordingly, summarily dismissed.”

shailesh.kwebmaker

13 Industrial undertaking – Deduction u/s. 80-IA can be claimed in return filed pursuant to notice u/s. 153A – Finding that assessee developer and not contractor – Assessee is eligible for deduction u/s. 80-IA(4)(i)

Princ. CIT vs. Vijay Infrastructure Ltd; 402
ITR 363 (All); Date of Order: 12/07/2017:

A.
Y. 2009-10:

Sections
80-IA and 153A

The
assessee was a developer eligible for deduction u/s. 80-IA(4)(i) of the
Income-tax Act, 1961. For the A. Y. 2009-10, the assessee claimed deduction
u/s. 80-IA in the return of income filed pursuant to notice u/s. 153A of the
Act. The Assessing Officer held that the assessee was a contractor and hence
was not eligible for deduction u/s. 80-IA(4)(i) of the Act.

The
Commissioner (Appeals) found that the assessee fulfilled all the criteria of a
developer in accordance with section 80-IA(4)(i) and by his works a new
infrastructure facility in the nature of road had come into existence and the
assessee was eligible for tax benefit u/s. 80-IA(4)(i) of the Act. The Tribunal
confirmed this. On the question whether the assessee is entitled to deduction
u/s. 80-IA(4)(i) when the claim is made in the return of income filed pursuant
to notice u/s. 153A of the Act, the Tribunal held that for the A. Y. 2009-10
and onwards, the time for filing revised return had not expired and therefore,
claim for deduction u/s. 80-IA if not made earlier could have been made in the
revised return. Once it could have been claimed in the revised return u/s.
139(1), it could have also been claimed u/s. 153A of the Act.

In appeal
by the Revenue, the following questions were raised before the Allahabad High
Court:

“i) Whether the Income-tax Appellate Tribunal was
justified in allowing the deduction u/s. 80-IA to the assessee on the basis of
a return filed after the issue of notice u/s. 153A of the Act?

ii) Whether the Income-tax Appellate Tribunal
was justified under the facts and circumstances of the case in confirming the
order of the Commissioner of Income-tax (Appeals) who has travelled beyond the
statutory provision of Chapter VI-A, u/s. 80-A(5) of the Income-tax Act, 1961
which clearly provides that if the assessee fails to make a claim in his return
of income of any deduction, no deduction shall be allowed to him thereunder?”

The
Allahabad High Court upheld the decision of the Tribunal and held as under:

“i) Sri Manish Misra, the learned counsel for the
appellant contended that the return u/s, 153A is not a revised return but it is
a original return. If that be so, then in our view, deduction u/s. 80-IA, if
otherwise admissible, always could have been claimed and we are not shown any
authority otherwise to take a different view. Therefore, in both ways,
deduction u/s. 80-IA, if otherwise admissible could have been claimed by the
assessee. Hence we answer both the aforesaid questions in favour of the
assessee and against the Revenue affirming the view taken by the Tribunal.

ii) It is next contended that there is another
substantial question of law that the assessee is not a “developer” but a
“contractor” and in this regard detailed finding has been recorded otherwise by
the Assessing Officer. The fact that the assessee was a “developer” and not a
“contractor” was a finding of fact concurrently recorded by the Commissioner
(Appeals) and the Appellate Tribunal, which was not shown to be perverse or
contrary to record. No substantial question of law arose.”

shailesh.kwebmaker

12 Company – Recovery of tax from director – There should be proper proceedings against the company for recovery of tax and only thereafter the balance outstanding can be recovered from directors u/s. 179 – Precondition for a valid notice u/s. 179(1) is that the notice indicate the steps taken to recover the tax dues from the company and its failure – The notice and order u/s. 179(1) quashed and set aside

Mehul
Jadavji Shah vs. Dy. CIT (Bom); W. P. No. 291 of 2018; Date of Order:
05/04/2018:

A.
Y. 2011-12:

Section
179(1) :

Art.
226 of Constitution of India

The
petitioner was a director of a private limited company viz., Shravan Developers
Pvt. Ltd. He had resigned from the company in the year 2013. The company had
failed to pay tax dues of Rs. 4.69 crore for the A. Y. 2011-12. On 06/02/2017,
the Assessing Officer of the company issued notice u/s. 179(1) of the
Income-tax Act, 1961 seeking to recover from the petitioner the tax dues of Rs.
4.69 crore of the company for the A. Y. 2011-12. The petitioner responded to
the notice and sought details of the notices issued to the company for recovery
of the tax dues. However, without responding to the particulars sought, the
Assessing Officer passed order u/s. 179(1) on 26/12/2017 making a demand of Rs.
4.69 crore upon the petitioner.

The
petitioner filed a writ petition before the Bombay High Court challenging the
validity of recovery proceedings u/s. 179(1) of the Act and the order u/s.
179(1) dated 26/12/2017. The Bombay High Court allowed the writ petition,
quashed the order dated 26/12/2017 passed u/s. 179(1) of the Act, and held as
under:

“i) It is clear that before the Assessing Officer
assumes jurisdiction u/s. 179(1) of the Act, efforts to recover the tax dues
from the delinquent Private Limited Company should have failed. This effort and
failure of recovery of the tax dues must find mention in the show cause notice
howsoever briefly. This would give an opportunity to the noticee to object to
the same on facts and if the Revenue finds merit in the objection, it can take
action to recover it from the delinquent Private Limited Company. This has to
be before any order u/s. 179(1) of the Act is passed adverse to the noticee.

ii) In this case, admittedly the show cause
notice itself does not indicate any particulars of the failed efforts to
recover the tax dues from the delinquent Private Limited Company. Thus, the
issue stands covered in favour of the petitioner by the order of this Court in Madhavi
Kerkar vs. ACIT; W. P. No. 567 of 2016 dated 05/01/2018.

iii) In the above circumstances, the impugned
order dated 26/12/2017 is quashed and set aside.”

shailesh.kwebmaker

11 Appeal to High Court – Delay – Condonation of delay – Period of limitation should not come as an hindrance to do substantial justice between parties – However, at same time, a party cannot sleep over its right ignoring statute of limitation and without giving sufficient and reasonable explanation for delay, expect its appeal to be entertained merely because it is a State – Delay of 318 days – No reasonable explanation – Delay not condoned

CIT(Exemption)
vs. Lata Mangeshkar Medical Foundation; [2018] 92 taxmann.com 80 (Bom); Date of
Order: 18/03/2018:

A.
Ys. 2008-09 and 2009-10:

Section
260A

For the A.
Ys. 2008-09 and 2009-10, the Department had filed appeal to the High Court u/s.
260A of the Income-tax Act, 1961 against the order of the Tribunal. There was
delay of 318 days in filing the appeals. An application was made for
condonation of delay. Sequence of events were narrated during the period of
delay. It was stated that the tax effect involved was over Rs. 6 crore for A.
Y. 2009-10 and over Rs. 3.4 crore for A. Y. 2008-09.

The Bombay
High Court refused to condone the delay and held as under:

“i) There is no proper explanation for the delay
on the part of the Commissioner. In fact, the affidavit, dated 16-9-2017 states
that, he handed over the papers to his subordinate i.e. the Deputy
Commissioner. This is also put in as one of the reasons for the delay. This
even though when they appear to be a part of the same office. In any case, the
date on which it was handed over to the Deputy Commissioner (Exemptions),
Circle, Pune is not indicated. Further, the affidavit dated 16-9-2017 also does
not explain the period of timse during which the proposal was pending before
the Chief Commissioner, Delhi for approval. The Chief Commissioner is also an
Officer of the department and there is no explanation offered by the Chief
Commissioner at Delhi or on his behalf, as to why such a long time was taken in
approving the proposal. In fact, there is even no attempt to explain the same.
The Commissioner being a Senior Officer of the revenue would undoubtedly be
conscious of the fact that the time to file the appeals was running against the
revenue and there must be averment in the application of the steps he was
taking to expedite the approval process.

Further,
there is no proper explanation for the delay after having received the approval
from the Chief Commissioner of Delhi on 29-5-2017. No explanation was offered
in the affidavits dated 16-9-2017 for having filed the appeal on 20-7-2017 i.e.
almost after two months. The additional affidavits also does not explain the
delay except stating that the Advocate to whom the papers were sent for
drafting asked for some document without giving particulars. Thus, the reasons
set out in the Affidavits and additional Affidavits in support were not
sufficient so as to condone the delay in filing the accompanying Appeal.

ii) The officers of the revenue were conscious
of the time for filing the appeal. This is particularly so as on an average
over 2000 appeals every year from the order of the Tribunal is filed by it
before this Court. Inspite of the above said callous delay. Thus, the delay
could not be condoned.

iii) The reasons that come out from the Affidavits
filed is, that the work takes time and, therefore, the period of limitation
imposed by the State should not be applied in case of revenue’s appeal where
the tax effect involved is substantial. Such a proposition could not be
accepted as it would be contrary to the law laid down by the Apex Court that
there is no different period of limitation for the State and the citizen.

iv) One more submission made on behalf of the
revenue is that, the assessee have been served and they have chosen not to
appear. Therefore, it must necessarily follow that they have no objection to
the delay being condoned and the appeal being entertained. Thus, it is
submitted that the delay be condoned and the appeal be heard on merits. This
submission ignores the fact that the object of the law of limitation is to
bring certainty and finality to litigation. This is based on the Maxim ‘interest
reipublicae sit finis litium’ i.e. for the general benefit of the community
at large, because the object is every legal remedy must be alive for a
legislatively fixed period of time. The object of law of limitation is to get
on with life, if you have failed to file an appeal within the period provided
by the Statute; it is for the general benefit of the entire community so as to
ensure that stale and old matters are not agitated and the party who is
aggrieved by an order can expeditiously move higher forum to challenge the
same, if he is aggrieved by it. As observed by the Apex Court in many cases,
the law assists those who are vigilant and not those who sleep over their
rights as found in the Maxim ‘Vigilantibus Non Dormientibus Jura Subveniunt’.
Therefore, merely because the assessee does not appear, it cannot follow that
the revenue is bestowed with a right to the delay being condoned.

v) The period of limitation should not come as a
hindrance to do substantial justice between the parties. However, at the same
time, a party cannot sleep over its right ignoring the statute of limitation
and without giving sufficient and reasonable explanation for the delay, expect
its appeal to be entertained merely because it is a State. Appeals filed beyond
a period of limitation have been entertained, where the delay has been sufficiently
explained such as in cases of bona fide mistake, mala fide action
of the Officer of the State etc; however, to seek that the period of
limitation provided in the statute be ignored in case of revenue’s appeals
cannot be accepted. The appeals which are filed by the revenue in this Court
u/s. 260A of the Act are very large in number and on an average over 2000 per
year from the orders of the Tribunal. Thus, the officers of the revenue should
be well aware of the statutory provisions and the period of limitation and
should pursue its remedies diligently and it cannot expect their appeals be
entertained, because they are after all the State, notwithstanding the fact
that delay is not sufficiently explained.”

shailesh.kwebmaker

9 Section 69 – Unexplained Investment – A. Ys. 1993-94 and 1994-95 Seizure of diaries and files – No cogent evidence to prove assessee booked vehicles in fictitious names or earned premium by sale – No addition for unexplained investment permissible on conjectures or surmises

CIT vs. Classic Motors Ltd.; 396 ITR 1
(Del):

The assessee was a car dealer. Pursuant to a
search action u/s. 132 of the Act, 1961 in the premises of the assessee certain
diaries and files were seized. Based on some abbreviations found in the seized
diaries, but, which did not state any particulars of amounts or addresses, the
Assessing Officer held that there were unexplained investments on account of
booking of vehicles in fictitious names for the A. Ys. 1993-94 and 1994-95, and
also by selling those vehicles at a premium for the A. Y. 1993-94.

Accordingly, he made additions calculated at
25% of peak booking amounts as unexplained investments. The Tribunal held that
without any material or evidence, no additions could have been made and deleted
the additions.

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

“i) The Appellate Tribunal
did not err in appreciating the evidence before it and concluding that without
cogent and credible material that the bookings were made by the assessee for
itself, the additions ought not to have been made.

ii) The Assessing Officer’s
additions made on account of peak booking amounts, as unexplained investments
from undisclosed income, were based on conjectures and surmises. The questions
are answered in favour of the assessee and against the Revenue.”

shailesh.kwebmaker

8 Section 263 – Revision – A. Y. 2009-10 AO not specifically mentioning particular claim does not mean that AO passed assessment order without making enquiry in respect of allowability of claim – AO not expected to raise more queries if he was satisfied about admissibility of claim on basis of material and details supplied – Order not erroneous or prejudicial to Revenue – Order u/s. 263 is not valid

MOIL vs. CIT; 396 ITR 244 (Bom):

The assessee, a public sector undertaking
was involved in the business of extraction and sale of manganese ore, generation
of electricity and manufacturing and sale of EMV and ferro minerals. In the
course of the scrutiny assessment for the A. Y. 2009-10, the Assessing Officer
issued notice u/s. 142(1) of the Act,
1961, requiring details in respect of twenty items. According to item No. 9,
the Assessing Officer asked the assessee to give a detailed note of expenditure
for the corporate social responsibility along with the bifurcation of the
expenses under different heads. In pursuance of the notice, the assessee had given
the bifurcation of expenses under various heads towards the corporate social
responsibility claim. The Assessing Officer allowed certain claims without
making a specific reference to them in the assessment order and disallowed
certain claims after giving detailed reasons for the disallowance. The
Commissioner invoked the jurisdiction u/s. 263 of the Act after holding that
the Assessing Officer had passed the assessment order without making any
enquiry regarding the alowability of expenses claimed by the assessee under the
head “corporate social responsibility” and hence, the order was erroneous and
prejudicial to the interest of the Revenue and remanded the matter to the
Assessing Officer to redo the assessment in respect of the claim of the
assessee pertaining to the corporate social responsibility. The Tribunal
confirmed this order.

On appeal by the assessee, the Bombay High
Court reversed the decision of the Tribunal and held as under:

“i) The Assessing Officer
applied his mind to the claims made by the assessee and wherever the claims
were disallowable they have been discussed in that assessment order and there
was no discussion or reference in respect of the claims that were allowed. It
could not be said that merely because the Assessing Officer had not
specifically mentioned about the claim in respect of corporate social
responsibility, the Assessing Officer had passed the assessment order without
making any enquiry in respect of the allowability of the claim of corporate
social responsibility.

ii) The query pertaining to
corporate social responsibility was exhaustively answered and the assessee had
provided the data pertaining to the expenditure under each head of the claim in
respect of corporate social responsibility, in details. The Assessing Officer
was not expected to raise more queries, if he was satisfied about the
admissibility of the claim on the basis of the material and the details
supplied. The provisions of section 263 of the Act could not have been invoked
by the Commissioner.

iii) The orders of the
Commissioner of Income-tax and the ITAT are quashed and set aside.”

shailesh.kwebmaker

7 Section 263 – Revision – A. Ys. 2010-11 and 2011-12 Erroneous and prejudicial to revenue – AO not overlooking relevant facts, not failing to make enquiries – Order not erroneous – Revision not justified – Revision order covering issues not mentioned in show-cause notice – Not permissible. DTAA between India and Oman, arts, 11 and 25 – Credit for tax paid in other country – Dividend received from Omani company by PE of assessee in Oman – Clarification of Oman authorities that exemption granted to dividend under Omani tax laws was tax incentive – To be regarded as conclusive – Assessments in earlier years allowing tax credit – Assessee entitled to benefit of tax credit

Principal CIT vs. Krishak Bharati
Co-perative Ltd.; 395 ITR 572 (Del):

The assessee was a multi co-operative
society registered in India. In a joint venture with the Oman oil company, it
formed a company in Oman in which it held 25% of the share holding. The
assessee established a branch office in Oman to oversee its investments in the
joint venture company. The branch office was independently registered as a
company in Oman and claimed the status of PE of the assessee in Oman under
article 25 of the DTAA between India and Oman and filed returns of income under
the Oman tax laws. For the A. Ys. 2010-11 and 2011-12, the assessments were
completed u/s. 143(3) of the Act, 1961, bringing to tax dividend received by
the assessee from the joint venture company but allowing tax credit in respect
of the dividend received from the joint venture company, although the dividend
was exempted under the Oman tax laws by an amendment w.e.f 2000. Thereafter,
the Principal Commissioner issued a notice u/s. 263 of the Act on the ground
that any income which was not taxed at all according to the tax laws, could not
be construed as an incentive and that the exemption granted was not an
incentive granted under the Omani tax laws. He held that no tax credit was due
to the assessee u/s. 90 and that the order passed by the Assessing Officer was
erroneous and prejudicial to the Revenue. He also held that the assessee had
credited more income than the dividend received by it, that the accretion and
addition to its opening capital in terms of the profit on account of its PE in
Oman, audited and submitted during the proceedings, were not disclosed in its
accounts in India. He directed the Assessing Officer to make the assessment
accordingly.

The Tribunal held that the order passed u/s.
263 was without jurisdiction and unsustainable and that tax credit had been
allowed to the assessee during several preceding assessment years and
therefore, when there was no change in the facts or the relevant provisions of
law, following the principle of consistency of approach, credit for deemed
dividend tax was allowable in respect of the assessment year in question. It
also held that, (a) the annual accounts of the PE were prepared in accordance
with the International Financial Reporting Standards and accordingly, its share
or profit or loss in the joint venture company at 25% had to be accounted as
income in the profit and loss account of the PE eventhough such income was only
to the extent of dividend declared and distributed, (b) the joint venture
company was required to transfer a specified amount out of the total
distributable profit to reserve under the Omani tax laws and only the remaining
profits were distributed to the shareholders, and (c) therefore, even under the
Omani laws, the PE offered for taxation only the dividend income actually
received and not the total share of the PE in the profits of the joint venture
company. The undistributed share of profits shown in the books of the PE could
not be said to partake the character of income under the provisions of the Act, 1961, as only the real income was
chargeable to tax. Accordingly, the Tribunal allowed the appeals of the
assessee.

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

“i) The order u/s. 263 dealt
with issues which were not covered by the show-cause notice which was issued to
the assessee. This was not permissible.

ii) Neither did the Assessing
Officer overlook the relevant facts nor did he not make inquiries. The queries
were specifically with respect to dividend income and exemption and had also
considered the explanation of the Omani authorities on the subject. Therefore,
the Commissioner’s view that the assessment orders were erroneous and required
revision was unsustainable.

iii) The certification
rendered by the Sultanate of Oman in its letter to the effect that under the
company income tax law of Oman, dividend formed part of gross income chargeable
to tax and that the tax law of Oman provided income tax exemption to companies
undertaking to certain identified economic activities considered essential for the
country’s economic development with a view to encouraging investments in such
sectors, were to be regarded as conclusive. If the tax authorities had any
doubts, they could not have proceeded to elevate them into findings, but
addressed them to Omani authorities if not directly, then through the Indian
diplomatic channels. In not doing so, but proceeding to interpret the laws and
certificate of Oman authorities, the Department had fallen into error.

iv) The Appellate Tribunal
found that up to the tax year 2011 in the orders passed under the income tax
law of Oman, dividend had been included in the total income and thereafter
deduction had been granted and that it was established that the assessee was
entitled to get credit for the deemed dividend tax under the provisions of
section 90 of the Act, 1961, together with the clarifications issued by the
Sultanate of Oman and the assessment made under Omani laws.

v) The findings of fact did
not call for interference and the Appellate Tribunal did not err in holding
that the Principal Commissioner had erred in directing the Assessing Officer
u/s. 263 to withdraw the tax credit. Questions of law are answered in favour of
the assessee and the appeals are dismissed.”

shailesh.kwebmaker

6 Sections 147 and 148 – Reassessment – A. Y. 2008-09 – Notice for reassessment by authority other than authority normally assessing assessee – Not mere irregularity or curable defect – Defective issuance of notice and not service of notice- Notice not valid – To be quashed

Shirishbhai Hargovandas Sanjanwalla vs.
ACIT; 396 ITR 167(Guj):

For the A. Y. 2008-09, the assessee’s return
was processed u/s. 143(1) of the Act, 1961 by the ACIT Circle 4(2) who is the
jurisdictional Assessing Officer of the assessee. Subsequently, ACIT Circle
5(2) issued a notice u/s. 148 for reopening the assessment. According to the
Department, as the assessee was described as an agriculturist in a sale deed,
having a particular residential address, his assessment was made by the ACIT
Circle 5(2). The assessee filed a writ petition challenging the reassessment
notice.

The Gujarat High Court allowed the writ
petition and held as under:

“i) In administrative or
quasi judicial matters, where exercise of powers is well regulated and segregated
through rules and regulations or administrative instructions, no authority or
officer who is not vested with the jurisdiction of the particular nature can
exercise such powers which would be purely a case of lack of authority failing
which there would be total anarchy and any officer positioned at any place may
choose to exercise jurisdiction over any assessee.

ii) It was a defective
issuance of notice and not a service of notice as it was issued by an authority
who was not competent. The Department ignored the fact that the assessee had
been regularly assessed year after year and originally was within the
jurisdiction of Income-tax Circle 9 and after restructuring, the ACIT Circle
4(2). Therefore, the ACIT Circle 5(2) had no jurisdiction to assess and issue
the notice for reassessment. It was not a mere irregularity or a defect which
could have been cured, but a question of jurisdiction of the authority to
reopen the assessment. The notice was to be quashed.“

shailesh.kwebmaker

47 Charitable purpose – Charitable institution – Exemption u/s. 11 r.w.s. 2(15) – A. Ys. 2010-11 and 2011-12 – Society created by RBI to assist banks and financial institutions – Finding by Tribunal that assessee carried out an object of general public utility and was not engaged in trade – Assessee entitled to exemption

Principal CIT (Exemptions) vs. Institute of Development and Research in Banking Technology; 400 ITR 66 (T & AP):

The assessee was a society registered at the instance of the Reserve Bank of India (RBI) for the purpose of assisting banks and financial institutions, for the improvement of their performance. The assessee also offered M. Tech courses and Ph. D degrees in banking. It claimed exemption u/s. 11 of the Act, for the A. Ys. 2010-11 and 2011-12. The Assessing Officer rejected the claim. The Tribunal found that the assesee was carrying out an object of general public utility. It held that the assessee was not carrying on an activity in the nature of any trade, commerce or business. The Tribunal also pointed out that the charging of a fee by the assessee was not with profit motive and that therefore, merely because the assessee derived income it could not be held to be carrying on an activity in the nature of trade, commerce or business. It granted the exemption to the assessee. On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) The assessee was created by the Reserve Bank of India for the improvement of the performance of banks and the financial sector of the country, ultimately to have a bearing upon the economy of the country. Hence it was an institution established for an object of public utility.

ii) The Tribunal had found that it was not carrying on any activity in the nature of trade. It was therefore entitled to exemption u/s. 11 for the A. Ys. 2010-11 and 2011-12.”

shailesh.kwebmaker

46 Cash credit – Section 68 – A. Y. 2005-06 – Amount claimed to be long-term capital gains – Evidence of contract and payments through banks – Tribunal wrong in disregarding entire evidence and sustaining addition on sole basis of late recording on demat passbook – Addition u/s. 68 not justified

Ms. Amita Bansal vs. CIT; 400 ITR 324 (All):

Assessee is an individual. For the A. Y. an addition of Rs. 11,77,000 was made which according to the assessee was long term capital gain on sale of 11,000 share of a company. The Assessing Officer disbelieved the long term capital gain and made a corresponding addition of Rs. 11,77,000 u/s. 68 of the Income-tax Act, 1961(hereinafter for the sake of brevity referred to as the “Act”). On appeal, the assessee adduced evidence in the shape of contract notes/bill receipt, payments made through banking channels, contract notes and copies of pass book of its demat account in support of its claim and asserted its claim of long term capital gain as genuine and correct. The Commissioner (Appeals) after a detailed examination of the case of the assessee and evidence adduced by the assessee including the entries in the demat account passbook, the evidence of the broker firms through whom the transactions were made, and the contract note dated November 10, 2003, allowed the appeal. The Tribunal restored the addition on the sole ground of purchase of shares having been recorded late in the demat account of the assessee.

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:

“i) An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the question of fact raised before the Tribunal.

ii) Although the fact of the purchase transaction being recorded late in the demat passbook raised a doubt as to its genuineness and this evidence was relevant to the issue, there existed other evidence, adduced by the assessee in this case, in the shape of contract notes, bank transactions pertaining to payment for purchase and sale of shares and other material relied on by the Commissioner (Appeals). The Tribunal had also not specifically dealt with the findings recorded by the Commissioner (Appeals).

iii) In view of this, the finding of the Tribunal and the consequential order could not be sustained. The addition could not be made.”

shailesh.kwebmaker

Derived or not Derived From …….. ……

ISSUE FOR CONSIDERATION
In the annals of the Income-tax Act, no controversy is buried for ever. Like a hydra, it raises its head at the first available opportunity. One such controversy is about the eligibility for an incentive deduction of interest, received on deposits made in the course of an activity of an under taking or a business, the income of which is otherwise eligible for deduction. Whether such an interest is derived from the eligible activity or business and therefore, qualifies for a deduction or not is an issue which refuses to die down and comes up with regularity before the courts, in varied circumstances, with interesting facets.

At a time when the import of the issue has been fairly understood and addressed by the law makers and the practitioners and was believed to have been settled, it has resurfaced with beautiful facts. The recent decision of the Bombay High Court on the subject has revived the controversy with an immortal life span.

CYBER PEARL’S CASE
The issue recently came up for consideration in the case of Cyber Pearl IT Park Pvt. Ltd. vs. ITO, 399 ITR 310 before the Madras High Court in the context of section 80IAB for A.Y. 2009-10. The assessee in that case was engaged in the business of developing and leasing of Information Technology parks. For the assessment year 2009-10, the assessee claimed deduction u/s. 80-IAB of the Act to the extent of Rs. 4,20,59,087 which included a sum of Rs. 2,52,04,544 representing interest which the assessee had earned from security deposits from persons who had taken on lease the facilities set up in the parks. In form 10CCB filed by the assessee, the claim for deduction u/s. 80-IAB was restricted to a sum of Rs. 1,68,54,543. Based on this, the Assessing Officer passed an order u/s. 143(3) of the Act, restricting the deduction to a sum of Rs. 1,68,54,543 and treating the sum of Rs. 2,52,04,544, which was interest received by the assessee from security deposits given by the lessees as income from other sources. The CIT(A) confirmed the order of the AO and the Tribunal rejected the assessee’s claim for deduction qua the balance sum, i.e. Rs. 2,52,04,544 on two grounds: (a) that via auditor’s certificate issued in form 10CCB, the claim u/s. 80-IAB had been restricted to Rs. 1,68,54,543, (b) that the interest received from security deposit in the sum of Rs. 2,52,04,544 had “no direct nexus” with the industrial undertaking.

On further appeal to the High Court, the assessee contended the following:

–    the Tribunal did not appreciate the fact that in the income tax return filed by the assessee, the entire amount, of Rs. 4,20,59,087 was claimed as a deduction. The learned counsel submitted that because the mere fact that Form 10CCB restricted the claim to a sum of Rs. 1,68,54,543 could not be a ground for denying the deduction, which the assessee could otherwise claim as a matter of right u/s. 80-IAB.
–   the interest derived from the security deposit upon its investment in fixed deposits with the bank, was income, which was derived from business of developing a Special Economic Zone and therefore, was amenable to deduction u/s. 80-IAB.
–   the issue was settled in favour of deduction by the Bombay High Court in CIT vs. Jagdishprasad M. Joshi, 318 ITR 420 (Bom).

In response on the other hand, the Revenue made the following submissions.
–    for the interest earned from security deposits, to be amenable to deduction u/s. 80-IAB, it should have a “direct nexus” with the subject activity, which was, the business of developing a special economic zone.
–    only those profits and/or gains, which were derived by an undertaking or an enterprise from “any” business of developing a Special Economic Zone, would come within the purview of section 80-IAB.
–   in the following cases, the courts have held that the deduction was not eligible:

(i)   CIT vs. A.S. Nizar Ahmed and Co., 259 ITR 244 (Mad)
(ii)   CIT vs. Menon Impex P. Ltd., 259 ITR 403 (Mad)
(iii)   Pandian Chemicals Ltd. vs. CIT, 262 ITR 278 (SC)
(iv)   CIT vs. Shri Ram Honda Power Equip, 289 ITR 475 (Delhi)
(v)   Dollar Apparels vs. ITO, 294 ITR 484 (Mad)
(vi)   Sakthi Footwear vs. Asst. CIT(No.1), 317 ITR 194 (Mad)
(vii)   CIT vs. Mereena Creations, 330 ITR 199 (Delhi) and
(viii)   CIT vs. Tamil Nadu Dairy Development Corpo.Ltd., 216 ITR 535 (Mad).

The High Court, on an analysis of provisions of section 80-IAB, observed that an assessee was entitled to a deduction of the profits and gains derived by an undertaking or an enterprise from the business of developing a special economic zone. On examination of the decision of the Supreme Court in Pandian Chemicals Ltd.’s case (supra), and applying it to the case before it, the court observed as under;
– Pandian Chemicals Ltd. was a case for deduction u/s. 80-HH in respect of interest on deposits with Electricity Board for supply of electricity to industrial undertaking and the issue therein was whether such interest could be construed to be profits and gains ‘derived’ from an industrial undertaking and were eligible for deduction.
– the Supreme Court rejected the claim of the assessee by observing that the term ‘derived’ concerned itself with effective source of income only and did not embrace the income by way of interest on deposits made, which was a
secondary source.

–    only such income was eligible for deduction which had a direct or immediate nexus with the industrial undertaking.
–   the term ‘derived from’ had a narrower meaning than the term ‘attributable to’ and excluded from its scope the income with secondary or indirect source as was explained by various decisions of the apex court including in the cases of Cambay Electric Supply Industrial Co. Ltd., 113 ITR 84 (SC) and Raja Bahadur Kamakhaya Narain Singh, 16 ITR 325 (PC) and Sterling Foods, 237 ITR 579(SC).
–    the Madras High Court in the case of Menon Impex P. Ltd. 259 ITR 403 denied the deduction us. 10A by holding that interest on deposits made for obtaining letter of credit was not ‘derived from’ the undertaking carrying on the business of export.
–    the contention of the assessee that the decisions cited by the Revenue did not deal with the provisions of
section 80-IBA of the Act was to be rejected as the provisions of section 80-IBA were found to be para materia with the provisions dealt with in those cases, as all of them were concerned with the true meaning of the term ‘derived from’ whose width and amplitude was narrower in scope than the term “attributable to”.
–    once it was found that income was from a secondary source, it fell outside the purview of desired activity, which in the case before them was the business of developing a Special Economic Zone.

In deciding the case, in favour of the Revenue, the court was unable to persuade itself to agree with the decision of the Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi, 318 ITR 421 which had taken a contrary view on the subject of deduction of interest.

JAGDISHPRASAD JOSHI’S CASE
The issue had come up for consideration before the Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi, 318 ITR 421 in the context of section 80-IA for A.Y. 1997-98.

In that case, the court was asked to address the following substantial question of law; “Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in allowing the appeal of the assessee holding that the interest income earned by the assessee on fixed deposits with the bank and other interest income are eligible for deduction u/s. 80-IA of the Income-tax Act, 1961 ?”

On behalf of the Revenue, a strong reliance was placed upon the judgement of the Supreme Court in the case of Pandian Chemicals Ltd.(supra) and also the judgement of the Madras High Court in the same case reported in 233 ITR 497.

On behalf of the assessee, equally strong reliance was placed on the judgement of the Delhi High Court in the case of CIT vs. Eltek SGS P. Ltd.,300 ITR 6, wherein the Delhi High Court had considered the very same issue, and in the process examined the applicability of the judgement relied upon by the Revenue, and the court in Eltek’s case. The Delhi High Court had distinguished the language employed under sections 80-IB and 80-HH and had observed as under :
“ That apart s. 80-IB of the Act does not use the expression ‘profits and gains derived from an industrial undertaking’ as used in s. 80-HH of the Act but uses the expression ‘profits and gains derived from any business referred to in sub-section’..

A perusal of the above would show that there is a material difference between the language used in s. 80-HH of the Act and s. 80-IB of the Act. While s. 80-HH requires that the profits and gains should be derived from the industrial undertaking, s. 80-IB of the Act requires that the profits and gains should be derived from any business of the industrial undertaking. In other words, there need not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains.

Learned counsel for the Revenue also drew our attention to Pandian Chemicals Ltd. vs. CIT, 262 ITR 278 (SC). However, on a reading of the judgement we find that also deals with s. 80-HH of the Act and does not lay down any principle different from Sterling Foods, 237 ITR 579 (SC). Reliance has been placed on Cambay Electric Supply Industrial Co. Ltd., 113 ITR 84 (SC) and the decision seems to suggest, as we have held above, that the expression ‘derived from an industrial undertaking’ is a step removed from the business of the industrial undertaking.”

The Bombay High Court dismissed the appeals, approving the decision of the Tribunal, holding that no substantial question of law arose in the appeal of the Revenue. The deduction allowed u/s. 80-IA to the assessee was upheld.

OBSERVATIONS
A few largely undisputed understandings, in the context of the issue under consideration, of the eligibility of an income from interest or any other receipt, are listed as under:
–   the term ‘attributable to’ is wider in its scope than the term ‘derived from’,
– the
term ‘attributable to’ is wider in its scope than the term ‘derived from’,
which has a limited scope of inclusion.
–    the term ‘attributable to’ usually includes in its scope, a secondary and indirect source of income, besides the primary and the derived source of income.
–    as against the above, the term ‘derived from’ means a direct source and may include a source which is intricately linked to the main activity which is eligible for deduction.
–    the difference between the two terms is fairly addressed to, explained and understood, not leaving much scope for assigning a new meaning.

It is also understood that the term ‘derived from’, is capable of encompassing within its scope, such income or receipts which can also be construed to be the primary source of the eligible activity or is found to be intricately and inseparably linked thereto.

Under the circumstances, whether a particular receipt or an income is derived from or not and is eligible for the deduction or not are always the questions of fact and no strait-jacket formula can be supplied for the same.

The legislature has from time to time enacted provisions for conferring incentives for promoting the preferred or the desired activities or businesses, over a period of almost a century. Obviously, the language employed in the multitude of sections and provisions varies and thereby, it has become extremely difficult to apply the ratio of one decision to the facts of another case, as a precedent. A little difference in the language employed by the legislature invites disputes, leading to a cleavage of judicial views as is seen by the present controversy under discussion. At times, it becomes very difficult to resolve an issue simply on the basis of the language alone, even where the provisions are otherwise required to be construed liberally, in favour of the tax payers.

An attempt has been made to list down a few of the examples of the language used in the different provisions of chapter VI-A and sections 10 A to 10 C of the Act.
–    Profits and gains derived from an industrial undertaking.
–    Profits and gains derived from the business of a hotel or a ship.
–    Profits and gains derived from a small scale industry.
–    Profits and gains derived from a business of …..
–   Profits and gains derived from execution of a Housing Project.
–    Profits and gains derived from exports.
–    Profits and gains derived from services.
–    Profits and gains derived from such business.
–    Profits and gains derived from an undertaking or an enterprise from any business of …..
–    100% of the profits.
–   Profits and gains derived by an undertaking from exports.

The list, though not exhaustive, highlights the possibility of supplying different meanings based on the difference in the language employed by the legislature. The major difference that has emerged in the recent years is between the following three terminologies:
–    Profits and gains derived from an undertaking .
–    Profits and gains derived from an undertaking or an enterprise from any business of …..
–   Profits and gains derived from a business of …..

The rules of interpretation provide that each word, or the omission thereof, should be assigned a specific meaning and should be believed to be inserted or omitted by the legislature with a purpose. Nothing should be believed to be meaningless. Applying this canon of interpretation, the Delhi High Court in the case of Eltek SGS P. Ltd. 300 ITR 006, in the context of section 80 IB, refused to follow the decisions in the cases of Cambay Electric Supply Industrial Co. Ltd. (supra), Sterling Foods (supra) and Pandian Chemicals Ltd. (supra) and Ritesh Industries, 274 ITR 324 (Delhi), by distinguishing the language used in sections 80 HH and 80 I from that used in section 80- IB of the Act. The High Court chose to strengthen its case by referring to the decision of the Gujarat High Court in the case of Indian Gelatin and Chemical Ltd. 275 ITR 284 (Guj). As noted earlier, in respect of income from interest, the Bombay High Court in Jagdishprasad’s case has followed the decision of the Delhi High Court in Eltek’s case in respect of duty drawback.

It is crucial to appreciate the difference in the language in section 80HH, section 80-I and section 80-IB of the Act. The language used in section 80-IB of the Act is a clear departure from the language used in section 80-HH and section 80-I of the Act. It is this choice of words that makes all the difference to the controversy that we are concerned with.

The court in Eltek’s case found it to be not necessary to go as far as the Gujarat High Court had done in coming to the conclusion that duty drawback was profit or gain derived from the business of an industrial undertaking. It was sufficient for the Court to stick to the language used in section 80-IB of the Act and come to the conclusion that duty drawback was profit or gain derived from the business of an industrial undertaking. The language used in section 80-IB of the Act, though not as broad as the expression ‘attributable to’ referred to by the Supreme Court in Sterling Foods and Cambay Electric’s cases is also not as narrow as the expression ‘derived from’. The expression “derived from the business of an industrial undertaking” is somewhere in between.

The distinction between the language employed in two different provisions has been noticed favourably by the courts in the judgements in the cases of Dharampal Premchand Ltd., 317 ITR 353 (Delhi) and Kashmir Tubes, 85 Taxmann.com 299 (J &K). In contrast, the Punjab & Haryana High Court following Liberty India, 317 ITR 258 (SC), has denied the deduction in spite of being informed about the difference in the language employed in the two provisions. [Raj Overseas, 317 ITR 215 and Jai Bharat Gums, 321 ITR 36].

A serious note needs to be taken of the decision of the Jammu & Kashmir High Court in the case of Asian Cement Industries, 261 CTR 561 wherein the court on a combined reading of section 80-IB(1) with section 80-IB(4), in the context of interest, held that nothing turned on the difference in language between the sections 80HH and 80IB and that the law laid down by the Supreme court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd. (supra) applied to section 80-IB as well. Similarly, the Uttarakhand High Court in the case of Conventional Fasteners, 88 Taxmann.com 163 held that the difference noted by the High Court in Eltek and Jagdishprasad’s cases was not of relevance and the ratio of the Supreme Court’s decisions continued to apply, in spite of the difference in language of the provisions.

Lastly, a careful reference may be made to the Supreme Court decision in the case of Meghalaya Steels, Ltd., 383 ITR 217 for a better understanding of the subject on hand. A duty drawback or refund of excise duty or receipt of an insurance claim or sale proceeds of scrap and such other receipts has obviously a better case for qualifying for deductions.

The better view appears to be that the use of different languages and terminologies in some of the provisions has the effect of expanding the scope of such provisions for including such incomes that may otherwise be derived from secondary source of the activity; more so, on account of the accepted position in law that an incentive provision should be construed in a manner that allows the benefit, than that denies the benefit. _

shailesh.kwebmaker

9 Section 11(4A) – Income from pharmacy shop run by a charitable hospital – Operation of pharmacy shop was intrinsic to the activities of running of hospital and hence, did not constitute business.

DCIT
(Exemption) vs. National Health & Education Society (Mumbai)

Members: Joginder Singh (J.M.) and Manoj
Kumar Aggarwal (A.M.)

I.T.A. No.1958/Mum/2016

Assessment Year: 2012-13. Date of Order: 10^th January, 2018

Counsels for Revenue / Assessee: H. N. Singh / S. C. Tiwari and Rituja Pawar

FACTS

The assessee trust is registered u/s. 12A
with DIT (Exemptions) and also registered with Charity Commissioner,
Bombay. During the assessment
proceedings, the AO noted that the trust was running a pharmacy shop in the
hospital and achieved turnover of Rs.42.83 crore with net surplus of Rs.16.73
crore. The turnover of the shop constituted about 12.82% of total hospital
collections. The income from the shop, in the opinion of the AO, constituted
business income in terms of section 11(4A). The assessee defended the same on
the ground that the drugs were supplied only to in-patients upon consultant’s
prescription and the charges of the drugs formed part of final patients’ bills.
However, the AO noted that the Trust Deed did not bar the hospital from selling
medicines to outsiders and the activity of pharmacy shop was systematic
business activity. The AO further noted that the trust was not maintaining
separate books of accounts for the shop. Finally, the net surplus of Rs.16.73
crore earned from the shop was assessed as business income against which
exemption under section 11 was denied.

Aggrieved, the assessee contested the same
successfully before the CIT(A), where the CIT(A), relying upon the order of its
predecessor in AYs 2010-11 & 2011-12, allowed the appeal of the assessee on
the premises that operation of the pharmacy shop was intrinsic to the
activities of the assessee and not incidental, and did not constitute business
and therefore, the provisions of section 11(4A) were not applicable.

In appeal filed before the Tribunal, the
revenue contested the findings of the CIT(A) on the ground that the assessee
had not maintained separate books of accounts for pharmacy shop and therefore,
failed to fulfill the conditions envisaged by section 11(4A).

HELD

The Tribunal noted that the issue had
already been decided in assessee’s favour by first appellate authority for AY
2010-11 & 2011-12. Also, it was noted that the Mumbai Tribunal, in the
assessee’s own case vide ITA No.87/Mum/2015 order dated 17/08/2016 for AY
2010-11, after considering the judgement of the Bombay High Court in Baun
Foundation Trust vs. CCIT [2012 73 DTR 45 (Bom)] and Mumbai Tribunal in
Hiranandani Foundation vs. ADIT [ITA Nos. 560-563/Mum/2016 order dated
27/05/2016] had upheld the stand of the CIT(A). Since the revenue was
unable to bring any contrary facts on record and distinguish the facts of
earlier years with that of the impugned assessment year, the Tribunal dismissed
the revenue’s appeal.

shailesh.kwebmaker

8 Sections 50C and 54F – For the purpose of section 54F net consideration is the amount of sale consideration and not the deemed consideration determined u/s. 50C.

ITO vs. Raj Kumar Parashar (Jaipur)

Members: Kul Bharat (J. M.) and Vikram Singh
Yadav (A. M.)

ITA No.: 11 / JP / 2016

AYs:
2011-12. Date of Order: 28^thSeptember, 2017

Counsel for Revenue / Assessee: Prithviraj Meena / Hemang Gargieya

FACTS

During the year under consideration, the
assessee had sold a property for a consideration of Rs. 24.6 lakh and deposited
the sale consideration in the capital gain account scheme for the purpose of
purchasing a new house property. The
entire capital gain earned by the assessee was claimed as exempt u/s. 54F. The
stamp authority    adopted    the
value   of the property sold at Rs. 96.03 lakh. Applying the provisions of section 50C, the
AO held the assessee was required to invest / deposit the deemed sale
consideration of Rs. 96.03 lakh. Since the assessee had deposited Rs. 24.6 lakh
only, the AO computed   capital   gain
at Rs. 70   lakh
after allowing Rs. 24.6 lakh as deduction u/s. 54F.

On appeal, the CIT(A) referred to the
definition of ‘net consideration’ as given in Explanation to section 54F and
also relying on the decision of the Jaipur bench of Tribunal in the case of Gyanchand
Batra (ITA No. 9 / JP / 2010) dated 13.08.2010 held that the deeming
provision in section 50C would not be applicable to section 54F and
accordingly, allowed the appeal of the assessee.

Before the Tribunal, the revenue supported
the order of the AO and contended that the order of the CIT(A) was not in accordance with the express provisions of section 50C.

HELD

According to the Tribunal, as per the
provisions of section 54F, where the net consideration in respect of the
original asset is fully invested in the new asset, the whole of the capital
gains is exempt and no part of the consideration can be charged u/s. 45. The
Tribunal agreed with the CIT(A) that the consideration which is actually
received or accrued as a result of transfer has to be invested in the new
asset. In the instant case, since the
consideration which had accrued to the assessee as per the sale deed was
Rs.24.6 lakhs and the whole of the said consideration was invested in the
capital gains accounts scheme for purchase of the new house property, the
provisions of section 54F(1)(a) were complied with and the assesse was eligible
for deduction in respect of the whole of the capital gains computed u/s.
45.

shailesh.kwebmaker

8 Section 54F – If the assessee has invested sale consideration in the construction of a new residential house within three years from the date of transfer, deduction u/s. 54F cannot be denied on the ground that he did not deposit the said amount in capital gain account scheme before the due date prescribed u/s. 139(1) of the Act.

[2017]
86 taxmann.com 72 (Kolkata)

Sunayana Devi vs. ITO

ITA No. : 996/KOL/2013

A.Y. : 2004-05

Date of Order:
13^thSeptember, 2017

Section 54F – If the assessee has invested
sale consideration in the construction of a new residential house within three
years from the date of transfer, deduction u/s. 54F cannot be denied on the
ground that he did not deposit the said amount in capital gain account scheme
before the due date prescribed u/s. 139(1) of the Act.

FACTS

During the
previous year under consideration, the assessee, an individual, sold land for a
consideration of Rs. 20 lakh on 9.12.2003.
The stamp duty value of the land sold was Rs. 41,00,000. Of the Rs. 20 lakh received on sale of land,
the assessee utilised a sum of Rs. 3,50,000 on purchase of land for
construction of a new residential house, on 29.7.2004, and also paid Rs. 31,839
as stamp duty thereon.

The Assessing Officer with a view to verify
the details of deposit of balance consideration in Capital Gains Account called
for the required details. The assessee
did not file the required details. In the circumstances, the AO proceeded to compute
long term capital gain at Rs. 38,94,750 by adopting stamp duty value of the
land transferred as full value of consideration. He denied allow exemption u/s.
54F of the Act.

Aggrieved, the
assessee preferred an appeal to CIT(A).
In the course of appellate proceedings, photocopy of pay in slip was
furnished to substantiate that cash of Rs. 2,60,000 was deposited on 31.7.2004
in Capital Gains Account Scheme and a cheque of Rs.13,90,000 was deposited on
30.7.2004 which cheque was misplaced by the Bank and on 12.2.2005 a fresh
cheque was issued to the bank for deposit in Capital Gains Account Scheme. The CIT(A) held that the assessee was
entitled to deduction of Rs. 2,60,000 u/s. 54F as this was the amount deposited
in Capital Gains Account Scheme by 31.07.2004 being due date of furnishing
return of income u/s. 139(1) of the Act.
With regard to the balance sum of Rs. 13,90,000 ( Rs.16,50,000 – Rs.
2,60,000) since deposit was made after 31.07.2004, the CIT(A) held that the
assessee will not be entitled to deduction u/s. 54F of the Act.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD

In the course
of appellate proceedings before the Tribunal, it was submitted that though the
completion certificate was not received within three years, the remand report
established that an Inspector was deputed to conduct spot inquiry and the
Inspector reported that the construction was completed within three years from
the date of transfer.

The Madras High
Court has in the case of CIT vs. Sardarmal Kothari [2008] 302 ITR 286
(Mad.), held that it would be enough if the assessee establishes that he
has invested the entire net
consideration within the stipulated period. The Chennai Bench of ITAT in the
case of Seetha Subramanian vs. ACIT [1996] 59 ITD 94 (Mad.) has taken a
view that investment of net consideration for construction of the house has
alone to be seen for allowing deduction u/s. 54F of the Act. The Tribunal held
that the absence of completion certificate cannot be a ground to deny the
benefit of deduction u/s. 54F of the Act.

The Tribunal
observed that having come to the conclusion that the assessee had utilised the
net consideration in construction of a house within a period of 3 years from
the date of transfer, the question would be whether the absence of deposit of
unutilised net consideration in a specific bank account as is required u/s
54F(4) of the Act, should the assessee be denied the benefit of deduction u/s.
54F of the Act.

The Tribunal
noted that the Karnataka High Court has in the case of CIT vs. K.
Ramachandra Rao [2015] 567 taxmann.com 163 (Karn.) held that if the
assessee invests the entire consideration in construction of the residential
house within 3 years from the date of transfer, he cannot be denied deduction
u/s. 54F of the Act on the ground that he did not deposit the said amount in
capital gains account before the due date prescribed u/s. 139(1) of the Act.

Considering the
factual position that the assessee invested the sale consideration in
construction of a residential house within three years from the date of
transfer and also the decision of the Karnataka High Court in the case of CIT
vs. K. Ramachandra Rao (supra), the Tribunal held that the assessee should
be given the benefit of deduction u/s. 54F of the sum of Rs. 16,50,000 also and
this benefit cannot be denied on the ground that he had not complied with the
requirements of section 54F(4) of the Act.

The Tribunal
held that in effect the assessee would be entitled to a deduction of Rs.
20,31,839 viz. for the investment of Rs. 3,50,000 in purchase of land, Rs.
31,839 stamp duty and registration charges and Rs. 16,50,000 utilised for
construction of a residential house within the period specified u/s. 54F(1) of
the Act. It directed the AO to allow
deduction of Rs. 20,31,839 u/s. 54F of the Act.

shailesh.kwebmaker

7 Section 37 – Expenditure incurred on stamp duty and registration charges on sale of flats, to attract buyers, as an incentive scheme by duly advertising the same, is allowable as a revenue expenditure.

[2017] 87 taxmann.com 70 (Mum.)

Kunal
Industrial Estate Developers (P.) Ltd. vs. ITO

ITA No. :
307/MUM/2017

A.Y.: 2012-13

Date of
Order: 10^th October, 2017

Section 37 –
Expenditure incurred on stamp duty and registration charges on sale of flats,
to attract buyers, as an incentive scheme by duly advertising the same, is
allowable as a revenue expenditure.

Interest on
delayed payment to creditors for payment beyond credit period is allowable
expenditure, since it is in relation to business carried on by the assessee.

FACTS-I

During the
previous year under consideration, the assessee, a builder, with a view to
attract buyers came up with a scheme of bearing expenses on stamp duty and
registration charges. This offer was known as Monsoon Offer and was advertised
in the newspapers as such. The assessee
incurred a sum of Rs. 2,28,400 as Stamp Duty and Rs. 1,28,450 as registration
charges in respect of flats registered and recorded as sales during the
year. This amount was claimed as a
deduction. In the course of assessment proceedings, the assessee filed copies
of relevant extracts of the newspaper in which the scheme was advertised. The
Assessing Officer (AO) disallowed this expenditure without stating the ground
or reason for disallowance.

Aggrieved, the
assessee preferred an appeal to CIT(A) who upheld the action of the AO without
mentioning any specific reason except mentioning that it is not a revenue
expenditure.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD-I

The Tribunal
noted that the CIT(A) had not given any reasons for upholding the disallowance
except stating that it is not a revenue expenditure. It held that when the
assessee had made the expenditure on stamp duty and registration charges, as
the incentive scheme by duly advertising the same, it did not give any reason
as to how it could not be treated as a revenue expenditure. It observed that
this expenditure is in relation to the sale of the item in which the assessee
deals in and the same is stock-in-trade.

Expenditure
related to the sale of the item in which the assessee deals in, can by no
stretch of imagination be deemed to be capital expenditure. The Tribunal set
aside the orders of the authorities below on this issue and decided this ground
in favour of the assessee.

FACTS-II

During the
previous year under consideration, the assessee, a
builder, incurred and
claimed a sum
of Rs. 17,999 as
interest on delayed payments to parties. This interest, it was submitted, was
charged by the parties since their payments were delayed beyond the credit
period. The AO disallowed this amount
claimed by the assessee.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the action of the AO on
the ground that this interest payment on delayed payment to creditors is not
compensatory in nature and therefore, not allowable.

Aggrieved, the
assessee preferred an appeal to the Tribunal.

HELD-II

The Tribunal
noted that the AO made the disallowance by holding that this interest is penal
in nature and cannot be allowed as a business expenditure. However, there is no
discussion in the assessment order as to how this is penal payment, not
allowable as a business expenditure. The action of the CIT(A) was held to be
absolutely mechanical. The Tribunal held that when the assessee is paying the
creditors interest for payment made beyond the credit period allowed, the
expenditure is undoubtedly in relationship (sic relation) to the
business conducted by the assessee and is therefore allowable. The Tribunal set
aside the orders of the AO and CIT(A) on this issue and decided this ground in
favour of the assessee.

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Introduction Of Group Taxation Regime – A Key To Ease Of Doing Business In India?

It is an undisputed fact that economic growth and tax legislation are inextricably linked together. This would concurrently boost tax revenues and bring debt ratios under control.

An excessively complex tax legislation has an adverse impact on the investment climate of the country. Laws which are unnecessary, unclear, ineffective and disjointed generate an expendable burden on the economy. Even the Guiding Principles for Regulatory Quality and Performance, endorsed by Organisation for Economic Co-operation and Development (OECD) member countries, advised governments to “minimise the aggregate regulatory burden on those affected as an explicit objective, to lessen administrative costs for citizens and businesses”, and to “measure the aggregate burdens while also taking account of the benefits of regulation”.

In the recent Indian context, ‘Make in India’ which is a major new national programme of the Government of India, designed to facilitate investment and build best in class manufacturing infrastructure among other things in the country. The primary objective of this initiative is to attract investments from across the globe and strengthen India’s economic growth. This programme is also aimed at improving India’s rank on the ‘Ease of Doing Business’ index by eliminating the unnecessary laws and regulations, making bureaucratic processes easier, making the government more transparent, responsive and accountable. Though India has jumped up 30 notches and entered the top 100 rankings on the World Bank’s ‘Ease of Doing Business’ index, thanks to major improvements in indicators such as resolving insolvency, paying taxes, protecting minority investors and getting credit, it still has a long way to go, standing at ranking of 100 out of 190 surveyed countries. A review of the application of tax policies and tax laws in the context of global best practices and implement measures for reforms required in tax administration to enhance its effectiveness and efficiency, is the need of the hour for India. This article discusses the concept of Group Taxation Regime, a suggested effective tax reform, in line with the global best practices which could help India provide some policy support to investors and achieve its political, social and economic objectives.

GROUP TAXATION REGIME

A company diversifies into other fields of business as a part of its strategy. As a part of their strategy, the companies incorporate subsidiary companies with different business objectives due to regulatory requirement, ensure corporate governance or to invite fresh capital from other shareholders. Some businesses have a medium to long gestation period as a company takes time to establish its strategies, markets, financers. The idea of group taxation is to reduce the burden on the holding company as it may be required to inject funds into a loss making company without any reduction in corporate tax. Also, the holding company shall receive a return on its investment only when the subsidiary becomes profitable.

The group taxation regime has been adopted by several countries viz, (a) Australia; (b) Belgium (c) Denmark (d) France (e) Germany (f) Italy (g) New Zealand (h) Spain (i) United Kingdom; and (j) United States of America.

A group taxation regime permits a group of related companies to be treated as a single taxpayer. Group taxation is designed to reduce the effect that the separate existence of related companies has on the aggregate tax liability of the group. The principles under the group taxation regime for income tax purposes are discussed below:
– the assets and liabilities of the subsidiary companies are treated as assets and liabilities of the head company;
– transactions undertaken by the subsidiary companies of the group are treated as transactions of the head company;
– the head company is liable to pay instalments on behalf of the
consolidated group based upon income derived by all members of the consolidated
group;

– intra-group
transactions are ignored (for example, management fees paid between group
members are not deductible nor assessable for income tax purposes);

– the
head company is liable for the income tax-related liabilities of the
consolidated group that relate to the period of consolidation. However, joint
and several liability is imposed on members of the group in the event that the
head entity defaults;

– eliminate
income and loss recognition on intragroup transactions by providing for deferral
until after the group is terminated or the group member involved leaves the
group; and

– permit
the offset of losses of one group member against the profits of a related group
member.

Unlike many countries, India does not have a system to consolidate the tax reporting of a group of companies or to offset the profits and losses of the members of a group of companies. The introduction of a system of group taxation would constitute a fundamental change to the Indian tax system. Such a regime could lead to significant benefits like (a) economic efficiency by better aligning the unit of taxation with integrated companies within a group (b) reduce compliance costs for taxpayers as groups of companies would have to apply a single set of tax rules across and deal with only one tax administration; (c) make certain compliance driven tax provisions like specified domestic transfer pricing redundant; (d) give flexibility to organise business activities and engage in internal restructurings and asset transfers without worrying about triggering a net tax; and (e) reduce the cost the government incurs in administration of the tax system including litigation cost.

The specific provisions of group taxation framework vary from country to country. The significant provisions relating to the regime are highlighted below:

Eligible Head of tax group (parent): The group tax consolidation laws in most countries consider a domestic company or a permanent establishment of a foreign company who is assessed to tax as per the domestic laws as an eligible parent company. Most of the countries restrict the definition of group companies to resident companies only and non-resident companies are excluded from this relief.

Group company eligibility: Group taxation includes all legal entities within a group of taxable entities. The criteria is that a company is deemed to control another company if, on the first day of the tax year for which the consolidated regime applies, it satisfies certain requirements. In Spain, the controlling company must directly or indirectly hold at least 75% of the other company’s share capital. In France, at least 95% of the share capital and voting rights of the company must be held, directly or indirectly, by the French company. In New Zealand, a group of resident companies that have 100% common ownership can be considered for consolidated group regime. The subsidiary company will be deemed to be 100% owned by the parent if the requisite degree of control is met as per the provisions of the group tax regime. The total income/ loss of the subsidiary company will be included in group taxation, even if the parent does not own 100% of a subsidiary. Prima facie, this advantage is given to the holding company of being able to utilise the losses of the subsidiary company although it does not own all the subsidiary’s shares. The minority shareholders will not be able to claim a group relief as they do not meet the requite control requirement. However, if the losses to be set off are restricted to percentage of shareholding, then it would mean that the loss making company in the group will be left with losses that cannot be set off immediately and can only be utilised against the company’s future profits.

Hence, in such scenarios, agreements, if any, made between shareholders may also be important. In several binding international rulings, it has been concluded that even if a company has the majority of the voting rights or the majority of the capital, joint taxation may still be denied due to agreement between shareholders. For instance, a minority shareholder has a veto on important decisions in the company, the majority shareholder cannot be jointly taxed with its subsidiary. For illustration, in Denmark the tax consolidation regime provides for a cross-border tax consolidation option based on an “all-or-none principle”, which means that (i) either all foreign group entities are included in the Danish tax consolidation group or (ii) none of them are. In case of a veto power provided and exercised by the minority shareholder vide an agreement may cause hindrance for applicability of the group taxation regime for the entire group. In India, companies having 100% shareholding must only be covered within the group tax regime to avoid disparity between shareholders.

Minimum Term: The minimum term for opting for group taxation differs country to country. In Denmark, the minimum period is 10 years, in France and Germany, the minimum period is 5 years. In Italy, Spain and USA, there is no requirement to opt for a minimum period. In India, having a minimum term of 5 years – 10 years would provide consistency and stability in the tax approach adopted by the group and as well as to the Revenue authorities from an assessment point of view.

Net operating loss: In all group relief provisions, only the current year losses and tax depreciation of group companies are available for set-off against the profits of the other companies in the group. In case of subsidiaries that are acquired, no consideration needs to be given to whether the items are post or pre-acquisition as only the current year losses and tax depreciation are available for relief.

1.Worldwide Corporate Tax Guide, 2017
2. BDO Joint Taxation in Denmark
3. IBFD Country Tax Laws

Exiting the group: A group member may exit the group at any point of time without terminating the group. A company will automatically exit the group as a result of liquidation or sale or merger or if the ownership requirements are not met. On exit, the adjustments made at the consolidated level maybe reassessed according to the standard rules and may give rise to additional tax liability in the hands of the exiting company. The exiting group member’s net operating loss carry forwards realised during the consolidation period would remain with the group. The losses generated while being a member of the consolidated group are transferred to the group and cannot be carried forward at the level of the exiting company when assessing its future taxable income. In France, the question was raised whether the exiting company should be compensated for the losses surrendered to the group. The Supreme Court of France ruled that the compensation given by a parent company to a loss making company subsidiary that exits a group does not constitute taxable income. Correspondingly, the payment is not a deductible expense of the parent company.

In light of the aforesaid provisions, it can be safely stated with the introduction of group taxation regime, the compliance burden would reduce for companies as intra group taxation would be disregarded and only the ‘real income’ would be taxed. It would also promote stability in corporate structures in India and attract foreign investment in India. The Revenue authorities may be at a disadvantage due to loss of revenue due to setting off of income by way of intra group transactions. However, this is fairly insignificant as compared to the advantages that the introduction of this regime would have to offer. The introduction of a group taxation regime would be a welcome move by the Government and will allow the exchequer to tax the real income which is in line with International tax practices. For illustration, if A Co (holding company) has a profit of Rs. 2 million and A Co’s wholly owned subsidiaries B Co and C Co have a loss of Rs. 0.5 million each. With the introduction of group taxation the real income of A Co i.e Rs. 1 million (2-0.5-0.5) would be liable to tax in India.

Currently, with the Indian Revenue authorities being well integrated with the wave of automation and digitisation lead by the current Government, the Revenue authorities can keep a real time tab on filings being made in different jurisdictions. For illustration, a company having a head office in jurisdiction X and subsidiaries in various jurisdictions like Y and Z would have to file separate return of income in each of the jurisdictions for each entity. The group taxation regime would require only the holding company to file its return of income in the jurisdiction where its head office is situated. This would lead to reduction in compliance burden for the corporates. Also, the Revenue authorities of the concerned jurisdiction i.e. Y and Z could view the filings made in jurisdiction X. With easy accessibility of records and integration of the tax systems, a robust infrastructure system is put in place by the tax administrators which makes it feasible to implement the group taxation regime and provide ‘ache din’ to the corporates.

As aptly quoted by Edward VI, the King of England and Ireland, “I wish that the superfluous and tedious statutes were brought into one sum together, and made more plain and short”. We wait with baited breath for India to bridge the gap between its tax legislation and simplify them to further boost economic growth.

REFERENCES
–    BDO, Joint Taxation in Denmark
–   Ernst & Young, Implementation of Group Taxation in South Africa
–   IBFD, Group taxation laws
–    India Brand Equity Foundation
–    Length of a tax legislation a measure of complexity – Office of Tax Simplification, UK
–   Pre and Post Budget Representations, 2017
–    Tax Administration Reform Commission Reports
–    When laws become too complex, Review by UK Parliamentary Counsel
–   Worldwide Corporate Tax Guide, 2017 _

4. IBFD Group Taxation in France

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3 Section 32 – Depreciation – Jetty – A. Y. 2005 – 06 – Rate of depreciation – 100% depreciation on temporary building structure – Jetty is a temporary structure – Entitled to 100% depreciation

CIT vs. Anand Transport; 396 ITR 204
(Mad):

The assessee was in the business of loading
and unloading of bulk cargo, relating to exports and imports, transportation of
cargo, both within and outside the ports and by see and attending to all works,
incidental to the works connected with the main business. The assessee was
awarded a contract by the MMTC on May 6, 2004. A jetty or loading platform was
erected, albeit, temporarily to facilitate loading of iron-ore onto vessels, in
furtherance of the contract awarded by MMTC, in favour of the assessee. The
assessee claimed 100% depreciation on the jetty. The Assessing Officer came to
the conclusion that the jetty or platform was a plant, as it was an apparatus
or tool which only enabled the assessee to carry on its business. The Assessing
Officer’s observation was that the jetty consisted mainly of a belt conveyor
and electrical support, and that the civil work was negligible. The Assessing
Officer further held that the conveyor belt could be dismantled and reused. He
allowed 25% depreciation on the jetty. The Tribunal allowed the assessee’s
claim.

On appeal by the Revenue, the Madras High
Court upheld the decision of the Tribunal and held as under:

“i) A bare perusal of the
meaning of the word “jetty” would show that, it is in the nature of a
construction which is used either as a landing stage, a small pier, bridge,
staircase or a construction, built into the water to protect the harbor. The
utility of the jetty is limited by its construction. It is used to obtain
either access to a vessel, or protect the harbour.

ii) The provisions of the
contract would show that the jetty or loading platform was constructed by the
assessee on build-operate-transfer basis for a period of three years from the
date of commencement of the vessel loading operation. Quite clearly, the jetty
or loading platform, in this case, was erected by the assessee in order to
effectuate its business under the contract entered into with MMTC, which was
tenure based, and therefore, could not have been treated as anything else but a
temporary erection. Upon completion of the contract the assessee was required
to dismantle it.

iii) The fact that the jetty had other contraptions attached to it, such as a
conveyor belt, to facilitate the process of loading could not convert such a
structure into a plant. Therefore, even if the functional test was employed the
main function of a jetty, in the facts of the instant case, is to provide a
passage or a platform to ferry articles onto the concerned vessels. This could
have been done manually. That it was done by using a conveyor belt would not
convert a jetty into a plant. The assessee was entitled to 100% depreciation on
the jetty.”

shailesh.kwebmaker

2 Section 41(1) – Business income – Deemed income A. Y. 2007-08 – Remission or cessation of trading liability – Benefit must be obtained in respect of liability – Assessee a co-operative bank – Stale demand drafts and pay orders for sums owed by assessee bank to customers – Bank not deriving benefit on account of liability and liability still subsisting – Section 41(1) not applicable

CIT vs. Raddi Sahakara Bank Niyamitha;
395 ITR 652 (Karn)

The assessee was a co-operative bank. For
the A. Y. 2007-08, the Assessing Officer made an addition in the income of the
assessee on the ground of demand drafts and pay orders payable as on the last
date of the financial year, which were not so far encashed by the customers. He
treated the said amount as representing cessation of liability u/s. 41(1) of
the Income-tax Act, (hereinafter for the sake of brevity referred to as the “Act”)
1961, and added back the amount to the declared income of the assessee. The
Tribunal deleted the addition.

On appeal by the Revenue, the Karnataka High
Court upheld the decision of the Tribunal and held as under:

“i) In order to invoke
section 41(1) of the Act, 1961, it must be first established that the assessee
had obtained some benefit in respect of a trading liability which was earlier
allowed as a deduction. It is not enough if the assessee derives some benefit
in respect of such liability, but it is essential that such benefit arises by
way of “remission” or “cessation” of liability.

ii) The addition could not be
made u/s. 41(1) of the Act, since the liability of the assessee bank to pay
back the amounts to the customers in respect of such stale demand drafts and
pay orders does not cease in law. The appeal is dismissed.”

shailesh.kwebmaker

1 Section 37(1) – Business expenditure -A. Ys. 1997-98 to 2002-03, 2004-05 and 2009-10 – Year in which deductible (Licence fee) – Assessee, sole proprietor of Oil Corporation, was granted licence by Northern Railway for use of a piece of Railway land against a licence fee – On 20/01/1999, Northern Railway revised licence fee taking revised base rate as on 01/01/1985 – Thereafter, for each of years from A. Y. 2002-03 till A. Y. 2008-09, Northern Railway issued letters demanding enhanced licence fees and damages – Assessee paid actual licence fee and claimed deduction on account of licence fee but had disputed enhanced liability – AO disallowed licence fee on ground that it was a contingent liability and not allowable as a deduction till liability for enhanced licence fee, which had been contested by assessee, actually crystallized

1 Business expenditure
– Section 37(1) – A. Ys. 1997-98 to 2002-03, 2004-05 and 2009-10 – Year in
which deductible (Licence fee) – Assessee, sole proprietor of Oil Corporation,
was granted licence by Northern Railway for use of a piece of Railway land
against a licence fee – On 20/01/1999, Northern Railway revised licence fee
taking revised base rate as on 01/01/1985 – Thereafter, for each of years from
A. Y. 2002-03 till A. Y. 2008-09, Northern Railway issued letters demanding
enhanced licence fees and damages – Assessee paid actual licence fee and
claimed deduction on account of licence fee but had disputed enhanced liability
– AO disallowed licence fee on ground that it was a contingent liability and
not allowable as a deduction till liability for enhanced licence fee, which had
been contested by assessee, actually crystallized – Since assessee was
following mercantile system of accounting, liability to pay enhanced licence
fee would arise in year in which demand was made or to which it related
irrespective of when enhanced fee was actually paid by assessee

Jagdish Prasad Gupta vs. CIT; [2017] 85
taxmann.com 105 (Delhi):

The assessee the sole proprietor of Oil
Corporation was granted licence by the Northern Railway for use of a piece of
Railway land for constructing and maintaining a depot for storage of petroleum
products etc. By a letter dated 08/02/1980, the Northern Railway revised
the licence fee. On 23/03/1988, the Northern Railway further enhanced the
licence fee. The Northern railway further terminated the licence for use of the
land on the ground that the assessee had failed to deposit the licence fees.
The Northern Railway applied to the Estate Officer (EO) praying for eviction of
the assessee from the land in question. The said application was disposed of by
the EO holding that the enhancements were made by the Northern Railway too
frequently and without legal basis. Further on 20/01/1999, the Northern Railway
revised the licence fee taking the base rate as on 01/01/1985. Thereafter, for
each of the years from assessment year 2002-03 till assessment year 2008-09,
the Northern Railway issued letters demanding enhanced licence fees and
damages. The tax treatment of the claim of the assessee in its income-tax
returns of the enhanced licence fee was deduction. The said claim was allowed
by the Assessing Officer for A. Ys. 1987-88 to 1994-95. For A. Ys. 1996-97 to
1999-2000, the Assessing Officer allowed the licence fee actually paid by the
assessee, holding that it was a contingent liability and not allowable as a
deduction till the liability for the enhanced licence fee, which had been
contested by the assessee, actually crystalised. CIT(A) and the Tribunal
allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

“i) The undisputed
fact is that the assessee is following the mercantile system of accounting. It
has to book the liability in the year in which it arises irrespective of
whether it in fact discharges the liability in that year. In that sense, the
liability to pay the enhanced licence fee would arise in the year in which
demand is made or to which it relate irrespective of when the enhanced fee is
actually paid by the assessee.

ii) In the present case,
the liability of the assessee to pay the enhanced licence fee has, far from
being excused, sought to be enforced by the Northern Railway by repeated demands
notwithstanding the EO’s order dated 28/03/1990. As noted earlier, the Northern
Railway has preferred claim for arrears of enhanced licence fees and damages to
the tune of over Rs. 45 crores against the assessee before the sole Arbitrator
appointed by it. The demand is therefore very much alive and is subject matter
of adjudication in arbitration proceedings.

iii) The order dated
29/03/1990 of the EO no doubt holds the termination notice dated 23/03/1988 and
the claim for enhanced licence fee to be bad in law. However, it does not hold
that there is no liability on the assessee to pay the enhanced licence fees as
and when that is determined in accordance with law. The EO has in fact observed
that the Northern Railway ‘should form a definite policy in revising the
licence fee for a considerable period on uniform basis by incorporating the law
of principles of natural justice to avoid unnecessary litigation thereby not
causing losses of revenue to the railway administration under these
circumstances and ensuring prompt and regular payment of licence fee by
licencees.’ Also the EO ends the order by stating. The applicant is free to
revise the licence fee in accordance with the provisions of law and as per
terms of agreement. The order of the EO read in the correct perspective,
requires the Northern Railway to follow the due process of law by giving a
hearing to those adversely affected by the upward enhancement of liability
before a decision is taken. The Revenue’s characterisation of the said order,
as negating the liability to pay the enhanced licence fee for all times to come
does not flow on the above reading of the said order. On the other hand, it is
more consistent with the plea of the assessee that while he is not denying the
liability to pay the licence fee he is only questioning the procedure involved
in its revision which, according to him, is not in accordance with law.
Consequently, it could not be said that the assessee has sought to mislead this
Court by contending that he is not questioning the liability to pay licence fee
but is only questioning the quantification or the quantum of the licence fee.

iv) While the revenue may be
right in pointing out that for assessment years 2002-03 to 2005-06, the
assessee claimed only Rs. 35,37,300 as deduction on the ground of enhanced
licence fee although it could have claimed the further enhancement which had
taken place by then, the fact remains that the enhanced liability claimed by
the Railways by its letter dated 20/01/1999 and later by the letter dated 29/07-1999
subsisted and was /being demanded. The explanation offered by the assessee for
this inconsistency in its claim is a plausible one. It does not deter from the
position that being an accrued liability, the enhanced licence fee can be
claimed by it as a deduction in the year in which such liability arose.

v) In the arbitration
proceedings, the claim of the Railways includes the claim for the enhanced
licence fee as well as the arrears. The arbitration proceedings could end
either in favour of the Railways or the assessee. If it goes in favour of the
assessee, it would then have no liability to pay such enhanced licence fee and
in the year in which such final decision is rendered, the corresponding
reversal of entries will have to take place in terms of section 41(3). All of
this, in no way, extinguishes the liability of the assessee to pay the licence
fee. The assessee would be justified in claiming the enhanced licence fee as
deduction in the year in which such enhancement has accrued even though the
assessee has not paid such enhanced licence fee in that year. This legal
proposition is well settled.

vi) The Railways has already
filed its claim before the Arbitrator for the arrears of licence fees and
‘damages’. As rightly held by the Commissioner (Appeals), and concurred with by
the Tribunal, the mere characterisation by the Northern Railway of the amount
claimed by it from the assessee as ‘damages’ will not, in the context of the
present case, make it any less an accrued liability. It is an expenditure
incurred by the assessee corresponding to the income he derives from using the
land for the purposes of his business.

vii) The Tribunal did not
make a grievous error, in the order passed by it, regarding the claim for
enhanced licence fee as a deduction being allowable not in assessment year
1995-96 but in assessment year 1996-97. The argument that the Tribunal may have
exceeded its jurisdiction done not hold since the revenue has, apart from not
challenging the said order, implemented it fully by the consequent appeal
effect order.

viii) For all of the above
reasons, the first issue is decided in favour of the assessee and against the
revenue by holding that the liability of the assessee to pay enhanced licence
fees for the assessment years in question was an accrued liability which arose
in the year in which demand was raised.”

shailesh.kwebmaker

Annual Value of a Vacant Property

Issue for Consideration

The annual value of any building or land
appurtenant thereto is chargeable to income tax in the hands of the owner,
under the head ‘Income from House Property’, as per section 22 of the
Income-tax Act. The amount received or receivable is deemed to be the annual
value, as per section 23(1)(c), in a case where the property is let and was
vacant during the whole or any part of the previous year and as a result
thereof, the amount received or receivable is less than the sum for which the
property is reasonably expected to be let from year to year.

The relevant part of section 23(1),
substituted with effect from 1.4.2002, reads as under:

23.
(1) For the purposes of section 22, the annual value of any property shall be
deemed to be—

(a) the sum for which the
property might reasonably be expected to let from year to year; or

(b) where the property or any
part of the property is let and the actual rent received or receivable by the
owner in respect thereof is in excess of the sum referred to in clause (a), the
amount so received or receivable; or

(c) where the property or any
part of the property is let and was vacant during the whole or any part of the
previous year and owing to such vacancy the actual rent received or receivable
by the owner in respect thereof is less than the sum referred to in clause (a),
the amount so received or receivable :

Issues arise in interpretation and application
of clause (c) of section 23(1), particularly about the possibility of claiming
the benefit of section 23(1)(c) by limiting the deemed annual value determined
under clause (a), in cases where the property was not let out during the year
and had remained vacant throughout the year. An additional dimension is
provided to the issue in a case where attempts are made to let out the property
without success, or where the property was let out during the preceding
previous year, but had remained vacant during the previous year.

A controversy has arisen around the true
import of clause (c) on account of certain decisions, whereunder the Pune and
other benches of the Income Tax Appellate Tribunal have taken a view that the
benefit of clause (c) shall be available even in cases where a property had
remained vacant throughout the year. Against that the Mumbai bench had recently
held that the property should have been let, at least for some part of the
year, for availing the benefit under the said clause.

Vikas Keshav Garud’s Case

The issue in
the recent past had arisen in the case of Vikas Keshav Garud vs. ITO, 71
taxmann.com 214,
before the Pune Bench of the Tribunal for assessment year 2009-10.

In that case, the commercial premises
situated at Dande Towers, Pune, owned by the assessee, had remained vacant
throughout the financial year 2008-09. The assessee had not offered any deemed
income for the purposes of taxation for assessment year 2009-10. The A.O.
however assessed the notional income of the premises at Rs. 1,51,200 under the
head ‘Income From House Property’ by adopting annual letting value of Rs.
12,600 p.m., which was the monthly rent received by the assessee during the
financial year 2006-07 from a tenant.

The assessee challenged the assessment under
the head ‘Income from House Property’ before the CIT(A) in appeal, which was
dismissed by the CIT(A), by confirming the action of the A.O., relying on the
decision of the Andhra Pradesh High Court in the case of Vivek Jain vs.
ACIT, 337 ITR 74 (AP).

The Tribunal, in a further appeal by the
assessee, noticed that the A.O. had denied the benefit of clause (c) on the
ground that the property was not let at all during the year under consideration
and had also held that the intention to let out the property had no bearing on
application of the provisions of clause (c) of section 23(1); that the assessee
had ardently contested the action of the A.O. by relying on the decisions,
before the CIT(A) in the cases of Premsudha Exports (P.) Ltd. vs. ACIT, 110
ITD 158 (Mum) and Shakuntala Devi vs. DDIT, ITA No. 1520/Ban/2010 dt.
20.12.2011; that both the authorities had relied upon the decision in the
case of Vivek Jain (supra) for denying the benefit of clause (c) and
rejecting the claim of the assessee.

The Tribunal noted that the property was let
out in financial year 2006-07 to IDBI Home Finance Ltd. at a monthly rent of
Rs. 12,600 and that the assessee could not let out the property during the
year, which led to the property remaining vacant throughout the year, though it
was available for being let and the intention to let, though clear, could not
fructify into actual letting. The Tribunal, in allowing the claim of the
assessee, held that the underlying principle of the provision was to be viewed
with regard to the intention of the assessee in letting out of the property,
together with the efforts put in by assessee for such letting out; that the
actual rent received from the property would have to be considered as ‘zero’ in
case of an assessee who made appropriate efforts for letting the property, but
failed to let.

Importantly, the Tribunal held that the
language of section 23(1)(c) clearly included a situation, where a property was
vacant for the whole year; that a situation could not co-exist wherein the
property was let during the year, with it being simultaneously vacant for the ‘whole’
year; that the words ‘let’ and ‘vacant’ were mutually exclusive;
that the interpretation placed by the authorities was inconsistent with the
phraseology of the provision.

The Tribunal gathered the legislative intent
of allowing the benefit of clause (c) in the given situation, by contrasting
the provisions of sub-section (3) of section 23 of the Act, whereunder the
legislature in its wisdom used the phraseology ‘house is actually let’.
The Tribunal observed that the legislature, wherever required, had insisted on
actual letting of the property in express terms. Applying the purposive
interpretation, the Tribunal held that the expression “property is let”
had to be read in contrast to “property is self-occupied” to arrive at
the true import of clause (c).

Importantly, the Tribunal observed that the
decision of the high court in Vivek Jain’s case (supra) could not
be read by the revenue in a manner that if the property remained vacant
throughout the year, section 23(1)(c) did not apply at all. The Tribunal also
relied on the fact that the property was actually let out during the financial
year 2006-07. In the totality of the circumstances and having regard to the
provisions of the Act, the Tribunal held that the annual value for the property
had to be assessed at Nil. The appeal of the assessee on this ground was
accordingly allowed by the tribunal.

A similar view was taken by the Mumbai bench
of the Tribunal in the case of Informed Technologies India Ltd. vs. Dy CIT
162 ITD 153.

Sharan Hospitality (P.) Ltd.’s case

The issue again arose before the Mumbai
bench of the ITAT in the case of Sharan Hospitality (P.) Ltd. vs. DCIT in
ITA No. 6717/Mum/2012 dt. 12.09.2016 for assessment year 2009-10.

The assessee company, in the facts of the
case during the previous year under consideration, had acquired two properties.
One of the properties was acquired on December 18, 2008 and possession was
received on the same date. The property was acquired with the intent of
letting, so as to earn rental income. The assessee had entered into
negotiations with a company, which was in the process of setting up a state of
the art laboratory, at the relevant time. The basic terms and conditions agreed
upon between the parties for taking the property on rent, w.e.f 1.4.2009
onwards, were recorded in a letter of Intent dated February 9, 2009. The
property was accordingly let with effect from 1.4.2009 at the agreed rent of
Rs.38.95 lakh per month vide Leave and License Agreement dated 06.08.2009. The
Assessing Officer computed the annual value of the said property for assessment
year 2009-10 at Rs.116.85 lakh, i.e., taking notional rent for three months,
being January to March, 2009, ignoring the fact that the property was vacant
during that period. The action of the AO was confirmed by the CIT(A).

In appeal to the Tribunal, the assessee,
while not disputing the quantum of the gross annual rental value, claimed that,
inasmuch as the property, though lettable, was ‘vacant’ during the entire
period of the year since its acquisition in December, 2008; that its annual
value ought to be restricted to the actual rent received or receivable, i.e.,
Nil; that the condition of the property being let was met by the intent to let
out the same; that when the legislature had required the house property to be
actually let, it had stated so, as in section 23(1)(a); that not accepting the
claim of assessee would lead to absurd results, as in a case where the property
was not let for a single day of the year, and was vacant for the whole year,
its AV would stand to be computed taking the lettable value for the entire
year, while if it was let even for a single day during the year, the same would
stand restricted to the actual rent received/receivable, i.e., for one day.

It was further argued that the property
could not be ‘let’ and be ‘vacant‘ for the whole year at the same
time in-as-much as the two conditions could not co-exist, as was pointed out by
the Tribunal in Premsudha Exports (P.) Ltd. vs. ACIT, 295 ITR (AT) 341
(Mum). The words “where the property was let” were to be
construed to include property held with the intent of letting it. Reliance was
also placed on decisions in cases of, Kamal Mishra vs. ITO 19 SOT 251 (Del);
Smt. Poonam Sawhney vs. AO, 20 SOT 69 (Del.); ACIT vs. Dr. Prabha Sanghi, 139
ITD 504 (Del); DLF Office Developers vs. ACIT, 23 SOT 19 (Del); Indu Chandra
vs. DCIT in ITA No. 96/2011 (Luck.); Shakuntala Devi vs. Dy. DIT (in ITA No.
1524/Bang/2010 dated 20.12.2011); Aryabhata Properties Ltd. vs. ACIT (in ITA
No. 6928/Mum/2011 dated 31.7.2013); and ACIT vs. Suryashankar Properties
Ltd. in ITA No. 5258/Mum/2013 dated 10.6.2015).

The Revenue, in reply, contended that the
notion of ‘proposed to be let’ or ‘held for letting‘, etc.,
could not be imported into the provision, which sought to bring to tax a
notional sum, being the income potential – termed annual value, of a house
property, subject of course to the provisions of the Act, the measure of which
was the fair rental value, defined as the rent at which the house property
might reasonably be let from year to year; that it had nothing to do with the
actual letting of the house property, or the actual receipt of rent, and was in
the nature of an artificial or statutory income; the law in the matter was
well-settled, by the decision in case of CIT vs. Dalhousie Properties Ltd.,
149 ITR 708 (SC); New Piece Goods Bazar Co. Ltd. vs. CIT, 18 ITR 516 (SC); CIT
vs. H. G. Gupta & Sons, 149 ITR 253 (Del); and Sakarlal Balabhai vs.
ITO, 100 ITR 97 (Guj). It was further contended that the annual value,
irrespective of whether the property was actually let or not, was thus to be
subjected to tax, unless covered u/s. 23(1)(b), as was reiterated in Sultan
Brothers (P.) Ltd. vs. CIT, 51 ITR 353 (SC) and In Liquidator of
Mahamudabad Properties (P.) Ltd. vs. CIT, 124 ITR 31 (SC), wherein it was
held that even where the property was found to be in a state of utter
disrepair, it would yet have some annual value. The decisions relied upon by
the assessee, viz. Premsudha Exports (P.) Ltd. (supra); Shankuntala
Devi (supra); and Indu Chandra (supra) were claimed to be
distinguishable on facts. Reliance was placed on the case of Vivek Jain vs.
ACIT 337 ITR 74 (AP), wherein the Andhra Pradesh high court, had rejected
similar contentions as were made in the instant case.

The Tribunal noted that a deduction for
vacancy allowance up to assessment year 2001-02, was allowable under clause
(ix) of section 24(1) which clause was omitted w.e.f. assessment year 2002-03.
Instead, section 23(1), substituted w.e.f. A.Y. 2002-03, contained clause (c)
that provided for appropriate reduction of annual value in cases where a let
property was vacant. The Tribunal simultaneously took note of various decisions
of the courts, wherein it was held that the vacancy allowance of the kind
provided u/s. 24(1)(ix) could not be claimed if the property was not let out at
all during the previous year concerned, and that a proportionate amount out of
the annual value was permissible to be deducted, only where the property was
let out for a part of the year.

The Tribunal further noted that the issue,
u/s. 24(1)(ix), was well settled in favour of the view that a vacancy allowance
was possible only where the property was let out for a part of the year and not
where the property remained vacant throughout the year. Importantly, the
Tribunal in paragraph 5.3 of its order observed, that the position of the law qua
vacancy remission, post amendment, remained the same. The law laid down by
the courts in interpreting section 24(1)(ix) materially remained the same u/s.
23(1)(c), and therefore, no adjustment was possible under clause (c) of section
23(1) for a property which was vacant throughout the year. It also referred to
Circular no. 14 of 2001 issued by the CBDT for explaining the provisions of the
Finance Act, 2001 and to the Notes to clauses and the Explanatory Memorandum
accompanying the said Finance Act.

The Tribunal, in paragraph 5.2, took a
detailed note of the decision of the Andhra Pradesh high court in the case of Vivek
Jain (supra) and the reasons supplied by the court in arriving at the
conclusion that no adjustment was possible u/s. 23(1)(c) on account of vacancy
in a case where the property was not let out at all during the year of
assessment.

The Tribunal also took note of the decisions
in cases of Ramesh Chand vs. ITO 29 SOT 570 (Agra) and Indra S. Jain
vs. ITO, 52 SOT 270 (Mum.), wherein a view similar to the one being
advocated by the revenue was taken. The plethora of cases cited by the assessee
in favour of its claim including the case of Premsudha Exports (P.) Ltd. vs.
ACIT, 295 ITR (AT) 341 (Mum.), could not persuade the Tribunal to allow a
relief under clause (c) of section 23(1). On the contrary, the Tribunal
expressed its anguish that the different benches in the past failed to take
notice of the decision in the case of Vivek Jain (supra) and also did
not notice the developed law on the subject while deciding the issue u/s.
24(1)(ix), now omitted. It also observed that the Tribunal, in any case, was
not competent to read down the provision of law in a manner desired by the
assessee.

The Tribunal further observed that vacancy
as a concept had a symbiotic relationship with the notion of letting out and both
of them were intrinsically linked. There could not be a vacancy without actual
letting and there was no scope for the application of the ‘principle of causus
omissus’, inasmuch as the law on the subject was abundantly plain and
clear. A vacancy could not exist or be considered independent of and de hors
the letting. The assessee’s appeal was accordingly dismissed.

Observations

The issue under consideration has become
extremely contentious in as much as some of the decisions, delivered by
different benches of the Tribunal, uphold the claim for relief u/s. 23(1)(c) on
account of vacancy, even after the sole decision of the high court on the
subject in the case of Vivek Jain (supra), a decision which was cited
specifically in Vikas Keshav Garud’s case (supra).

In Vivek Jain’s case (supra), the
assessee, a practicing advocate, had adopted an annual value of Rs. Nil in
respect of a property that was vacant during the year as the same was not let
out. The benefit of section 23(1)(c) claimed by him was rejected by the AO, the
CIT(A) and the ITAT. In the further appeal u/s. 260A, the Andhra Pradesh High
Court upheld the action of the assessing officer with the following findings
and observations;

– the
contention that, as clause (c) provided for an eventuality where a property
could be vacant during the whole of the relevant previous year, both
situations, i.e., “property is let” and “property is vacant for
the whole of the relevant previous year”, could not co-exist, did not
merit acceptance.

– a
property let out for two or more years could also be vacant for the whole of a
previous year bringing it within the ambit of clause (c) of section 23(1) of
the Act.

– clause
(c) encompassed only such cases where a property was let out for more than a
year in which event alone would the question of it being vacant during the
whole of the previous year arose.

– the
contention that, if the owner had let out the property even for a day, it would
acquire the status of “let out property” for the purpose of clause
(c) for the entire life of the property even without any intention to let it
out in the relevant year was also not tenable.

– the circumstances in which the annual let out value of a house
property should be taken as nil was as specified in section 23(2) of the
Act.

– u/s.
23(l)(c), the period for which a let out property might remain vacant could not
exceed the period for which the property had been let out.

– if
the property had been let out for a part of the previous year, it can be vacant
only for the part of the previous year for which the property was let out and
not beyond.

– for that part of the previous year during which the property was not
let out, but was vacant, clause (c) would not apply and it was only clause (a)
which would be applicable, subject of course to sub-sections (2) and (3) of
section 23 of the Act.

– such
a construction did not lead to any hardship, inconvenience, injustice,
absurdity or anomaly and, therefore, the rule of ordinary and natural meaning
being followed could be departed from.

– the
benefit u/s. 23(1)(c) could not be extended to a case where the property was
not let out at all.

– there
was no merit in the submission that the words “property is let” were
used in clause (c) to take out those properties which were held by the
owner for self-occupation from the ambit of the said clause.

– section
23(2)(a) took out a self-occupied residential house, or a part thereof,
from the ambit of section 23(1) of the Act. Likewise, u/s. 23(2)(b),
where a house could actually not be occupied by the owner, on account of his
carrying on employment, business or profession at any other place requiring him
to reside at such other place in a building not belonging to him, the annual
value of the property was also required to be treated as nil, thereby taking it
out of the ambit of section 23(1) of the Act. Section 23(3)(a) makes it
clear that section 23(2) would not apply if the house, or a part thereof, was
actually let during the whole or any part of the previous year. Thus, only such
of the properties which were occupied by the owner for his residence, or which
were kept vacant on account of the circumstances mentioned in clause (b)
of section 23(2), fell outside the ambit of section 23(1) provided they were,
as stipulated in section 23(3)(a), not actually let during the whole or part of
the previous year.

– clause
(c) was not inserted to take out from its ambit properties held by the
owner for self-occupation inasmuch as section 23(2)(a) provided for such
an eventuality.

– it
was only to mitigate the hardship faced by an assessee, and as clause (b)
did not deal with the contingency where the property was let and, because of
vacancy, the actual rent received or receivable by the owner was less than the
sum referred to in clause (a), that clause (c) was inserted.

– in
cases where the property had not been let out at all, during the previous year
under consideration, there was no question of any vacancy allowance being
provided thereto u/s. 23(l)(c) of the Act.

– the
order of the Tribunal, denying the benefit of vacancy u/s. 23(1)(c), was
upheld.

The unfairness of the law is manifest in
cases where the property is ready for being let out and cannot be let out in
spite of the best of the efforts of the owner. This unfairness is further
aggravated in a case where the property was let out in the past but could not
be let out during the year. It is in such circumstances that the decision of the
Andhra Pradesh high court hits hard and perhaps requires reconsideration. It is
true that the court had comprehensively examined the provisions, on hand, of
section 23(1)(c). There, however, is an urgent need to appreciate the
following:

– the
provisions of section 23(1)(c) are materially different than the erstwhile
provisions of section 24(1)(ix), and therefore the case law developed on the
subject of a provision, now omitted, i.e. based on past law, should not color
the outcome on a new provision of law. An independent appraisal of section
23(1)(c) on the basis of the language of the law is required.

– the
express words of the phraseology ‘was vacant during the whole or any part of
the previous year’ in section 23(1)(c) requires to be given due weightage.
While the Andhra Pradesh High Court has sought to give meaning to the term ‘whole’
in the provision by explaining that it dealt with a situation involving letting
out of the premises for longer period, it remains to be interpreted in the
context of real life situations involving shorter periods of letting out. There
is no reason to not apply the provision in cases of letting out for shorter
periods and, if done so, there is a good possibility of a relief in such cases.

– again,
the use of the phraseology ‘actually let’ in section 23(3)(a), during the whole
or any part of the previous year, clearly indicates that the legislature
whenever intended has in express terms provided for actual letting out of the
premises during the year itself. This aspect, though examined by the court, in
our respectful opinion, requires to be reviewed in as much as the fact
continues to be that the term ‘actually let’ has been used in contradiction to
only ‘let’ in the same section 23(3).

– it
is impossible to envisage a situation wherein a property is vacant for the
‘whole of the year’ and is still let out during the same year. The property is
either vacant or let out.

We are of the considered view that the
provisions of section 23(1)(c), when read in the manner in which it has been
read by the Andhra Pradesh High Court, results in unjust deprivation of a
deserving benefit in cases where the property had remained vacant throughout
the year and was not put to any use. The legislative intent therefore requires
to be clarified, or the law requires to be amended to restore the equity and
fairness.

shailesh.kwebmaker

Section 80JJAA – A Liberalised Incentive

Introduction

Job creation is the objective of any welfare
state. In a developing country like India, with its typical demographic
profile, creating employment is a priority of the government. For this purpose,
the state often promotes labour intensive industry and business. Giving a tax
incentive to businesses which provide for jobs is a method adopted for this
purpose. If the object is to promote a certain category of expenditure a tax
incentive/deduction is normally related to the expenditure itself. Section
80JJAA, from the time it was brought on the statute book from assessment year
1999-2000, provided such a deduction with reference to “additional wages”
paid to new regular workmen.

The manner in which it was enacted,
restricted its availability to only a few assessees. Firstly, only those
carrying on the business of manufacture of goods in a factory were entitled to
the deduction. Secondly, the deduction was limited only to payments to workmen.
Thirdly, the deduction was available only with reference to new regular workmen
in excess of 50 workmen, and that too, only if there was an increase of 10% or
more in the number of workmen employed. All in all, the deduction did not
provide the requisite incentive.

Finance Act
2016, with effect from 1^st April 2017, liberalised the deduction
substantially. While some further relaxation would make the provision even more
effective, in its current form as well, the deduction is welcome. Though the
amendment to this provision was enacted a year earlier, it does not seem to
have attracted the attention that it deserves. The object of this article is to
explain the provisions, and bring to the notice of the reader certain issues
that may arise.

Scope of the deduction

The deduction granted u/s. 80JJAA (1)
specifies the following conditions:

(1) it applies to an assessee
to whom section 44AB applies

(2) the gross total income of
such an assessee should include any profits and gains derived from business.

If these threshold conditions are satisfied, the
assessee is eligible for a deduction of 30% of “additional employee cost”
incurred in the course of such business for three assessment years commencing
from the year in which such employment is provided.

Exclusions

The deduction will not be available if

(1) the business is formed by
splitting up or the reconstruction of an existing business (the proviso
excludes business which is formed as a result of re-establishment,
reconstruction or revival specified in section 33B)

(2) the business is acquired by
the assessee by way of a transfer from any other person or as a result of any
business reorganisation

(3) the assessee fails to
furnish along with the return of income the report of an accountant as defined
in the explanation to section 288, giving such particulars in the report as may
be prescribed ( Rule 19 AB and form 10DA).

Definitions

The explanation defines the terms
“additional employee cost”, “additional employee” and “emoluments”.

Additional employee cost

This means the total emoluments paid or
payable to additional employees employed during the previous year. In the first
year of a new business, the additional employee cost will be the aggregate
emoluments paid or payable to employees employed during the previous year. In
case of an existing business, if there is no increase in the number of
employees from the total number of employees employed on the last day of the
preceding year, the additional employee cost shall obviously be “nil”

Emoluments paid otherwise than by account
payee cheque, account payee bank draft or the use of electronic clearing system
through a bank account would not be eligible for deduction. This would ensure
that the payment to the employee is verifiable subsequently and, since cash
payments are not permissible, it would significantly reduce misuse.

Additional employee

An additional employee is one who is
employed by the employer during the previous year and thereby increases the
total number of employees employed by the employer. The following employees are
excluded from this definition.

(1) Employees whose total
emoluments are more than Rs. 25,000 per month.

(2) An employee whose entire
contribution is paid by the government under the employees pension scheme
notified in accordance with the Employees Provident Funds and Miscellaneous
Provisions Act 1952 (EPF Act). Under the EPF Act, this refers to employees with
a disability. The rationale and relevance of this exclusion is not understood
and is discussed separately in the following paragraphs.

(3) An employee who is
employed for a period of less than 240 days during the previous year.

(4) An employee who does not
participate in the recognised provident fund.

Emoluments

The term emolument is defined as any sum
paid to the employee but excludes

(1) contribution by the
employer to a pension fund, provident fund or any other fund for the benefit of
employees

(2) any lump sum payment
paid or payable to an employee at the time of termination of his service, or on
superannuation or voluntary retirement such as gratuity, severance pay, leave
encashment, voluntary retrenchment benefits, commutation of pension etc.

Deduction for earlier years

Sub-section 80JJAA (3), provides that the
provisions of this section as they stood prior to the amendment would govern
the deduction for the assessment year 2016-17, and earlier years.

Issues

The amended provisions are certainly far
more liberal than those in force for assessment year 2016-17, and earlier
years. However, certain issues still remain. These are

(1) The deduction is available only to an
assessee to whom section 44AB applies and whose gross total income includes any
profits and gains derived from business. The question that arises is
whether an assessee carrying on a profession would be eligible for the
deduction.

The terms business and profession are defined distinctly in section 2. Further,
section 44AB itself prescribes different thresholds for business and
profession. The Act, where it seeks to include the term profession, does so
explicitly (e.g., section 28). Therefore, it appears that an assessee carrying
on a profession will not be eligible for the deduction.

(2) If an assessee acquires a business
either by way of transfer or business reorganisation, such an assessee
would not be eligible for the deduction. While denying the benefit to an
assessee who acquires business on transfer may have some logic, one does not
understand as to why the benefit should be denied in a case of business
reorganisation. An undertaking may be transferred in the course of an
amalgamation or demerger. The business in such a situation is continued in a
different entity post such amalgamation/demerger. The possible reason for this
exclusion may be that the benefit is not intended to be given on account of
employees added due to a business being received on amalgamation/demerger.

However, succession to a business which
falls neither in the term “transfer” or “business reorganisation”, should not
result in a denial of the deduction. To illustrate if a business is succeeded
by legal heirs on the demise of the proprietor, the legal heirs should be
entitled to the deduction, in regard to the remaining assessment year/s for
which the claim is available

(3) The term additional employee excludes a
person whose emoluments are more than 25,000 per month. It may so happen
that an employee joins employment at a lower salary, but during the period of
three years for which an assessee employer is entitled to the claim his
emoluments cross 25,000. The issue would be whether emoluments paid to such
an employee, should be excluded in totality or if such exclusion is
partial/limited. The exclusion of the employee is one “whose total emoluments
are more than Rs. 25,000 per month”. Therefore, till the emoluments reach that
threshold, the employee would continue to be an additional employee. The
provision to be interpreted is a deduction granting relief. Consequently, the
emoluments paid till they reach the threshold should be eligible for the
deduction.

(4) An employee who is employed for a
period of less than 240 days is excluded from the definition of “additional
employee”. An issue is whether leave taken by the employee is to be
included for counting the days of employment. If an employee is entitled to a
certain number of days leave for the days served, the days of paid leave should
certainly be included for the purposes of calculating the number of 240 days.
Even otherwise, just because an employee has gone on leave, it cannot be said
that his employment has ceased during that period.

(5) An employee who does not participate
in a recognised provident fund is excluded from the definition of additional
employee. In a situation where the provident fund act does not apply to the
establishment, on account of the number of employees being less than the
threshold limit, this should not act as a disability. This is on account of the
established principle of law that an assessee cannot be asked to do the impossible.
Therefore, if the relevant statute does not apply to the assessee, he should
not be denied deduction.

(6) A very odd
provision seems to be the provision of Explanation (ii)(b). As has been
mentioned in the foregoing paragraphs, under the Employees Provident funds and
Miscellaneous Provisions Act 1952, the contribution to the employees pension
fund is to be borne by the government in the case of an employee having a
disability. Such an employee is excluded from the definition of an additional
employee and consequently the emoluments paid to him do not qualify for
deduction. This provision does not seem to have any rationale, except perhaps,
that the Government does not want to give an additional benefit in such cases,
over and above the PF contribution that it is already bearing. The government
always seeks to promote and ensure that persons with disability are employed
gainfully. Therefore those employers who employ differently abled persons ought
to get an incentive. An amendment to this provision is called for.

(7) One more issue is in respect of
calculation of number of additional employees. This could be a potent point for
litigation and therefore working of it is a key element. Consider the following
example in respect of eligible employees:

Year 1

Year 2

Employees at the beginning of the year

Resigned during the year

Added during the year

Net Addition

(3)

Total at year end

Considering the
above example, following questions arise:

a) In Year 1, should net
additional employees be considered for deduction or gross addition?

b) Does one need to maintain a
list of eligible employee and if so, how? If the numbers resigning / retrenched
are more, will deduction be denied?

c) In Year 2, if there is a
net deduction, should the assessee still make a claim for 2 the additions made?

While at first blush this appears to be a
controversial issue, the answer is contained in the definition of additional
employee in the Explanation to the section. According to clause (ii) of the
explanation the term “additional employee” means an employee who has been
employed during the previous year and whose employment has the effect of
increasing the total number of employees employed by the employer as on the last
day of the preceding year. In the illustration given above, the employer
employs five new employees during the year, but three resign resulting in a net
addition of two employees.

The issue arises because while the
explanation requires a comparison to be made with the strength of the employees
as on the last day of the preceding year, it does not contain a stipulation as
to when this comparison is to be made. When there is no specific mention one
would have to go by a purposive interpretation of the section. The incentive is
for employment generation. This is how the explanatory memorandum
describing the amendment refers to it. In light of the same, it will be
appropriate to consider only the net addition of employees. As to the point of
time when the comparison is to be made, it should be the last day of the
previous year for which the deduction is to be claimed. In respect of which
employee the deduction is to be claimed will be left to the discretion of the
employer assessee. Therefore in year one, the deduction should be claimed in
respect of the net increment of two employees. As far as the second year is
concerned, it appears that the assessee would not be entitled to any deduction.

Conclusion

Considering the provision in totality, it is
certainly far more liberal than its predecessor. A large number of assessees
could become entitled to the benefit of this deduction. This will be the first
year of the claim, and therefore, my professional colleagues should apprise
their clients of this deduction.

shailesh.kwebmaker

Reporting in form 3CD For AY 2017-18 – New Elements

Tax Audit has become more onerous with each
passing year. Tax Audit u/s. 44AB is carried out by perhaps the largest number
of practitioners, even more than statutory audit of companies. This article
seeks to cover important new points relevant to Tax Audit for AY 2017-18.
There have been notable changes in clauses related to ICDS and Loans. This
article seeks to put those points in perspective and update the reader of
nuances and intricacies that require a professional’s attention either as a
preparer or as the tax auditor.

1. Clause 8

The relevant clause
of section 44AB under which the audit has been conducted is required to be
mentioned here. This aspect becomes important considering the fact that certain
deductions and exemptions may depend on the appropriate selection, and possibly
trigger action from CPC. A new category inserted in the utility pertains to S.
44ADA which is applicable from AY 1718:

Clause (d) For
claiming profits less than prescribed u/s. 44ADA

Eligible assessee [as
per section 44AA (1)] can select this clause in the utility if assessee chooses
to show taxable profit from specified profession less than 50% of total
turnover not exceeding Rs. 50 lakh.

2. CLAUSE 13 – Method of accounting – ICDS Aspects

Sub-clauses (d),
(e) and (f) have been inserted this year to cover the impact of the Income
Computation and Disclosure Standards (ICDS). The Tax Auditor is required to
identify whether any adjustment is required to be made to the profit or loss as
per books of accounts in order to comply with the ICDS and if so, quantify the
adjustment. Further, the various disclosures required by each ICDS are required
to be given in clause (f). The following paragraphs deal briefly with each ICDS
and identify probable areas which may warrant adjustment from the income in the
books to arrive at the taxable income and consequent reporting under these
clauses.

3. ICDS discussed

The Income
Computation and Disclosure Standards are applicable for computation of income
chargeable under the head “Profits and gains of business or
profession” or “Income from other sources” and not for the
purpose of maintenance of books of account. The Preamble to every ICDS provides
that in case of any conflict between the provisions of the Income-tax Act,
1961(‘the Act’) and the relevant ICDS, the provisions of the Act shall prevail
to that extent.

3.1 ICDS II – Inventories

3.1.1 ICDS II requires the
value of inventories to include duties and taxes (the “inclusive method”) in
line with the provisions of section 145A of the Act. This is in contrast with
Accounting Standard (“AS”) – 2 on Valuation of Inventories which mandates the
“exclusive method”. Under the exclusive method, inventories are to be valued
net of any duties or taxes that are subsequently recoverable from the taxing
authorities. The ICAI Guidance Note on Tax Audit provides detailed
reconciliation of the adjustments required u/s. 145A of the Act between both
the methods and concludes that the effect on the profit or loss due to these
adjustments would be ‘nil’. Looking at the requirements of ICDS II in isolation
one may conclude that the inclusion of recoverable duties and taxes in the
value of inventories would result in increase of profit for the year. However,
taking the effect of all the adjustments required as per the provisions of
section 145A, there would be no resulting increase or decrease of profit.
Accordingly, the Tax Auditor may report ‘nil’ under this head with a suitable
note detailing the Section 145A adjustments and the stand taken by her.

3.1.2 In respect of business
of service providers, AS 2 does not cover work in progress (WIP) arising in the
ordinary course of business. Therefore, if under Ind-AS, WIP of service
providers is recognised, that is to be ignored under the ICDS unless it falls
under ICDS III.

3.2 ICDS III – Construction
contracts

3.2.1 ICDS III requires
contract revenue to be recognised when there is a reasonable certainty of
ultimate collection while AS 7 and Indian Accounting Standard (“Ind- AS”) -11
mandate recognition when it is possible to reliably measure the outcome of the
contract. In cases where these two conditions are not simultaneously met, it
could result in an adjustment.

3.2.2 ICDS III provides for
adopting the percentage of completion method (‘POCM’) for recognising contract
revenue and contract costs at the reporting date. AS 7 and Ind-AS 11 also
provide similarly. The manner of determining the stage of completion for
recognition of contract revenue / contract costs is similarly provided.

3.2.3 Under ICDS III, as in AS
7 and Ind-AS 11, during the early stage of contract where the outcome of the
construction contract cannot be estimated reliably, contract revenue is
recognised only to the extent of costs incurred. However, early stage of a
contract shall not extend beyond 25% of the stage of completion as per ICDS
III. There is no such requirement under AS-7 or Ind-AS 11. The difference in
treatment will result in an adjustment.

3.2.4 Retention monies are
part of contract revenue as defined in ICDS III. AS 7 is silent on their
treatment. If the retention monies are not recognised in books till they are
due, there will be an adjustment required to taxable income.

3.2.5 Both AS 7 and Ind-AS 11
require recognition of expected losses, that is, when it is probable that total
contract costs will exceed total contract revenue, as an expense immediately.
There is no such provision under ICDS III and such expected loss would be
recognised like any other loss from the contract on the basis of Percentage of
Completion Method followed. This difference in treatment would require an
adjustment while computing the taxable income.

3.2.6 CBDT has ‘clarified’
that there is no specific ICDS applicable to real estate developers, BOT
projects and leases.¹ However, in the later part of the
clarification, CBDT has stated, “Therefore, relevant provisions of the Act
and ICDS shall apply to these transactions as may be applicable”. It
appears that since there is no special treatment given for these businesses,
all the ICDS would be relevant. However, the draft ICDS on Real Estate
Transactions issued in May 2017, would be notified in due course. In case
of Builder-Developer, applicability of
ICDS III and ICDS IV is questionable,
considering that such Developer is constructing on his own account and not as a
contractor, and further, is not selling goods or rendering servicces. However,
ICDS IV may apply for other income of Real Estate Developers.

3.2.7 ICDS IV applies to sale
of goods and rendering of services. In cases where, in substance, the
transactions are not in nature of construction contracts, with the developer
not passing on the risk and rewards of ownership, the developer is selling
immovable property which are not goods and he is not rendering any services as
he develops the property on his own account and subsequently sells or leases
them. Hence, arguably, ICDS IV should also not apply to him.

3.3 ICDS
IV – Revenue Recognition

3.3.1 Revenue is measured
under Ind AS 18 at fair value of consideration received or receivable. If there
is an element of deferred payment terms in the consideration, then the fair
value of consideration may be less than the nominal amount of cash receivable.
In such a case, the difference is to be recognised as interest revenue. ICDS IV
does not require such treatment and the resulting difference in the amount of
revenue will require an adjustment.

3.3.2 In cases where the
transaction price is composite, for instance, where the selling price of a
product includes consideration for after-sales service, Ind AS 18 requires the
consideration for such after-sales service to be deferred and recognised as
revenue over the period during which the service is performed. There is no such
requirement in
ICDS IV.

3.3.3 Services contracts-

AS 9 gives the option
of completed service contract method for services contracts in certain
situations. In contrast, under ICDS IV, services contract revenue is to be
recognised as per the percentage of completion method (POCM) in accordance with
ICDS III. The resulting difference would require an adjustment. Further, ICDS
IV permits completed services contract method in cases of services contracts
with duration of not more than ninety days. Similar relaxation is not available
under AS 9 and could result in an adjustment.

3.3.4 Interest, royalty and
dividends-

a. Interest received on
compensation or enhanced compensation is taxable when received [section
145A(2)] and ICDS IV is not applicable.

b. ICDS requires interest on
any refund of tax, duty or cess to be recognised when received. This treatment
may be at variance with that in the books when such interest is recorded
earlier on accrual..

c. Under ICDS IV, interest is
to be recognised on time basis while royalty on the basis of contractual terms.
The condition of reasonable certainty of ultimate collection contained in AS 9
or Ind-AS 18 is absent. The difference in treatment could result in an
adjustment.

3.4 ICDS
V – Tangible assets

3.4.1 Under Ind-AS 16, the
components of costs of property, plant and equipment (PPE) include estimated
costs of dismantling and removing the item and restoring the site. Also
included in the costs are costs of major inspections. These costs are not
included under ICDS V and such expenditure cannot be considered as expenditure
directly attributable in making the asset ready for its intended use.

3.4.2 Ind-AS 16 provides that
in case the payment for PPE is beyond the normal credit terms, the difference
between the cash price equivalent and the total payment is to be recognised as
interest over the period of credit unless such interest relates to a period
before such asset is ready for intended use and is capitalised in accordance
with Ind- AS 23. However, ICDS V is silent in this regard, and therefore, the
total payment would be treated as the cost.

3.4.3 Under both AS 10 and
Ind-AS 16, cost of a fixed asset/PPE should be recognised as an asset only if
it is probable that future economic benefits associated with the item will flow
to the enterprise and such costs can be measured reliably. Under ICDSV, this
condition is absent. As a result, under ICDS V, the initial recognition of the
asset and subsequent addition to the cost would be made whether or not economic
benefits will flow to the enterprise.

3.4.4 Though AS 10 recognises
that the cost of fixed asset may undergo changes subsequent to its acquisition
and construction due to exchange fluctuations, exchange losses or gains cannot
be capitalised after the asset is ready for its intended use. However, ICDS VI
provides for recognition of exchange difference as per section 43A of the Act.
Section 43A provides that, in case of an asset acquired from a country outside
India, the increase or reduction in liability while making payment towards the
cost of the asset or repayment of the moneys borrowed for acquiring the asset
due to change in the rate of exchange, shall be added to or deducted from the
actual cost of such asset. Section 43A has no application in case of asset
acquired from within India by availing a foreign currency loan. These
differences in treatment could result in an adjustment while computing the
taxable income.

3.5 ICDS
VI – Effect of changes in Forex Rates

3.5.1 ICDS VI requires
non-monetary items to be translated at the rate on the date of the transaction,
except in case of inventory which is carried at net realisable value
denominated in foreign currency, where it shall be reported at the closing
rate. This treatment is in accordance with AS 11 dealing with effects of
foreign exchange rates. However, ICDS [in para 5(ii)] provides that any
exchange difference arising on conversion of non-monetary items on the
reporting date shall not be recognised as income or expense of the year. There
is an apparent contradiction within ICDS VI itself in the treatment provided in
this respect.

3.5.2 Foreign operations

AS 11 and Ind-AS require that all assets and
liabilities of a non-integral foreign operation to be converted at closing rate
and resulting exchange differences to be taken to a Foreign Currency
Translation Reserve (FCTR). ICDS VI requires the transactions of a foreign
operation, integral or non-integral, to be treated as the transactions of the
assessee itself. Accordingly, the difference in treatment will give rise to
adjustment to the taxable income. Further, the transitional provisions require
any balance in FCTR as on 1^st April, 2016 to be recognised in AY
2017-18 to the extent not recognized in the computation of income in the past
[FAQ 16 Circular No. 10/2017, dated 23^rdMarch, 2017]. These
differences in treatment will result in adjustments while computing the taxable
income.

3.5.3 Forward exchange
contracts

AS 11 requires
mark-to-market (MTM) losses/gains to be recognised at the reporting date in
respect of trading or speculation contracts. In contrast, ICDS requires
premium/discount on such contracts to be recognised only on settlement.

3.6 ICDS
VII – Government grants

3.6.1 ICDS VII provides that
the recognition of government grants should not be postponed beyond the date of
receipt. In a case where the grant is received pending compliance of some
conditions and the accrual of the grant has not taken place, the grant would be
disclosed as a liability in the books of accounts. This difference in treatment
could result in an adjustment in the computation of income, though it can be
argued that where income has not accrued, ICDS VII should yield to section 5 of
the Act.

3.6.2 As per AS 12, grants
that relate to non-depreciable assets are to be credited to a capital reserve.
Such an option is not available under ICDS VII and has to be recognised as
income. This will require an adjustment to the computation of total income.

3.6.3 As per AS 12,
non-monetary assets given at concessional rates are to be accounted in the
books at their acquisition cost or if given free, such assets are to be
accounted at a nominal value. ICDS VII also requires similar treatment.
However, Ind-AS 20 requires such assets to be accounted at fair value,
warranting an adjustment in computation.

3.7 ICDS
VIII – Securities

3.7.1 Under ICDS VIII, where a
security is acquired in exchange for other security, the fair value of security
so acquired shall be its actual cost. This is in contrast to the treatment
under AS 13 wherein the acquisition cost should be the fair value of the
securities issued. This difference in treatment would result in different costs
of securities for accounting and tax purposes and will affect the resulting
gain or loss on their disposal.

3.7.2 The treatment of
pre-acquisition interest is same in ICDS VIII and AS 13.

3.7.3 ICDS VIII requires the
securities held as stock-in-trade to be valued at year-end at actual cost or
net realisable value, whichever is lower. However, the comparison of actual
cost and net realisable value is required to be done category-wise and not
item-wise as is done under AS 13. The categories for the purpose of
comparison under ICDS VIII are shares, debt securities, convertible securities
and any other securities not covered above. Therefore, adjustments would need
to be made for the difference in valuation of closing stock.

3.7.4 ICDS VIII requires
unlisted and thinly-traded securities held as stock in trade to be valued at
actual cost regardless of their realisable value. AS 13 does not deal with
unlisted and thinly-traded securities specifically.

3.8 ICDS
IX – Borrowing Costs

3.8.1 Borrowing costs defined-

Section 36(1)(iii)
and Explanation 8 to section 43(1) of the Act cover only interest to be
considered for capitalisation to the cost of the asset. ICDS IX extends
capitalisation requirement to other components of borrowing costs [vide para
2(1)(a)]. Borrowing costs are defined in ICDS IX on the same lines as under AS
16 and Ind-AS 23, except that the exchange differences arising from foreign
currency borrowings to the extent they are regarded as an adjustment to
interest costs are not dealt with by ICDS IX.

3.8.2 In case of inventories,
as per AS 2, interest and other borrowing costs are usually considered as not
relating to bringing the inventories to their present location and condition
and as a result not included in the cost of inventories. On the other hand,
inventories which require a substantial period of time to bring them to a
saleable condition are qualifying assets and borrowing costs that are directly
attributable to the acquisition, construction or production of such assets are
to be capitalised as part of the cost of such asset as laid down in AS 16.
However, Proviso to section 36(1)(iii) read with Explanation 8 to section 43(1)
require that interest paid on amount borrowed for the acquisition of new assets
for the period before such assets are first put to use is to be capitalised and
not allowable as revenue expenditure. Arguably, inventories are not for
extension of business or profession and are not ‘put to use’ and the proviso
ought not apply to inventories. Contrarily, ICDS IX requires capitalisation of borrowing
costs related to inventories which take more than twelve months to bring them
to saleable condition. This will result in an adjustment.

3.8.3 Under AS 16 and Ind-AS
23, qualifying assets requiring capitalisation of borrowing costs are assets
requiring substantial period of time to get ready for their intended use. There
is no such requirement under ICDS IX. Thus, any delay, however short, in
putting to use any asset, being tangible or intangible assets listed in the
definition would require capitalisation of borrowing costs directly related to
their acquisition. The treatment mandated by ICDS IX is in accordance with
provisions of section 36(1)(iii) and Explanation 8 to section 43(1) of the Act.

3.8.4 Further, there is no
provision in ICDS IX for suspension of capitalisation during extended periods
when active development in construction of a qualifying asset is interrupted as
is mandated by AS 16 and Ind-AS 23. This treatment is in accordance with the
provisions of section 36(1)(iii) and Explanation 8 to section 43(1) of the Act.

3.8.5 Capitalisation –
Borrowing costs directly attributable borrowings

Where funds are
borrowed specifically for acquisition, construction or production of a
qualifying asset, ICDS IX provides that the amount of borrowing costs to be
capitalised on that asset shall be the actual borrowing costs incurred during
the period on the funds so borrowed. In cases where funds borrowed are not
utilised for the qualifying asset or where funds are borrowed for other
purposes but are utilised for acquisition, construction or production of
qualifying asset, ICDS IX would have no application. However, such a literal
reading of ICDS IX could lead to an anomalous interpretation and the
consequences may be unintended. Utilisation of the funds borrowed for the
purposes of acquisition, construction or production of qualifying asset alone
should qualify for capitalisation.

3.8.6 Capitalisation –
Borrowing costs of general borrowings

ICDX IX gives detailed
calculations to determine borrowing costs to be capitalised in case of use of
general borrowings to acquire qualifying assets. The calculations given do not
envisage situations where funds are utilised out of general borrowings on
different dates. Both AS 16 and Ind-AS 23 provide for weighted average cost of
borrowing to be capitalised. The difference in determining the borrowing costs
for general borrowings could result in adjustment in computation of income.

3.8.7 Income from temporary
investments out of borrowed funds

Both AS 16 and Ind-AS
23 provide that where borrowed amounts are temporarily invested pending their
expenditure on the qualifying asset, the borrowing costs to be capitalised
should be determined as the actual borrowing costs incurred on that borrowing
during the period less any income on the temporary investment of those
borrowings. ICDS IX is silent in this respect and could result in an
adjustment. The Supreme Court has held that such interest cannot be set off
against interest paid and has to be offered to tax under the head ‘Income from
other Sources’.² On the other hand, it was held in another case that
where the investment is inextricably linked with the process of setting up of
the plant, such interest should be set-off against the interest paid and the
net interest is to be capitalised³. The Tax Auditor may form her
opinion on the basis of specific facts of the auditee and apply these rulings.

3.9 ICDS
X – Provisions and contingencies

3.9.1 As in AS 29 and Ind AS
37, ICDS X does not require recognition of a contingent asset. However, for
subsequent recognition of a contingent asset as an asset, ICDS X requires
‘reasonable certainty’ of inflow of economic benefits, as against the need for
‘virtual certainty’ of inflow of economic benefits under AS 29 and Ind AS 37.
This difference in treatment could result in an adjustment.

3.9.2 In respect to
recognising reimbursements of expenditure to be provided for, both AS 29 and
Ind AS 37 require a ‘virtual certainty’ of the receipt of reimbursement. In
contrast, ICDS X requires only ‘reasonable certainty’ to recognise the
reimbursements.

3.9.3 Under ICDS X, provisions
are to be reviewed at every year-end and if it is no longer reasonably certain
that an outflow of resources will be required to settle the obligation, the
provision should be reversed. AS 29 and Ind AS 37 both require reversal of the
provisions if it is no longer probable that there will be an outflow of
resources. This difference in the trigger for reversal of provisions could lead
to an adjustment in computing taxable income.

3.9.4 Transitional
provisions in ICDS X require that at the end of the financial year 2016-17, a
review of all past events is needed to be carried out to see whether any
provision is to be recognised or derecognised, and whether any asset is to be
recognised or derecognised, in relation to such past events, as per the
provisions of ICDS X.

3.10 One will have to
carefully consider the transitional provisions given in each ICDS to ascertain
exact applicability of the respective ICDS for previous year ended 31^st
March 2017 being the first transitional year.

3.11 An important point that
demands mention here relates to keeping track of ICDS related changes in the
following years. Since ICDS effect is given directly in the computation of
income, and not in books of account, one will have to keep a track on a
memorandum basis. In the subsequent year/s, this effect will have to be
considered at the time of computation of income since the same might be getting
reflected in the books of account and double inclusion of income and its
elimination will be required. For example, an item of revenue was considered in
FY 2017-18. Due to ICDS revenue standard, it was already added to taxable
profits in FY 2016-17 (AY 2017-18). In such a scenario, this item needs to be
removed at the time of computing the income for AY 2018-19.

3.12 A welcome measure
introduced by way of a proviso to section 36 (1)(vii) which has considered the
possible implications of an item being considered as income even though not in
the books and its subsequent irrecoverability not being written off in the
books of account. This provision was introduced by Finance Act 2015 w.e.f.
1.4.2016 and accordingly applies from AY 2017-18 onwards.

3.13 Disclosure required by
clause 13(f) is a new challenge. The online utility already contains a field
for standard wise disclosures. However, in the utility, no tables are getting
accepted thus necessitating description. It is suggested that the practitioner may
compile a list of ICDS disclosures required each ICDS wise, and insert them in
these fields. Alternatively, an annexure may be prepared of all such
disclosures ICDS wise, and uploaded as an annexure to the tax audit report.

4. CLAUSE 18: Depreciation

Recently, the CBDT
has made changes in the Income Tax Rules to restrict the rate of
depreciation maximum up to 40% for block of assets which are currently eligible
for depreciation at a higher rate (50%, 60%, 80%, 100%). This amendment is
applicable from current financial year itself (i.e. FY 2016-17) in case of new
manufacturing companies (incorporated on or after 1.3.2016) which will opt for
lower corporate tax rate of 25% u/s. 115BA of the Income Tax Act, 1961.

For all other
assessees, the Notification states the effective date is 01.04.2017. However,
ITRs for A.Y. 2017-18 have not been modified and they still mention rates of
depreciation higher than 40%. Hence, it can be inferred that the above
amendment is applicable from next year (i.e. FY 2017-18) for assesses not
opting for section 115BA benefit.

5. CLAUSE 26 – Section 43B – Any tax, duty or other sum

Section 43B has been
amended vide Finance Act (FA) 2016 to include any sum payable by the assessee
to the Indian Railways for the use of railway assets [Clause (g)]. For
instance, this clause will include amounts charged by Indian Railways to hire
out wagons. The disallowance under this clause does not include railway freight
payable as the same is towards service of transportation and not for use of
railway assets.

6. CLAUSE 31: ACCEPTANCE OR REPAYMENT OF LOAN OR DEPOSIT OR SPECIFIED
SUMS (SECTION 269SS/SECTION 269T)

Substantial changes
have been made in clause 31 of Form 3CD dealing with above transactions.

Earlier there were
three sub clauses in clause 31. In the amended form, there are five sub
clauses. Sub-clause (a) deals with particulars of each loan or deposit
in an amount exceeding the limit specified in section 269SS taken or accepted
during the previous year. Sub-clause (b) deals with particulars of each specified
sum in an amount exceeding the limit specified in section 269SS taken or
accepted during the previous year.

In both the above
clauses, following details to be reported additionally:

– Whether the loan or deposit or specified sum
was taken or accepted by cheque or bank draft or use of electronic clearing
system through a bank account;

– in case the loan or deposit or specified sum
was taken or accepted by cheque or bank draft, whether the same was taken or
accepted by an account payee cheque or an account payee bank draft.

In this regard,
reference may be made to amendment to sections 269SS and 269T by the Finance
Act 2015, whereby the scope of these sections was extended to transactions in
immovable property. Explanation to section 269SS defines the term specified sum
as money receivable as advance or otherwise in relation to transfer of an
immovable property, whether or not transfer has taken place. Explanation to
section 269T defines the term specified sum as money in the nature of advance
or otherwise in relation to transfer of an immovable property, whether or not
transfer has taken place. This definition does not distinguish between capital
asset or stock in trade. So the scope of this section is very wide. All
transactions in immovable property exceeding the threshold will have to be
reported in this clause.

Sub-clause (c) deals
with particulars of each repayment of loan or deposit or any specified sum in
an amount exceeding the limit specified in section 269T made during the
previous year. In addition to the existing details, the following details are
to be reported additionally:

– whether the repayment
was made by cheque or bank draft or use of electronic clearing system through a
bank account;

– in case the repayment
was made by cheque or bank draft, whether the same was taken or accepted by an
account payee cheque or an account payee bank draft

In addition to the
above changes, two new sub- clauses (d) and (e) are inserted:

Sub-clause (d) deals
with particulars of repayment of loan or deposit or any specified sum in
an amount exceeding the limit specified in section 269T received otherwise
than by a cheque or bank draft or use of electronic clearing system through a
bank account during the previous year. Sub-clause (e) deals with
particulars of repayment of loan or deposit or any specified sum in an
amount exceeding the limit specified in section 269T received by a cheque or
bank draft which is not an account payee cheque or account payee bank draft during the previous year.

Following details are
required to be given in these clauses:

(i) name, address and
Permanent Account Number (if available with the assessee) of the payer;

(ii) amount of loan or deposit or any specified advance received
otherwise than by a cheque or bank draft or use of electronic clearing system
through a bank account during the previous year / received by a cheque or bank
draft which is not an account payee cheque or account payee bank draft during
the previous year.

The reporting
requirement in respect of section 269T was earlier applicable only in case of
the person making the repayment of loan or deposit or any specified advance.
Under the new clause 31, reporting is also to be done by the recipient. So the
person who receives any repayment of loan or deposit or any specified sum
in an amount exceeding the limit specified in section 269T, will have to
scrutinize the mode of repayment and report whether any repayment is received
by him otherwise than by a cheque or bank draft or use of electronic
clearing system through a bank account during the previous year or received by
a cheque or bank draft which is not an account payee cheque or account payee
bank draft during the previous year. This information will enable the
department to initiate penalty proceedings u/s. 271E against the person who has
made the repayment in contravention of section 269T.

7. Cash
deposits during demonetisation period – Impact on Clause 16 (a) & 16(d)

Cash deposits in the
bank accounts due to demonetisation would be very common. This needs to be
dealt with diligently as it might have consequences on taxable income of the
assessee. Clause 16 of the tax audit report requires reporting of certain
amounts not credited to the Profit & Loss A/c. It has several sub-clauses
out of which the followings may be relevant:

(a) the items falling within
the scope of section 28

(d) any other item of income

It might be possible
that cash has been deposited in personal bank account of the assessee (who has
a proprietary concern) and it does not form part of the books of account
related to his business which have been audited. In such case, the auditor
should not be concerned about its source and evidences in that regard as the
scope of audit is restricted only to the books of account related to the
business or profession of the assessee.

However, when cash
has been deposited in the regular bank account of the business and has also
been recorded in the books of account which are subject to audit, the auditor
needs to consider the following aspects:

– Whether
it is out of the balance available in the cash book as on that particular date?

– Are
there any irregular / unusual receipts which are recorded in the cash book
which have increased the cash balance matching with deposit into bank account?

– What
is the source of such receipts and are there sufficient audit evidences
available to justify it?

In case of companies,
the disclosure made in the financial statements pursuant to MCA Notification GSR
308(E) dated 31-3-2017 should also be taken into account while reviewing the
above aspects. One may need to ascertain, especially in case of non corporate
assessees, that the available cash balance shown as on 31^st March
consist of permitted / non SBN currency to ensure accuracy and validity of cash
balance.

The
reporting under the specific clause as mentioned above or reporting of
qualification at the appropriate place in Form No. 3CA/3CB may be considered
depending upon outcome of the inquiry made in this regard. Where sufficient and
reliable audit evidences are not available justify the source of cash deposits,
the auditor may qualify his report by incorporating suitable qualification in
Form No. 3CA/3CB.

shailesh.kwebmaker

7 Section 271(1)(c) – Penalty levied on account of depreciation wrongly claimed deleted.

Harish Narinder Salve vs. ACIT

Members:
H. S. Sidhu (J. M.) and L.P. Sahu (A. M.)

I.T.A. No. 100/Del/2015

A.Y.: 2010-11.
Date of Order: 21^stSeptember, 2017

Counsel for Assessee / Revenue: Sachit Jolly / Arun Kumar Yadav

Section 271(1)(c) – Penalty levied on
account of depreciation wrongly claimed deleted.

FACTS

The assessee is an Advocate by profession. During
the assessment proceedings, additions on account of, amongst others, excess
depreciation claimed in his return of income of Rs. 11.4 lakh and for claiming
as expenditure, a sum of Rs. 1.69 lakh towards loss on sale of fixed assets,
were made. According to the AO, the
assessee furnished inaccurate particulars of income which resulted into
concealment of income. Considering the same, the penalty of Rs. 4.04 lakh u/s.
271(1)(c) was levied which was confirmed by the CIT(A).

Before the Tribunal, the revenue justified
its action stating that the assessee had made illegal and unjustified claim of
expenses on account of depreciation on car and on account of loss on sale of
fixed assets. The assessee had understated his taxable income by claiming
higher depreciation of Rs. 11.4 lakh and loss on sale of fixed assets at Rs.
1.69 lakh. The assessee did not voluntarily surrender the claim of
depreciation, it was only when a show cause was issued by the AO as to the
basis of claim of depreciation for the entire year, the assessee offered to tax
additional income. Before issuing show cause, the assessee was sitting quietly.
This shows that it was not merely a bonafide mistake or error. The revenue
further stated that the assessee was unable to prove that he had filed the true
particulars of his income and expenses during the assessment proceedings. The
facts clearly showed that though the car was purchased and delivered in
November 2009, the assessee had wrongly claimed depreciation for the entire
year. According to it, the fact was very much in the knowledge of the assessee
and the claim of depreciation and loss on sale of assets was ex-facie bogus
which attracted penalty u/s. 271 (1) (c). In support of the above contention,
the revenue also relied upon the following cases:

– MAK
Data P. Ltd. vs. CIT (38 Taxmann.com 448) / (2013 358 ITR 593);

– CIT
vs. Escorts Finance Ltd. (183 Taxman 453);

– CIT
vs. Zoom Communication (P) Ltd. 191 Taxman 179 (Delhi);

– B.
A. Balasubramaniam and Bros. Co. vs. CIT (1999) 236 ITR 977 (SC);

– CIT
vs. Reliance Petroproducts (2010) 189 Taxman 322 (SC);

– Union
of India vs. Dharmendra Textile Processors (2007) 295 ITR 244.

HELD

The Tribunal noted that during the
assessment proceedings, the assessee had given his explanation supported by
documentary evidences on the additions in dispute, especially relating to the
depreciation issue, that he had forgone the benefit of 50% depreciation on
account of car and offered the amount to tax vide his letter dated 20.11.2012
to avoid litigation. According to the Tribunal, the claim for depreciation only
gets deferred to subsequent years by claiming it for half year. The Tribunal
further added that the deferral of depreciation allowance does not result into any
concealment of income or furnishing of any inaccurate particulars.

As regards wrongful claim of loss on sale of
fixed assets, the Tribunal agreed that it was a sheer accounting error in
debiting loss incurred on sale of a fixed asset to profit & loss account
instead of reducing the sale consideration from written down value of the block
under block concept of depreciation. There was a separate line item viz., loss
on fixed asset of Rs.1.69 lakh in the Income & Expenditure Account which
was omitted to be added back in the computation sheet. The error went unnoticed
by the tax auditor as well as by the tax consultant while preparing the
computation of income. According to it, there was no intention to avoid payment
of taxes. The quantum of assessee’s tax payments clearly indicated the
assessee’s intention to be tax compliant. The assessee’s returned income of Rs.
34.94 crore and tax payment of more than Rs.10.85 crore, according to the
Tribunal, did not show any mala fide intention to conceal an income of Rs.13.09
lakh (not even 0.4% of returned income) with an intention of evading tax of Rs.
4 lakh (not even 0.4% of taxes paid). Therefore, in view of the above mentioned
facts and circumstances, the allegation that the assessee was having any mala
fide intention to conceal his income or for furnishing inaccurate particulars
of income was not correct. Hence, the penalty in dispute needs to be deleted.

According to the Tribunal, the case laws
relied upon by the revenue were distinguishable on the facts of the present
case, and hence, the same were not applicable in the present case.

Further, relying on the decision of the
ITAT, Mumbai Bench in the case of CIT vs. Royal Metal Printers (P) Ltd.
passed in ITA No. 3597/Mum/1996 AY 1991-92 dated 8.10.2003 reported in (2005)
93 TTJ (Mumbai) 119, the Tribunal set aside the orders of the authorities below
and deleted the levy of penalty.

shailesh.kwebmaker

17 Section 32 read with Explanation 3 – Expenditure incurred on construction of road on Built, Operate and Transfer (“BOT”) basis gives rise to an intangible asset in the form of right to operate the road and collect toll charges, which is in the nature of licence or akin to licence as well as a business or commercial right as envisaged u/s. 32(1) read with Explanation 3 and hence assessee is eligible to claim depreciation on said intangible asset.

ACIT vs. Progressive Constructions Ltd.
(2018) 161 DTR (Hyd)(SB) 289
ITA No:1845/Hyd/2014
A.Y.:2011-12
Date of Order: 14th February, 2017

FACTS

The assessee
had entered into a Concession Agreement (“C.A.”) with the Government of India
for four laning of National Highway No. 9 on BOT basis. As per this agreement
the assessee was to complete the work at its own cost and maintain the same for
a period of 11 years and seven months. The assessee had incurred a sum of
Rs.214 crores for the said project. The only right allowed to the assessee was
to operate the highway for the concession period of 11 years and 7 months and
to collect toll charges from the vehicles using the highway.

During the
assessment proceedings, it was noticed that depreciation at the rate of 25% was
claimed by the assessee on opening written down value of built, operate and
transfer (BOT) highway of Rs 40,07,94,526. The assessee had completed the
construction in financial year 2008-09 and had claimed depreciation @ 10% on
the said asset treating it as building. However from assessment year 2010-11,
assessee had started treating the asset as an intangible asset in terms of
section 32(1)(ii) of the Act. However, the AO disallowed the claim of
depreciation on the basis that assessee is not the owner of the asset and also
assessee has not maintained consistency in its claim of depreciation.

Thus, being
aggrieved by the disallowance of depreciation, an appeal was preferred before
CIT(A). The CIT(A) noting that the claim of depreciation being allowed by the
Tribunal in case of said assessee in preceding previous year, allowed the claim
of depreciation in the impugned assessment year. Aggrieved by the CIT(A)’s
order, the Department preferred an appeal before ITAT. A Special Bench was
constituted to dispose the appeal filed by the Department against the order of
CIT(A). The only point under consideration before Special Bench was whether the
expenditure incurred for construction of road under BOT contract with
Government gives rise to an asset and if so, whether it is an intangible asset
or tangible asset.

HELD

The assessee
had incurred expenses of Rs 214 crores and Government of India was not obliged
to reimburse the cost incurred. Thus, the only way in which the assessee can
recoup the cost incurred was to operate the bridge during the concession period
of 11 years and seven months and collect toll thereon. Thus, by investing such
huge sum of Rs 214 crores, the assessee had obtained a valuable business right
to operate the project facility and collect toll charges.This right in form of operating the project and collecting the toll is an intangible asset created by
the assessee by incurring expenses of Rs 214 crores.

It is necessary
now to examine whether such intangible asset comes within the scope and ambit
of section 32(1)(ii).It is the claim of assessee that the right acquired under
C.A to operate the project facility and collect toll charges is in the nature
of licence. Since licence is not defined under the Income-tax Act 1961, the
definition of licence under the Indian Easements Act, 1882 has to be seen. If
the facts of the present case are examined vis-a-vis the definition of licence
under the Indian Easements Act, 1882, it is clear that assessee has only been
granted a limited right by virtue of C.A. to execute and operate the project
during the concession period, on expiry of which the project/ project facility
will revert back to the Government. What the Government of India has granted to
the assessee is the right to use the project site during the concession period
and in the absence of such right, it would have been unlawful on the part of
the concessionaire to do or continue to do anything on such property. However,
the right granted to the concessionaire has not created any right, title or
interest over the property. The right granted by the Government of India to the
assessee under the C.A. has a license permitting the assessee to do certain
acts and deeds which otherwise would have been unlawful or not possible to do
in the absence of the C.A. Thus, the right granted to the assessee under the
C.A. to operate the project / project facility and collect toll charges is a
license or akin to license, hence, being an intangible asset is eligible for
depreciation u/s. 32(1)(ii) of the Act.

Even assuming
that the right granted under the C.A. is not a license or akin to license, it
requires examination whether it can still be considered as an intangible asset
as described u/s. 32(1)(ii) of the Act. The Hon’ble Supreme Court in CIT vs.
Smifs Securities (2012) 348 ITR 302 after interpreting the definition of
intangible asset as provided in Explanation 3 to section 32(1), while opining
that principle of ejusdem generis would strictly apply in interpreting
the definition of intangible asset as provided by Explanation 3(b) of section
32, at the same time, held that even applying the said principle ‘goodwill’
would fall under the expression “any other business or commercial rights
of similar nature”. Thus, as could be seen, even though, ‘goodwill’ is not
one of the specifically identifiable assets preceding the expressing “any
other business or commercial rights of similar nature”, however, the
Hon’ble Supreme Court held that ‘goodwill’ will come within the expression
“any other business or commercial rights of similar nature”.
Therefore, the contention of the learned Senior Standing Counsel that to come
within the expression “any other business or commercial rights of similar
nature” the intangible asset should be akin to any one of the specifically
identifiable assets is not a correct interpretation of the statutory
provisions. It has been held by the Hon’ble Delhi High Court in case of Areva
T&D India Ltd. that the legislature did not intend to provide for
depreciation only in respect of specified intangible assets but also to other
categories of intangible assets which were neither visible nor possible to
exhaustively enumerate. It also observed that any intangible assets which are
invaluable and result in smoothly carrying on the business of the assessee
would come within the expression “any other business or commercial rights of
similar nature”. Thus, the right to operate the toll road and collect toll
charges is a business or commercial right as envisaged u/s. 32(1)(ii) read with
Explanation 3(b).

Further the
assessee neither in the preceding assessment years nor in the impugned
assessment year has claimed the expenditure (amount invested/ expenses
incurred) as deferred revenue expenditure, hence there is no scope to examine
whether the expenditure could have been amortized over the concession period in
terms of CBDT Circular No. 9 of 2014 dated 23rd April, 2014. The aforesaid CBDT
circular is for the benefit of the assessee and such benefits shall be granted
only if the assessee claims it. The benefit of the circular cannot be thrust
upon the assessee if it is not claimed.

Thus the right
granted to the assessee to operate the road and collect toll is a licence or
akin to licence as well as a business or commercial right as envisaged u/s.
32(1) read with Explanation 3 and hence, assessee is eligible to claim
depreciation on said intangible asset.

shailesh.kwebmaker

20 Sections 2(15) and 12AA – Charitable purpose – Registration and cancellation – A. Y. 2009-10 – Exclusion of advancement of any other object of general public utility, if it involved carrying out activities in nature of trade, commerce or business with receipts in excess of Rs. 10 lakh – Dominant function of assessee to provide asylum to old, maimed, sick or stray cows – Selling milk incidental to its primary activity – No bar on selling its products at market price – Assessee not hit by proviso to section 2(15) – No need to cancel registration of assessee

20. Charitable
purpose – Registration and cancellation – Sections 2(15) and 12AA – A. Y.
2009-10 – Exclusion of advancement of any other object of general public
utility, if it involved carrying out activities in nature of trade, commerce or
business with receipts in excess of Rs. 10 lakh – Dominant function of assessee
to provide asylum to old, maimed, sick or stray cows – Selling milk incidental
to its primary activity – No bar on selling its products at market price –
Assessee not hit by proviso to section 2(15) – No need to cancel registration
of assessee

DIT
(Exemption) vs. Shree Nashik Panchvati Panjrapole; 397 ITR 501 (Bom)

The
assessee trust was registered with the Charity Commissioner since 1953. The
assessee was granted a certificate
of registration u/s. 12A of the
Act, on 04/08/1975. By Finance (No. 2) Act, 2009, the definition of “charitable
purpose” u/s. 2(15) of the Act, was amended w.e.f. April 12, 2009. According to
the newly added proviso, charitable purpose would not include advancement of
any other object of general public utility, if it involved carrying out
activities in the nature of trade, commerce or business, with receipts in
excess of Rs. 10 lakh. The Director of Income-tax (Exemption) issued a show
cause notice upon the assessee and held that the activities carried out by the
assessee of selling milk were in the nature of trade, commerce or business and
thus, the assessee was not entitled to registration u/s. 12A of the Act. In
response to the show-cause notice, the assessee pointed out that it was running
a panjrapole i.e., for protection of cows and oxen for over 130 years. The
activity of selling milk was incidental to its panjrapole activity and in any
case did not involve any trade, commerce or business, so as to be hit by the newly
added proviso to section 2(15) of the Act. But the Director of Income-tax
(Exemption) cancelled the assessee’s registration under the Act invoking
section 12AA(3) of the Act, in view of the newly added proviso to section 2(15)
of the Act. The Tribunal held that the activity of selling milk would be
incidental to running a panjrapole and the proviso to section 2(15) of the Act
was not applicable. The Tribunal set aside the order of the Director of
Income-tax (Exemption) cancelling the registration.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:

i) The
appeal should be decided only on the grounds mentioned in the order for
cancellation of registration and no other evidence not considered by the Director
of Income-tax (Exemption) could be looked into, while deciding the validity of
the order. The Tribunal recorded a finding of fact that the dominant function
of the assessee was to provide asylum to old, maimed, sick and stray cows.
Further, only 25% of the cows being looked after yielded milk and if the milk
was not procured, it would be detrimental to the health of the cows. Therefore,
the milk which was obtained and sold by the assessee was an activity incidental
to its primary activity of providing asylum to old, maimed, sick and disabled
cows.

ii) The
activity of milking the cows and selling the milk was necessary in the process
of giving asylum to the cows. An incidental activity of selling milk which
might be resulting in receipt of money, by itself would not make it trade,
commerce or business nor an activity in the nature of trade, commerce or
business to be hit by proviso to section 2(15) of the Act.

iii) Further,
the fact that the milk was sold at market price would make no difference as
there was no bar in law on a trust selling its produce at market price.
Therefore there was no need to cancel the registration. The appeal is
dismissed.”

shailesh.kwebmaker

19 Section 68 – Cash credit – A.Y. 2006-07 – Sums outstanding against trade creditors for purchases – Appellate Tribunal concluding that assessee having failed to furnish confirmation had paid in cash from undisclosed sources – Finding not based on any material but on conjectures and surmises – Perverse – Addition cannot be sustained

19. Cash credit – Section 68 – A.Y. 2006-07 –
Sums outstanding against trade creditors for purchases – Appellate Tribunal
concluding that assessee having failed to furnish confirmation had paid in cash
from undisclosed sources – Finding not based on any material but on conjectures
and surmises – Perverse – Addition cannot be sustained

Zazsons
Export Ltd. vs. CIT; 397 ITR 40 (All):

The assessee was a
manufacturer of leather goods for export purposes. It purchased the raw
material on credit from petty dealers, who were shown as trade creditors in the
books of account, and payments were made subsequently. For the A.Y. 2006-07,
the assessee disclosed the purchase of raw materials from small vendors, part
of which amount was confirmed and the remaining was unconfirmed. Such
unconfirmed amount was treated as cash credits u/s. 68 of the Income-tax Act,
1961 (hereinafter for the sake of brevity referred to as the “Act”),
and added as income of the assessee. The Commissioner (Appeals) deleted the
addition. The Appellate Tribunal restored the addition on the ground that the
assessee had failed to confirm the amount and that such purchases were made on
cash payment, which had not been accounted for and as such liable to be added
to the assessee’s income u/s. 68.

On appeal by the assessee,
the Allahabad High Court reversed the decision of the Tribunal and held as
under:

i) The
credit purchases of raw material shown in the books of account of the assessee
from petty dealers even if not confirmed would not mean that it was concealed
income or deemed income of the assessee, which could be charged to tax u/s. 68
of the Act. The finding of the Appellate Tribunal that it was possible that the
assessee paid them in cash from undisclosed sources without accounting for it
and therefore, the amount paid was to be added to the income of the assessee,
was based on no material but on conjectures and surmises. The purchases made by
the assessee were accepted by the Assessing Officer and the trade practice that
payment in respect of the purchases of raw material was made subsequently was
not disputed. Therefore, its finding was perverse.

ii) In
order to maintain consistency, a view which had been accepted in an earlier
order ought not to be disturbed unless there was any material to justify the
Department to take a different view of the matter. In respect of the earlier
assessment year, 2005-06, the Department had accepted the decision of the
Appellate Tribunal that the trade amount due to the trade creditors in the
books of account of the assessee could not be added to the income of the
assessee. There was nothing on record to show that any appeal had been filed by
the Department against that order, which had become conclusive.

iii) The
appeal is allowed insofar as the addition of Rs. 1,05,01,948 u/s. 68 of the Act
is concerned.”

shailesh.kwebmaker

Loan or Advance to Specified ‘Concern’ by Closely Held Company which is Deemed as Dividend U/S. 2 (22) (E) – Whether can be Assessed in the Hands of the ‘Concern’? – Part I

Introduction

1.1 Section
2(22)(e) of the Income-tax Act,1961 (the Act) creates a deeming fiction to
treat certain payments by certain companies to their shareholders etc.
as dividend subject to certain conditions and exclusions provided in section
2(22) ( popularly known as ‘ deemed dividend’). These provisions are applicable
to certain payments made by a company, not being a company in which public are
substantially interested (‘closely held company’/ such company) of any sum
(whether as representing a part of the assets of the company or otherwise) by
way of advance or loan. For the sake of brevity, in this write-up, such sum by
way of advance or loan both are referred to as loan. In this context, section
2(32) is also relevant which defines the expression ‘person who has a
substantial interest in the company’ as a person who is the beneficial owner of
shares, not being shares entitled to a fix rate of dividend, whether with or
without a right to participate in profits (shares with fixed rate of dividend),
carrying not less than 20% of the voting power in the company. Under the
Income-tax Act, 1922 (1922 Act), section 2(6A)(e) also contained similar
provisions with some differences [such as absence of requirement of substantial
interest etc.] which are not relevant for the purpose of this write-up. Such
payments can be treated as ‘deemed dividend’ only to the extent to which the
company possesses `accumulated profits’.
The expression “accumulated profits” is also inclusively defined in
Explanations 1 & 2 to section 2 (22). Section 2(22)(e) also covers certain
other payments which are not relevant for this write-up.

1.2 The
Finance Act, 1987 (w.e.f. 1/4/1988) amended the provisions of section 2(22)(e)
and expanded the scope thereof. Under the amended provisions, dividend includes
any payment of loan by such company made after 31/5/1987 to a shareholder,
being a person who is the beneficial owner of the shares (not being shares with
fix rate of dividend) holding not less than 10% of the voting power, or to any
concern in which such shareholder is a member or partner and in which he has
substantial interest. Simultaneously, Explanation 3 has also been inserted to
define the term “concern” and substantial interest in a concern other than a
company. Accordingly, the term ‘concern’ means a Hindu undivided family (HUF),
or a firm or an association of person [AOP] or a body of individual [BOI] or a
company and a person shall be deemed to have substantial interest in a
‘concern’, other than a company, if he is, at any time during the previous
year, beneficially entitled to not less than 20% of the income of such
‘concern’. It may be noted that in relation to a ‘concern’, being a company,
the determination of person having substantial interest will be with reference
to earlier referred section 2(32). As such, with these amendments, effectively
not only loan given to specified shareholder but also to a ‘concern’ in which
such shareholder has substantial interest is also covered within the extended
scope of section 2(22)(e) (New Provisions – Pre-amended provisions are referred
to as Old Provisions).The cases of loan given by such company to specified
‘concern’ are only covered under the New Provisions and not under the earlier
provisions.

1.3 Under
the 1922 Act, in the context of the provisions contained in section 2(6A)(e),
the Apex Court in the case of C. P. Sarathy Mudaliar (83 ITR 170) had
held that the section creates a deeming fiction to treat loans or advances as “
dividend” under certain circumstances. Therefore, it must necessarily receive a
strict construction .When section speaks of “shareholder”, it refers to the
registered shareholder [i.e. the person whose name is recorded as shareholder
in the register maintained by the company] and not to the beneficial owner of
the shares. Therefore, a loan granted to a beneficial owner of the shares who
is not a registered shareholder cannot be regarded as loan advanced to a
‘shareholder’ of the company within the mischief of section 2(6A)(e).This
judgment was also followed by the Apex Court in the case of Rameshwarlal
Sanwarmal (122 ITR 1) under the 1922 Act. Both these judgment were in the
context of loan given by closely held company to HUF, where it’s Karta was
registered shareholder. As such, under the 1922 Act, the position was settled
that for an amount of loan given to a shareholder by the closely held company
to be treated as deemed dividend, the shareholder has to be a registered
shareholder and not merely a beneficial owner of the shares. Even in the
context of expression ‘shareholder’ appearing in section 2(22) (e), this
proposition , directly or indirectly, found acceptance in large number of
rulings under the Act. [Ref:- Bhaumik Colour (P). Ltd – (2009) 18 DTR 451
(Mum- SB), Universal Medicare (P) Ltd – (2010) 324 ITR 263 (Bom), Impact
Containers Pvt. Ltd. – (2014) 367 ITR 346 (Bom), Jignesh P. Shah – (2015) 372
ITR 392, Skyline Great Hills – (2016) 238 Taxman 675 (Bom), Biotech Opthalmic
(P) Ltd- (2016) 156 ITD 131 (Ahd), etc]

1.4 Under
the New Provisions, loan given to two categories of persons are covered viz. i)
certain shareholder (first limb of the provisions) and ii) the ‘concern’ in
which such shareholder has substantial interest (second limb of the
provisions). In this write-up, we are only concerned with the loan given to
person covered in the second limb of the provisions (i.e. ‘concern’). For both
these provisions, the expression shareholder was understood as registered as
well as beneficial shareholder as explained by the special Bench of the tribunal
in Bhaumik Colour’s case (supra) and this position of law largely
held the field in subsequent rulings also.

1.4.1 For
the purpose of understanding the effect of section 2(22)(e) under both the
limbs of the provisions, the decision of the Special Bench in Bhaumik
Colour’s case (supra) is extremely relevant as that has been
followed in number of cases and has also been referred to by the High courts.
Basically, in this case, the Special Bench laid down following main principles:

(i) The expression ‘shareholder’ referred to
in section 2(22)(e) refers to registered shareholder. For this, the Special
Bench relied on the judgments of the Apex Court under 1922 Act, delivered in
the context of section 2(6A)(e), referred to in para 1.3 above.

(ii) The
expression ‘ being a person who is beneficial owner of shares’ referred to in
the first limb of the New Provisions is a further requirement introduced under
the New Provisions which was not there earlier. Therefore, to invoke the first
limb of New Provisions of section 2(22)(e), a person has to be a registered
shareholder as well as beneficial owner of the shares. As such, if a person is
a registered shareholder but not the beneficial shareholder then the provisions
of the section 2 (22)(e) contained in the first limb will not apply. Similarly,
if a person is a beneficial shareholder but not a registered shareholder then
also this part of the provisions of the section 2(22)(e) will not apply.

(iii) The second limb of the New Provisions
dealing with treatment of loan given to specified ‘concern’ is introduced for
the first time in the New Provisions. The expression ‘such shareholder’ found
in this provision dealing with a loan given to a ‘concern’, only refers to the
shareholder referred to in the first limb of the provisions referred to in (ii)
above. As such, to invoke this provision, a person has to be a registered
shareholder as well as beneficial shareholder having requisite shareholding
[i.e. 10 % or more] in the lending company and this shareholder should have a
substantial interest in the ‘concern’ receiving the loan.

(iv)
If, the conditions of second limb of provisions referred to in (iii) above are
satisfied, then the amount of the loan should be taxed as deemed dividend only
in the hands of the shareholder of the lending company and not in the hands of
the ‘concern’ receiving the amount of
loan.

1.5.
Even in cases where the condition for invoking the second limb of the
New Provisions are satisfied (i.e. the concerned person is a registered shareholder
as well as beneficial owner of the shares), the issue is under debate that, in
such cases, where the loan is given to a ‘concern’ in which such shareholder
has substantial interest, whether the amount of such loan is taxable as deemed
dividend in the hands of such shareholder or the ‘concern’ to whom the loan is
given. In this context, the CBDT (vide Circular No 495 dtd. 22/9/1987) has
expressed a view that in such cases, the deemed dividend is taxable in the
hands of the ‘concern’. However, the judicial precedents largely, directly or
indirectly, showed that in such cases, the deemed dividend should be taxed in
the hands of the shareholder [Ref: in addition to most of the cases referred to
in para 1.3., Ankitech (P) Ltd. – (2012) 340 ITR 14 (Del), Hotel Hilltop –
(2009) 313 ITR 116 (Raj), N. S.N. Jewellers (P) Ltd.- (2016) 231 Taxman 488
(Bom), Alfa Sai Mineral (P) Ltd. – (2016) 75 taxmann.com 33(Bom), Rajeev
Chandrashekar – (2016) 239 taxman 216 (Kar), etc.

1.6
In the context of loan given to an
HUF by a closely held company in which it’s Karta is the registered shareholder
having requisite shareholding, the issue was under debate as to whether the New
Provisions relating to deemed dividend will apply and if these provisions are
applicable, the amount of such deemed dividend should be taxed in whose hands
i.e. the registered shareholder or the HUF, which received the amount of loan.
This issue has been dealt with by the Apex Court in the case of Gopal &
Sons (HUF) [391 ITR 1]. The Apex Court in this case, based on the facts of that
case, decided that the amount of such loan will be taxable as deemed dividend
in the hands of the HUF. As such, the Court impliedly decided the issue
referred to in para 1.5 which gives support to the opinion expressed in the
CBDT circular referred to in that para. This judgment has been analysed by us
in this column in April and May issues of the journal.

1.7 Recently,
the issue referred to in para 1.5 directly came-up for consideration before the
Apex Court in the case of Madhur Housing & Development Co. Considering the
impact of the judgment in this case, it is thought fit to consider the same in
this column.

CIT
vs. Madhur Housing and Development Company [ITA 721/2011- Delhi HC]

2.1 In the above case, the relevant facts [as found
from the decision of the Tribunal] were: the assessee company was a closely
held company and during the previous year relevant to A. Y. 2006-07, the
assessee company had received Rs. 1,87,85,000 from M/s Beverley Park
Operations & Maintenance (P) Ltd. [BPOM] against the issue of fully
paid debentures by the assessee company. In BPOM, one Mrs. Indira Singh was
holding 33.33% equity shares, in her individual capacity, carrying voting
power. She as well as her husband [Mr. K. P. Singh] were also indirectly
holding 32.3 % equity shares each in BPOM through another company, which was
ultimately held [through layer companies] by holding company controlled by Mr.
and Mrs. Singh with the holding of all the equity shares [50% each] . All these
companies were part of DLF group of companies and were controlled by Mr. K. P.
Singh and family. There was sufficient accumulated profits in BPOM to cover the
amount of debentures issued to it by the assessee company. It was also revealed
that Mr. K. P. Singh and Mrs. Indira Singh [both, break-up in individual name
is not available] were holding 58.27% of equity shares in the assessee company
for which the investment was made by the partnership firm known as General
Marketing Corporation [GMC]. As such, GMC was the beneficial owner of the
shares [58.27%] held in the assessee company which were registered in the name
of its partners [namely, Mrs. Indira Singh and Mr. K. P. Singh]. Necessary
disclosures for holding these shares on behalf of the firm [GMC] were also made
before the Registrar of Companies [ROC]. Mr. & Mrs. Singh were also holding
certain preference shares with fixed rate of dividend in the assessee company.

2.1.1
During the assessment
proceedings, the Assessing Officer [AO] took the view that the assessee company
received a loan in the form of debentures from BPOM and Mr. K. P. Singh and
Mrs. Indira Singh are having substantial interest as they are registered
shareholder holding 10,200 equity shares [58.27%] in the assessee company. Name
of the GMC is not there in the register of the assessee company and as such,
they are registered and beneficial shareholder having substantial interest in
the assessee company. They are also beneficially holding more than 10% equity
shares in BPOM [may be , more so as Mrs. Indira Singh was holding 33.33% shares
directly for herself in BPOM]. As such, the conditions of section 2(22)(e) are
satisfied and accordingly, the AO treated the said amount of 1,87,85,000 as
deemed dividend in the hands of assessee company. While doing so, the AO
rejected the main contentions of the assessee that: Mr. K P Singh and Mrs.
Indira Singh were only registered shareholders of the assessee company as the
firm as such can not hold shares in it’s name and shares were actually held by GMC
through its partners, payment by BPOM was not a loan but investment in
debentures and the amount given by BPOM was in the ordinary course of business
and money lending is a substantial part of the business of BPOM and as such,
the transaction is covered by the exceptions provided in section 2(22)(e).

2.2 When
the above issue came up before the Commissioner of Income- tax (Appeals) [CIT
(A)] at the instance of the assessee company, the CIT (A) noted the principles
laid down by the Special Bench of the tribunal in Bhaumik Colour’s case
(supra) to the effect that the deemed dividend can be assessed only in
the hands of the shareholder of the lending company and not in the hands of a
person other than a shareholder and the expression shareholder in section 2(22)(e)
refers to both registered shareholder as well as beneficial shareholder [refer
para 1.4.1 above].

2.2.1 The
CIT (A) then noted the fact that Mr. K. P. Singh and Mrs. Indira Singh are
holding 10,200 equity shares [i.e. 58.27% of equity capital] in the assessee
company. However, these shares are beneficially held by the GMC and they are
registered in the name of it’s partners. Therefore, these shares are not
beneficially held by Mr. and Mrs. Singh. Mrs. Indira Singh and Mr. K. P. Singh
are also holding certain non- cumulative preference shares in the assessee
company in their individual capacity which are carrying fixed rate of dividend
and not carrying any voting power and therefore, this fact is not relevant for
involving section 2(22)(e).The assessee company is neither a registered
shareholder nor a beneficial shareholder in BPOM and further, admittedly, Mrs.
Indira Singh held equity shares in both the companies [i.e. assessee company as
well as BPOM] but, she did not hold any equity shares in the assessee company
in her individual capacity as equity shares held by her in assessee company
were on behalf of GCM in which she is one of the partners. Finally, CIT(A) took
the view that in the light of these facts, in view of the decision of Special
Bench of the tribunal in Bhaumik Colour’s case (supra), the
provisions of section 2(22)(e) cannot be invoked in this case. Accordingly, CIT
(A) deleted additions made on account of deemed dividend. It seems that CIT (A)
does not seem to have either gone in to other contentions raised by the
assessee company before the AO (ref para 2.1.1) or had not found any merit in
the same.

2.2.2
From the above, it appears that CIT (A) seems to have deleted the
additions of deemed dividend on two counts viz. (i) the assessee company is neither a registered
shareholder nor the beneficial shareholder in BPOM (i.e. lending company) and
(ii) though Mrs. Indira Singh is registered as well as beneficial shareholder
holding more than 10% equity shares in BPOM, she did not
beneficially hold any equity share in the assessee company as the shares
registered in her name were held by her for and on behalf of GMC(i.e. she is
registered shareholder but not the beneficial
owner of the shares).

2.3
The above matter was carried to the Appellant Tribunal at the instance
of the Revenue [ITA NO: 1429/Del/2010]. After hearing contentions of both the
parties which primarily related to the decision of the Special Bench in Bhaumik
Colour’s case (supra), the Tribunal observed as under:

“7.2
We have carefully considered the submissions. We find that the Tribunal in the
Special Bench decision in the case of Bhaumik Colours has held that
deemed dividend can be assessed only in the hands of a person who is a
shareholder of the lender company and not in the hands of the borrowing concern
in which such shareholder is member or partner having substantial interest.
Admittedly, in the case assessee is not shareholder of BPOM. Hence, the amount
of Rs. 1,87,85,000/- borrowed by the assessee from BPOM cannot be considered
deemed dividend in the hands of the assessee.”

2.3.1
Finally, the Tribunal decided the issue in favour of assessee and held as under

“7.3
Ld. Commissioner of Income Tax (Appeals) has followed the aforesaid Hon’ble
Special Bench decision and found that the ratio is applicable in this case and
no contrary decision or contrary facts has been brought to our notice. On the
facts of the present case the ratio of the said decision is applicable. Hence,
we do not find any infirmity or illegality in the order of the Ld. Commissioner
of Income Tax (Appeals). Accordingly, we uphold the same.”

2.3.2
From the above, it would appear that the tribunal has effectively
confirmed the order of the CIT (A). This shows that the Tribunal has also
confirmed the findings of the CIT (A) and both the reasons given by CIT(A) for
deletion of the additions referred to in para 2.2.2 above.

2.4
The matter then travelled to the Delhi High Court at the instance of the
Revenue. It seems that on an earlier day, the Division Bench of the Delhi High
Court had already decided similar issue in the case of Ankitech (P) Ltd.
[ITA No 462/2009]. Following that decision, the High Court dismissed the
appeal [vide order dated 12-05-2011] of
the Revenue by observing as under:

“This
matter is covered by the judgment of this Court dated 11.5.2011 passed in ITA
No. 462/2009 (CIT vs. Ankitech Pvt. Ltd.) In view of the said judgment, the assessment cannot be in the
hands of the assessee herein u/s. 2(22)(e) of the Income-tax Act, but it has to
be in the hands of the shareholder of
the company.”

2.5 From
the above, it would appear that the issue was decided in favour of the assessee
company on the short ground that the assessee company was not the shareholder
of the lending company and the deemed dividend u/s.2(22)(e) can not be assessed
in the hands of the assessee company (i.e. ‘concern’) but can be assessed only
in the hands of shareholder of the company. As such, it seems that the High Court decided the issue only on one
ground for deletion [given by the CIT(A)] referred to in para 2.2.2 for
confirming the deletion of the addition made on account of deemed dividend u/s.
2(22)(e). _

[To be
continued]

shailesh.kwebmaker

Set-Off of Losses from an Exempt Source Of Income

Issue for consideration

It is usual to come across cases of losses
on transfer of shares of listed companies held as long term capital assets.
These losses arise for several reasons including on account of erosion in
value, borrowing cost and indexation. Such losses, where on capital account,
are computed under the head ‘capital gains’. Any long-term capital gains on
transfer of listed shares, on which STT is paid, is exempt from liability to
taxation u/s. 10(38) provided the conditions prescribed therein are satisfied.

Sections 70 and 71 permit the set-off of the
losses under the head ‘capital gains’ against any other income within the same
head of income and also against the income under any other sources subject to
certain specified conditions.

An issue often discussed is about the
eligibility of the losses, of the nature discussed above, for set-off in
accordance with the provisions of section 70 and 71 of the Act. In the recent
past, the Mumbai bench of the Tribunal held that such losses are eligible for
set-off against income from other sources, while the Kolkata bench held that it
is not permissible to do so.

LGW Ltd.’s case

The issue arose in the case of LGW Ltd.
vs. ITO, 174 TTJ 553 (Kol.). In that case, the assessee incurred a loss of
Rs.5,00,160 on sale of listed shares for assessment year 2009-10. The loss was
claimed as a deduction in the computation of the total income by setting off
against the other income. The AO disallowed the set-off of loss in view of the
fact that section 10(38) exempted any income arising from the long-term capital
asset being equity share and as such the loss if any should be kept outside the
computation of the total income; thus, loss in view of section10(38), would not
enter the computation of total income of an assessee. The appeal of the
assessee against the said order was dismissed by the CIT(A). The assessee not
being satisfied raised the following ground before the Tribunal; “That the
learned Commissioner of Income Tax (Appeals) erred in confirming the
disallowance of loss of Rs.5,00,160 incurred by the assessee company on sale of
Long Term investment in shares.”

On behalf of the assessee, it was submitted
that section 10(38) of the Act used the expression “any income” and
therefore loss on sale of long term capital asset being equity shares should be
allowed as deduction. In reply, the Revenue relied on the order of CIT (A).

The Tribunal observed that the stand taken
by the assessee was not acceptable in view of the decision in the case of CIT
vs. Harprasad & Co. (P.) Ltd. 99 ITR 118 (SC)., and cited with approval
the following part of the decision : ‘From the charging provisions of the
Act, it is discernible that the words ” income ” or ” profits
and gains ” should be understood as including losses also, so that, in one
sense ” profits and gains ” represent ” plus income ”
whereas losses represent ” minus income ” (1). In other words, loss
is negative profit. Both positive and negative profits are of a revenue
character. Both must enter into computation, wherever it becomes material, in
the same mode of the taxable income of the assessee. Although section 6
classifies income under six heads, the main charging provision is section 3
which levies income-tax, as only one tax, on the ” total income ” of
the assessee as defined in section 2(15). An income in order to come within the
purview of that definition must satisfy two conditions. Firstly, it must
comprise the ” total amount of income, profits and gains referred to in
section 4(1) “. Secondly, it must be ” computed in the manner laid
down in the Act “. If either of these conditions fails, the income will
not be a part of the total income that can be brought to charge.’

The Tribunal noted that Supreme Court in
that case, took note of the fact that any capital gains arising between April 1, 1948, and April 1,
1957 was not chargeable to tax and therefore had held that the condition, namely,
“the manner of computation laid down in the Act” which “forms
an integral part of the definition of ‘ total income’ ” was not
satisfied and in the assessment year,
capital gains or capital losses did not form part of the “total
income” of the assessee which could be brought to charge, and therefore,
were not required to be computed under the Act.

The Tribunal held that the law laid down by
the Supreme Court clearly supported the stand taken by the Revenue and as a
consequence, the claim for deduction by way of set-off of loss was without any
merit and the same was dismissed.

Raptakos Brett & Co. Ltd.’s case

The issue arose in the case of Raptakos
Brett & Co. Ltd. vs. DCIT, 58 taxmann.com 115 (Mumbai). In that case,
the assessee, a pharmaceutical company, in the computation of income had shown
long term capital loss on sale of shares amounting to Rs.57,32,835 and loss on
sale of mutual funds units amounting to Rs.2,61,655. The said long term capital
loss had been set off against the long term capital gains of Rs.94,12,00,000
arising from sale of land at Chennai. The AO held that the losses claimed could
not be allowed since the income from long term capital gain on sale of shares
and mutual funds was exempt u/s. 10(38) of the Act of 1961. He held that the
long term capital loss in respect of shares, where securities transaction tax
had been paid, would have been exempt from long term capital gain had there
been profits, and therefore, long term capital loss from sale of shares could
not be set off against the long term capital gain arising out of the sale of
land. The CIT(A) confirmed the action of the AO on the ground that exempt
profit or loss construed separate species of income or loss and such exempt
species of income or loss could not be set off against the taxable species of
income or loss. He held that the tax exempt losses could not be deducted from
taxable income and, therefore, the AO had rightly disallowed the claim of
losses from shares to be set off against the long term capital gain from sale
of land. The assesseee company in appeal to the Tribunal raised the following
grounds; ‘1.1 On the facts and circumstances of the case and in law, the
learned Commissioner of Income-tax (Appeals) – Central II, Mumbai [“the
CIT(A)”] erred in confirming the action of Deputy Commissioner of Income
Tax (the A.O) by not allowing the claim of set off of Long term Capital Loss on
sale of shares where Security Transaction Tax (“STT”) was deducted
against the Long Term Capital Gain arising on sale of land at Chennai; 1.2 the
appellant prays that such set off of the said Long Term Capital Loss be
allowed;

It was submitted that what was contemplated
in section 10(38) was exemption of positive income and losses would not come
within the purview of the said section; the set off of long term capital loss
had been clearly provided in sections 70 and 71; the legislation had not put
any embargo to exclude long term capital loss from sale of shares to be set off
against long term capital gain arising on account of sale of other capital
asset; even in the definition of capital asset u/s. 2(14), no exception or exclusion
had been provided to equity shares the profit/gain of which were treated as
exempt u/s. 10(38); capital gain was chargeable on transfer of a capital asset
u/s. 45 and mode of computation had been elaborated in section 48; certain
exceptions had been provided in section 47 to those transactions which were not
regarded as transfer; nothing had been mentioned in sections 45 to 48 that
capital gain or loss on sale of shares were to be excluded as section 10(38)
exempted the income arising from the transfer of long term capital asset being
an equity share or unit; legislature had given exemption to income arising from
transfer of long term capital asset being an equity share in company or unit of
equity oriented fund, which was chargeable to STT; section 10(38) could not be
read into section 70 or 71 or sections 45 to 48.

The assessee supported the contention by
relying upon the decision of the Calcutta High Court in the case of Royal
Calcutta Turf Club vs. CIT, 144 ITR 709 to submit that similar issue with regard
to the losses on account of breeding horses and pigs which were exempt u/s.
10(27), whether it could be set off against its income from a business source
was considered and the High Court after considering the relevant provisions of
section 10(27) and section 70, had held that section 10(27) excluded in
expressed terms only any income derived from business of livestock breeding,
poultry or dairy farming and did not exclude the business of livestock
breeding, poultry or dairy farming from the operation of the Act. The losses
suffered by the assessee in respect of livestock, breeding were held to be
admissible for deduction by the court and were allowed to be set off against
other business income. It was pointed out that the court in turn had relied on various
decisions, especially in the case of CIT vs. Karamchand Premchand Ltd.40 ITR
106(SC). It was pointed out that there was a decision of the Gujarat High
Court in the case of Kishorebhai Bhikhabhai Virani vs. Asstt. CIT, 367
ITR 261, which had decided the issue against the assessee and the said decision
had not referred to the decisionof the Calcutta High Court at all and
therefore, did not have precedence value as compared to the Calcutta High Court
decision, which was based on Supreme Court decision on the point. Also pointed
out was the fact that the ITAT Mumbai bench also in the case of Schrader
Duncan Ltd. vs. Addl. CIT 50 SOT 68 had decided a somewhat similar issue
against the assessee but was distinguished.

On the other hand, the Revenue strongly
relied upon the order of the AO and CIT(A) and submitted that, firstly, if the
income from the long term capital gain on sale of shares was exempt, then the
loss from such sale of shares would also not form part of the total income and
therefore, there was no question of set off against other income or long term
capital gain on different capital asset. Secondly, the decisions of the Gujarat
High Court and ITAT Mumbai bench were required to be followed. It was further submitted
that it was quite a settled law that income included loss also and, therefore,
if the income from sale of shares did not form part of the total income, then
the losses from such shares also would not form part of the total income.

The Mumbai Tribunal on the conjoint reading
and plain understanding of all the sections observed that;

– firstly,
shares in the company were treated as capital asset and no exception had been
carved out in section 2(14), for excluding the equity shares and unit of equity
oriented funds that they were not treated as capital asset;

– secondly,
any gains arising from transfer of Long term capital asset was treated as
capital gain which was chargeable u/s. 45;

– thirdly,
section 47 did not enlist any such exception that transfer of long term equity
shares/funds were not treated as transfer for the purpose of section 45, and
section 48 provides for computation of capital gain, which was arrived at after
deducting cost of acquisition i.e., cost of any improvement and expenditure
incurred in connection with transfer of capital asset, even for arriving of
gain in transfer of equity shares;

– sections
70 & 71 elaborated the mechanism for set off of capital gain. Nowhere, any
exception had been made/carved out with regard to Long term capital gain
arising on sale of equity shares. The whole genre of income under the head
‘capital gain’ on transfer of shares was a source, which was taxable under the
Act. If the entire source was exempt or was considered as not to be included
while computing the total income then in such a case, the profit or loss
resulting from such a source did not enter into the computation at all.
However, if a part of the source was exempt by virtue of particular
“provision” of the Act for providing benefit to the assessee, then it
could not be held that the entire source would not enter into computation of
total income.

– the
concept of income including loss would apply only when the entire source was
exempt and not in the cases where only one particular stream of income falling
within a source was falling within exempt provisions. Section 10(38) provided
exemption of income only from transfer of long term equity shares and equity
oriented fund and not only that, there are certain conditions stipulated for exempting
such income and as such exempted only a part of the source of capital gain on
shares.

– it
needed to be seen whether section 10(38) exempted the source of income which
did not enter into computation at all or only a part of the source, the income
in respect of which was excluded in the computation of total income.

– the
precise issue had come up for consideration before the Calcutta High Court in Royal
Calcutta Turf Club’s case (supra), wherein the court observed that “under
the Income tax Act, 1961 there are certain incomes which do not enter into the
computation of the total income at all. In computing the total income of a
resident assessee, certain incomes are not included under s.10 of the Act. It
depends on the particular case; where the Act is made inapplicable to income
from a certain source under the scheme of the Act, the profit and loss
resulting from such a source will not enter into the computation at all. But
there are other sources which, for certain economic reasons, are not included or
excluded by the will of the Legislature. In such a case, one must look to the
specific exclusion that has been made.” The court relying specifically
on the decision of in the case of Karamchand Premchand Ltd. (supra),
came to the conclusion that “cl.(27) of s.10 excludes in express terms
only “any income derived from a business of live-stock breeding or poultry
or dairy farming. It does not exclude the business of livestock breeding or
poultry or dairy farming from the operation of the Act. Therefore, the losses
suffered by the assessee in the broodmares account and in the pig account were
admissible deductions in computing its total income”

– the
decision in the case of Schrader Duncan Ltd. (supra), the issue
involved was slightly distinguishable and secondly, the ratio of Calcutta High
Court was applicable in the case before them. Lastly, the decision of the
Gujarat High Court in the case of Kishorebhai Bhikhabhai Virani (supra),
though the issue involved was almost the same, and was decided against the assessee,
the ratio of the decision of the Calcutta High Court was to be followed more so
where the said decision had not been referred or distinguished by the Gujarat
High Court.

The Mumbai bench of the Tribunal finally
held that the ratio laid down by the Calcutta High Court was clearly applicable
and accordingly was to be followed in the case before them to conclude that
section 10(38) excluded in expressed terms only the income arising from
transfer of long term capital asset being equity share or equity fund which was
chargeable to STT and not entire source of income from capital gains arising
from transfer of shares and that the provision of section 10(38) did not lead
to exclusion of the entire source and not even income from capital gains on
transfer of shares. Accordingly, long term capital loss on sale of shares was
allowed to be set off against long term capital gain on sale of land in
accordance with section 70(3) of the Act.

Observations

The issue being considered here has a long
history. Time and again, it has been subjected to judicial inspection including
by the Supreme Court and in spite of the decisions of the Apex court,
conflicting decisions are being delivered by the courts on the subject as was
highlighted by this feature published in BCAJ, some 25 years ago.

The Supreme court in the case of Harprasad
& Co. (P) Ltd. 99 ITR 118 (SC) (supra) held that losses from a
source, the income whereof did not enter into computation of total income, was
not eligible for set-off against income from other sources. The Supreme court
in yet another case, Karamchand Premchand & Co. (supra),
narrated the circumstances where the losses of the given nature were eligible for set-off.

One would have thought the issue of set-off
was settled with the Supreme court decisions on the subject, but as is pointed
out by the conflicting decisions of the Tribunal that the issue is alive and
kicking. Subsequent to the Apex court decisions, the Madras High Court in the
case S.S. Thiagarajan 129 ITR 115(Mad) examined the issue to decide
against the eligibility for set-off of such losses from an exempt source of
income. In that case, the assessee had incurred losses on his activity of
racing and betting on horses, the income whereof was otherwise exempt u/s.
10(3) of the Income-tax Act. Subsequently, the Calcutta High Court in the case
of Royal Calcutta Turf Club 144 ITR 709 held that the losses from a
source, the income whereof was otherwise exempt, was eligible for set-off
against income from other sources. In that case, the assessee club had incurred
losses on its activities of livestock breeding, dairy farming and poultry
farming, the income whereof was exempt from taxation under the then section
10(27) of the Act and had sought its set off against the income from dividend
which was then taxable. In deciding the issue, the High Court took notice of
the decision of the Madras High Court in the case of S.S. Thiagarajan (supra)
and dissented from the ratio of the said decision.

A finer distinction is to be kept in mind,
for supporting the claim, between a case where an income does not enter into
computation of total income per se, as per the scheme of taxation, for
e.g., an agricultural income or a capital receipt as against the case of an
income, otherwise taxable, but has been exempted expressly from taxation for
economic reasons or where a part thereof only is exempted and not the entire
source thereof or a case where the exemption is conditional. It is believed
that in the later cases, where the exemption is conferred for economic reasons
and few other reasons cited, the law otherwise settled by the Supreme Court in
the case of Harprasad & Co. should not apply. Needless to say that
the exemption, u/s. 10(38) for long term capital gains on sale of shares was
given for economic reasons of developing the securities market and was also
otherwise a case quid pro quo inasmuch as exemption was only on payment
of another direct tax namely STT and in any case is conditional and further, is
not for all types of capital gains.

There also is a merit in the contention that
section 10(38) deals with the case of an ‘income’ alone and should not be
stretched to include the case of a ‘loss’ and principle that an ‘income
includes loss ‘should not be applicable to the provision of section 10(38) of
the Act.

Section 10(38) is a beneficial provision
introduced to help the tax payers to minimise their tax burden, once an STT is
paid. In the circumstances, it is in the fitness of the things that the
provisions are construed liberally in favour of the exemption. Bajaj Tempo
Ltd., 196 ITR 188(SC). The fact that the issue of eligibility of setoff is
controversial and is capable of two conflicting views is highlighted by the two
opposing decisions discussed here and therefore, a view favourable to the tax
payer, in such cases, should be taken. Vegetable Products, 88 ITR 192 (SC).

In Harprasad & Co.‘s case (supra)
, the assessee claimed capital loss on sale of shares of Rs.28,662 during the
previous year relevant to assessment year 1955-56. The AO disallowed the loss
on the ground that it was a loss of a capital nature and the CIT (A) confirmed
his order. Before the Tribunal, the assessee modified its claim and sought that
the loss which had been held to be a ” capital loss ” by the authorities
below, should be allowed to be carried forward and set off against profits and
gains, if any, under the head ” capital gains ” earned in future, as
laid down in sub-sections (2A) and (2B) of section 24 of the Act of 1922. The
Tribunal accepted the contention of the assessee and directed that the ”
capital loss ” of Rs. 28,662
should be carried
forward and set off
against ” capital gains “, if any, in
future. On appeal, the Delhi High Court confirmed the order of the tribunal.

On further appeal by the Revenue, the
Supreme Court considered: “Whether, on the facts and in the
circumstances of the case, the capital loss of Rs. 28,662 could be determined
and carried forward in accordance with the provisions of section 24 of the
Indian Income-tax Act, 1922, when the provisions of section 12B of the
Income-tax Act, 1922, itself were not applicable in the assessment year 1955-
56. “The Court, on due consideration of facts and the law, held: ‘Under
the Income Tax Act, 1922, capital gain was not included as a head of income and
therefore capital gain did not form part of the total income. Certain important
amendments were effected in the Income-tax Act by Act XXII of 1947. A new
definition of ” capital asset ” was inserted as Section 2(4A) and
” capital asset ” was defined as ” property of any kind held by
an assessee, whether or not connected with his business, profession or vocation
“, and the definition then excluded certain properties mentioned in that
clause. The definition of ” income ” was also expanded, and ” income
” was defined so as to include ” any capital gain chargeable
according to the provisions of Section 12B “. Section 6 of the Income-tax
Act was also amended by including therein an additional head of income, and
that additional head was ” capital gains, ” Section 12B, provided
that the tax shall be payable by an assessee under the head ” capital
gains ” in respect of any profits or gains arising from the sale, exchange
or transfer of a capital asset effected after 31st March, 1946, and that such
profits and gains shall be deemed to be income of the previous year in which
the sale, exchange or transfer took place. The Indian Finance Act, 1949,
virtually abolished the levy and restricted the operation of section 12B to
” capital gains ” arising before the 1st April, 1948. But section
12B, in its restricted form, and the VIth head, ” capital gains ” in
section 6, and sub-sections (2A) and (2B) of section 24 were not deleted and
continued to form part of the Act. The Finance (No. 3) Act, 1956, reintroduced the
” capital gains ” tax with effect from the 31st March, 1956. It
substantially altered the old section 12B and brought it into its present form.
As a result of the Finance (No. 3) Act of 1956, “capital gains ”
again became taxable in the assessment year 1957-58. The position that emerges
is that ” capital gains ” arising between April 1, 1948, and March
31, 1956, were not taxable. The capital loss in question related to this
period.’

In Karamchand Premchand & Co. Ltd.
(supra) the court held ; “What it says in express terms is that the Act
shall not apply to any incosme, profits or gains of business accruing or
arising in an Indian State etc. It does not say that the business itself is
excluded from the purview of the Act. We have to read and construe the third
proviso in the context of the substantive part of section 5 which takes in the
Baroda business and the phraseology of the first and second provisos thereto,
which clearly uses the language of excluding the business referred to therein.
The third proviso does not use that language and what learned counsel for the
appellant(Revenue) is seeking to do is to alter the language of the proviso so
as to make it read as though it excluded business the income, profits or gains
of which accrue or arise in an Indian State. The difficulty is that the third
proviso does not say so; on the contrary, it uses language which merely exempts
from tax the income, profits or gains unless such income, profits or gains are
received in or brought into India”. It went on to hold “ Next, we have to
consider what the expression “income, profits or gains” means. In the
context of the third proviso, it cannot include losses ……….. and the expression
“income, profits or gains” in the context cannot include losses. ………
The appellant(Revenue) cannot therefore say that the third proviso excludes the
business altogether, because it takes away from the ambit of the Act not only
income, profits or gains but also losses of the business referred to therein.”
Lastly, “The argument merely takes us back to the question—does the third
proviso to section 5 of the Act merely exempt the income, profits or gains or
does it exclude the business ? If it excludes the business, the appellant
(Revenue) is right in saying that the position under the proviso is not the
same as under section 14(2)(c) of the Indian Income-tax Act. If on the contrary
the proviso merely exempts the income, profits or gains of the business to
which the Act otherwise applies, then the position is the same as under section
14(2)(c). It is perhaps repetition, but we may emphasize again that exclusion,
if any, must be done with reference to business, which is the unit of taxation.
The first and second provisos to section 5 do that, but the third proviso does
not.”

The Mumbai bench of the Tribunal, in
deciding the issue in favour of the assessee, has taken due note of the direct
decision of Gujarat High Court in the case of Kishore Bhikhabhai Virani,
(supra) which in turn had followed the decision of Madras High Court in S.S.
Thiagarajan’s case(supra) and chose to chart a different course of
action for itself only after due consideration of the law on the subject. The
Kolkata bench of the Tribunal has however followed the said decision of the
Gujarat High Court to arrive at the opposite conclusion.

In deciding the issues before them, both the
High Courts have based their decisions on the different decisions of the
Supreme court, one in the case of Harprasad & Co.(supra) and
the other in the case of Karamchand Premchand Ltd.(supra). The
Mumbai bench has dutifully examined the ratio of these decisions of the Supreme
court while applying one of the ratios of the decisions of the high courts. It
has also examined the application or otherwise of the direct decision of the
Gujarat High Court. In that view of the matter, the decision of the Mumbai
bench is the only decision which has examined the issue with its various facets
and has brought on record a very detailed analysis of a vexatious and complex
issue on due application of judicial process. The better view, in our humble
opinion, is in favour of allowance of the set-off of losses against income from
other sources, for the reasons discussed here. _

shailesh.kwebmaker

E-Assessments – Insights on Proceedings

In 2006, the Indian government introduced
mandatory e-filing of income tax returns by the corporate assesses. Later on,
this was extended to other types of assessees and since then, the digitisation
in this area has progressed for betterment. Gradually, a lot of facilities have
been provided through the official e-filing website of income tax like checking
refund status and demand status, filing of online rectifications, viewing 26AS
for the ease of tax payers etc.

Until now, processing of returns is done by
two ways, i.e. summary assessments u/s. 143(1) and scrutiny assessment u/s.
143(3). In summary assessment, the arithmetical accuracy of returns filed like
errors in interest calculation or claim of credit u/s. 26AS or any such errors
are checked by Centralised Processing Centre (CPC) on e-filing of return of
income. Intimation is thereby sent to the taxpayer by email determining a
demand, refund or just accepting the return as filed, if there are no errors.
Tax payer can file a response to this intimation online on the e-filing portal.
In the latter case of scrutiny assessment, the case is transferred from CPC to
the jurisdictional Income Tax Officer of the assessee to analyse the case in detail.

A scrutiny assessment requires submission of
lot of paper work, evidences and submission of basically everything which the
Assessing officer (AO) desires. Also, the assessee is required to be present
every time the AO will request attendance by way of notice. The entire process
of filing heaps of paper with several meetings and of course, a never-ending
wait outside the officer’s cabin has made the entire process of assessment time
consuming and cumbersome, not to mention the menace of growing corruption in
the whole practice.

As a part of the e-governance initiative and
with a view to facilitate a simple way of communication between the Department
and the taxpayer, through electronic means, the Central Board of Direct Taxes
(CBDT), the policy making body of income tax department, launched its pilot
project on E-assessment proceedings in October, 2015. The idea was to reduce
human interface in the proceedings and to bring transparency and speed.

Initially, the pilot project was launched in
5 metro cities i.e. in Ahmedabad, Bengalaru, Chennai, Delhi and Mumbai where a
few non corporate assessees were assessed through notices and replies shared
through electronic mails (E- mails) and through e-portal of income tax, and
later on it was extended to another two metros – Kolkata and Hyderabad. This
pilot project was successful in these 7 cities. A latest blue print prepared by
the department on the subject states that the number of paperless or
e-assessments over the internet has seen growth in the last three years. It
also said that a simple analysis of the figures states that the growth in the
number of cases being processed in an e-environment has jumped slightly over 78
times. As digital platform is now available to conduct end to end scrutiny
proceedings, CBDT has decided to utilise it in a widespread manner for conduct
of proceedings in scrutiny cases.

The Finance Bill, 2016 proposed to amend
various provisions of the Income-tax Act, 1961 read with Rule 127 of Income Tax
Rules, 1962 and the Notification No. 2/2016 issued by the Central Board of
Direct Taxes (CBDT) which aimed to provide adequate legal framework for
e-assessment, in order to enhance the efficiency and reduce the burden of
compliance.

Accordingly, section 282A is amended so as
to provide that notices and documents required to be issued by income-tax
authority under the Act shall be issued by such authority either in paper form
or in electronic form in accordance with
such procedure as may be prescribed. Also, sub-section (23C) is inserted to
section 2 so as to define the words “Hearing” to include the communication of
data and documents through electronic mode.

The Central Board of Direct Taxes (CBDT)
vide Income-tax (18^th Amendment) Rules, 2015 had notified Rule 127
for Service of notice, summons, requisition, order and other communication on 2^nd
December 2015. This rule states the manner of communications through physical
and electronic transmission. Also, the Principal Director General of Income tax
(Systems) has specified by Notification No. 2/2016, the procedure, formats and
standards for ensuring secured transmission of electronic communication in
exercise of the powers conferred under sub-rule (3) of Rule 127. So, all the e-
assessment proceedings will be governed by the above stated section, rule and
notification.

Who and what is covered under E-assessments?

– All
taxpayers who are registered under the e-filing portal of income tax –
http//:incometaxindiaefiling.gov.in are technically covered by this initiative.

– The
new regime is voluntary for the tax payer and the tax payer can choose between
the e-proceedings through electronic media or the existing manual assessment
proceedings with the income tax department.

– The
E-functionality shall be open for all types of notices, questionnaires, and
letters issued under various sections of the Income-tax Act, 1961, and it shall
cover the following:

– Regular Assessment
proceedings u/s. 143(3).

– Transfer pricing
assessments.

– Penalty proceedings under various
sections.

– Revision assessments.

– Proceedings in first
appeal for hearing notice.

– Proceedings for granting
or rejecting registrations u/s. 12AA, 80G or other exemptions.

– Proceedings for seeking
clarification for resolving e-nivaran grievances.

– Rectification applications
and proceedings and any other things which may be notified in future.

Step by step procedure of E-assessment
proceedings:

– All
the notices and questionnaires will be visible to the taxpayers after they log
onto the income tax e-filing website under “E-proceeding” tab and the same
shall also be sent to the registered email address of the taxpayer. In case a
taxpayer wishes to communicate through any other alternative email ID, the same
may be informed to the officer in writing. All mails from the income-tax
department for the e-assessment proceedings should be sent through the
designated email ID of the assessing officer having the official domain, for
eg: domain@incometax.gov.in.

– Also,
a text message will also be required to be sent on the mobile number of the
taxpayer registered on the e-filing website.

– Notice
received u/s. 143(2) should clearly mention the nature of scrutiny as “Limited
Scrutiny” or “Complete Scrutiny” as the case may be, along with issues
identified for examination i.e. reason for selection by the Assessing Officer
is supposed to have detailed description related to the case collected from
AIR, CIB and other sources.

– All
notices/questionnaires/communications sent by department through e-proceeding
shall be digitally signed by the Assessing officer.

– The
ITO along with these correspondences shall also send a letter by email seeking
consent for use of email based communication of paperless assessment. However,
the assessee will have the choice to opt out of the e-proceedings and this can
be communicated by sending a response through e-filing website. Also, the
assessee can, even after he has opted for e-assessment proceedings, at any time
choose to switch to manual proceedings with prior mention to the Assessing
Officer. This should remove apprehensions about limiting the right to
being heard.

– Manual
mode can also be adopted for those assessees who are not registered on the
E-filing website of The Income-tax Department or if the Income-tax Authority so
decides with specific reasons which should be recorded in writing and approved
by the immediate supervisory authority.

– Response
should be submitted in PDF format as attachments and the size of attachments in
a single email cannot exceed 10MB. In case total size of the attachments
exceeds 10 MB, then the tax payer shall split the attachment and send in as
many emails as may be required to adhere to the limit of the attachment size of
10MB per mail. Alternatively, responses may also be sent in e-filing website
through e-proceeding tab available.

– The
Assessee will be able to view the entire history of
notice/questionnaire/letter/orders on ‘My Account’ tab on the e-filing website
of the department, if the same has been submitted under this procedure.

– All
email communications between the tax officer and taxpayer shall also be copied
to e-assessment@incometax.gov.in for audit trail purposes.

– In
order to facilitate a final date and time for e-submission, the facility to
submit a response will be auto closed 7 days prior to the Time-Barring (TB)
date, if any. If there is no statutorily prescribed TB date, then the
income-tax authority can, on his volition, close the e-submission whenever the
compliance time is over or when the final order or decision is under
preparation to avoid last minute submissions. The authority shall close
proceedings in such case after mentioning in the electronic order sheet that
‘hearing has been concluded’

– Once
the proceeding is closed or completed by the income-tax authority, e-submission
will not be allowed from assessee.

– Once
the scrutiny/hearing is completed, the tax officer shall pass the assessment
order/final letter and email it in PDF format to the taxpayer and the same will
also be uploaded on the e-filing portal of the user.

Salient Features of CBDT’s Instruction no.9/2017
dated 29^thSeptember, 2017:

CBDT vide its Instruction No. 8/2017 dated
29^thSeptember, 2017 has brought about various aspects of conducting
assessments electronically in cases which are getting time barred by limitation
during the financial year 2017-18.

– All
time barring scrutiny assessments pending as on 1^st October 2017,
where hearing has not been completed shall be now migrated to e-proceeding
module on ITBA. An intimation informing the same shall be sent by the AO to
assessee before 8^th October, 2017.

– In
respect of ‘limited scrutiny’ cases, now an option has been made available to
the assessee to give his consent to conduct e-proceeding of their scrutiny
assessment. The consent is required to be submitted before 15^thOctober,
2017.

– Scrutiny
cases which are covered as above or cases where assessee has opted for manual
proceedings, all time barring assessments u/s. 153C/53A or any specific time
barring proceedings such as proceedings before the transfer pricing officer,
before the Range head u/s. 144A shall be continued to be conducted
manually.

–
Assessment proceedings being carried out through e–proceeding facility may
under following situations take place manually:

– Where manual books of
accounts or original documents needs to be examined.

– Where AO invokes
provisions of section 131 of the Act or notice has been issued for any third
party investigation/enquiries.

– Where examination of
witness is required to be made by the concerned assessee or department.

– Where a show cause notice
has been issued to the assessee expressing any adverse views and assessee
requests for personal hearing to explain the matter.

– In
time barring ‘limited scrutiny cases’ or seven metros under email based
assessment where now proceedings will be conducted through e-proceeding
facility, the records related to earlier case proceedings shall be continued to
be treated as part of assessment records. In these cases, case records as well
as note sheet of subsequent proceedings through e-proceeding shall be maintained
electronically.

Advantages if the taxpayer opts for the
scheme:

– It
shall certainly save a lot of time and money of the tax payer contrary to the
existing scenario, where most of the time goes in travelling to the income tax
offices and being present personally before the officer, as also waiting
outside the cabins of the officers.

– No
bulky submissions are required to be made physically anymore, so this will
definitely reduce the compliance burden on the assessee. It will also result in
saving of tonnes of paper.

– Facilitates
ease of operation for both the taxpayer as well as the Income Tax Officer.
Taxpayer can at anytime, and from anywhere, reply to the questionnaires and
notices issued by the Income Tax Officer.

– Taxpayer
and Assessing Officer can track a complete record of any number of proceedings
between the two, thus offering stability and uniformity.

– The
e-assessment process will limit the interactions between the taxman and the
taxpayer and will improve transparency in the entire course of assessments,
accordingly helping in reducing corruption in the system.

– The
taxpayer has flexibility any time at his discretion to opt out of this scheme
with prior intimation to the Assessing Officer.

Prospective issues which may occur:

– The
complete proceedings of e-assessments are based on technology and hence, the
system shall totally depend on the timely and appropriate two way communication
between the tax payer and the tax officer and also the simplicity the system
provides.

– Currently,
many tax payers are reluctant to opt for e-assessments, worrying that it will
be difficult to make a complex representation.

– For
assessments where voluminous data and details are asked by the assessing
officer, it may be a challenge to upload everything online within the given
limit of 10 MB, and may also become an onerous task at the same time.

– Once
the proceedings are closed by the officer, no e-submission of the assessee will
be accepted, one has to wait and watch the consequences of genuine defaults and
delays.

– The
proceedings can be a nightmare for senior citizens who may not be technology
savvy to use this service, so they may opt for manual proceedings only.

However, given the limited hardships it has,
the expediency offered by the paperless proceedings cannot be neglected. The
time and cost saved in consultants, record keeping, and making personal
representations are worth appreciating. Considering the significance of
technology in today’s era, it is a welcome move by the government towards
digitalisation of India.

The e-proceedings are hassle free and cannot
be tampered with under vigilant cyber security laws. If best practices are
adopted by the taxmen and the taxpayer towards the e-proceedings, it shall
prove to be a historic change in the tax systems of the country. A large number
of assessments today are done based on asking for details and data and seeking
justifications and explanations; this option should help such assessees.

The success of the scheme shall depend upon
the ease of operation in e-proceedings, acceptance of tax officers to get acquainted
with it and the willingness of the taxpayers to opt for it. _

shailesh.kwebmaker

6 Section 40a(i) read with section 195 – Sales commission paid to foreign agent is neither technical service nor managerial, hence not covered under Explanation to section 9(2). No tax required to be deducted u/s. 195.

6.
Divya Creation vs. ACIT

Members:
R. K. Panda (A. M.) and Suchitra Kamble (J. M.)

ITA No.5603/Del/2014.

A.Y.: 2010-11

Date of Order: 14^thSeptember,
2017

Counsel for Assessee / Revenue: Piyush Kaushik / Arun Kumar Yadav

Section 40a(i) read with section 195 –
Sales commission paid to foreign agent is neither technical service nor
managerial, hence not covered under Explanation to section 9(2). No tax
required to be deducted u/s. 195.

FACTS

The assessee is a partnership firm engaged
in the business of manufacturing and export of plain and studded gold and
silver jewellery. During the year under
appeal, the assessee had paid commission of Rs. 62.13 lakh to two parties in
France and Switzerland for promoting the sales in Europe.The AO disallowed the
commission u/s. 40a(i) for non-deduction of tax at source u/s. 195 giving
following reasons:

– commission
has been remitted to the foreign agent only after realisation of proceeds by
the assessee from the customers solicited by the agents;

– as
per the agreement, in case of losses / interest which are not paid by the
customers on account of delay in payment, the same was to be adjusted against
commission payable to the agent;

– as
per the agreement, the agent was personally acting as agent of the assessee,
which was inferred by the AO as that the income of foreign agent had a real and
intimate connection with the income accruing to the assessee and this
relationship amounted to a business connection through or from which income can
be deemed to accrue or arise to the non-resident.

Further, relying on the decision of the AAR
in the case of SKF Boilers and Driers Pvt. Ltd. reported in 68 DTR 106 and the
decision of AAR in the case of Rajiv Malhotra reported in 284 ITR 564, the AO
disallowed the commission u/s. 40a(i). According to the CIT(A) although the
non-resident agents had rendered services and procured orders abroad, but the
right to receive the commission arose in India when the orders got executed by
the assessee. Accordingly, he upheld the order of the AO.

Before the Tribunal, the revenue relied on
the orders of the lower authorities.

HELD

The Tribunal referred to the following
decisions:

– The
Ahmedabad Tribunal in the case of DCIT (International Taxation) vs. Welspun
Corporation Ltd. reported in 77 taxmann.com 165 held that the commission
paid to agent cannot be considered as the fees for payment for technical
services. Such payments were in nature of commission earned from services
rendered outside India which had no tax implications in India. The Tribunal
while deciding the issue had also considered the two decisions of the AAR which
were relied on by the AO as well as the CIT(A);

– The
Allahabad High Court in the case of CIT vs. Model Exims reported in 363
ITR 66 held that the payments of commission to non-resident agents, who have
their own offices in foreign country, cannot be disallowed, since the agreement
for procuring orders did not involve any managerial services. It was held that
the Explanation to section 9(2) was not applicable;

– The
Delhi High Court in the case of CIT vs. EON Technology P. Ltd. reported
in 343 ITR 366, held that non-resident commission agents based outside India
rendering services of procuring orders cannot be said to have a business
connection in India and the commission payments to them cannot be said to have
been either accrued or arisen in India;

– The
Tribunal also referred to the decision of the Supreme Court in the case of CIT
vs. Toshoku Ltd. reported in 125 ITR 525, Madras High Court in the cases of
CIT vs. Kikani Exports Pvt. Ltd. reported in 369 ITR 96 and CIT vs.
Faizan Shoes Pvt. Ltd. reported in 367 ITR 155.

In view of the above, the Tribunal held that
the assessee was not liable to deduct tax under the provisions of section 195
on account of foreign agency commission paid outside India for promotion of
export sales.

shailesh.kwebmaker

6 Business expenditure – Mark to market loss – Loss suffered in foreign exchange transactions entered into for hedging business transactions – cannot be disallowed as being “notional” or “speculative” in nature: Section 37(1)

6. Business
expenditure – Mark to market loss – Loss suffered in foreign exchange
transactions entered into for hedging business transactions – cannot be
disallowed as being “notional” or “speculative” in nature: Section 37(1)

CIT-4 vs. Walchandnagar Industries Ltd. [Income tax Appeal no. 352 of
2015 dated : 01/11/2017 (Bombay High Court)].

[Walchandnagar Industries Ltd. vs. ACIT. [ITA No. 3826/Mum/2013; Bench
: G ; dated 21/08/2014 ; AY 2009-10, Mum. ITAT ]

The
assessee is a manufacturer of engineering goods. During the course of the
assessment proceedings, the A.O noticed that the assessee has shown loss on
account of foreign exchange currency rate fluctuation. On perusing the details,
the A.O noticed that the loss was on account of marked to market loss.

The
assessee was show caused to explain why the exchange rate fluctuation loss
should not be treated as speculation loss. The assessee explained the
difference between forward contracts and option contracts. The AO did not
accept the detailed submission of the assessee. The AO was of the opinion that
the loss arising from revaluation as on 31.3.2009 is a notional loss and cannot
be allowed as expenditure u/s. 37(1) of the Act.

The
assessee carried the matter before the Ld. CIT(A) but without any success.

Before
ITAT, the assessee stated that the issue of disallowance on account of marked
to market loss is squarely covered in favour of the assessee by the decision of
the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India
Pvt. Ltd. 312 ITR 254.

The
ITAT find that the Hon’ble Supreme Court in the case of Woodward Governor
India (Supra) has held that loss suffered by the assessee on account
of fluctuation in the rate of foreign exchange as on the date of the balance
sheet is an item of expenditure u/s. 37(1) of the Act. Respectfully following
the decision of the Hon’ble Supreme Court, the AO is directed to delete the
disallowance of Rs. 2,28,01,707/-.

Being
aggrieved the Revenue filed an appeal to the High Court. The court perused the
said decision of this Court in the case of CIT vs. M/s. D. Chetan &
Co ( 2017) 390 ITR 36 (Bom.)(HC); the Court held that ; Loss
suffered in foreign exchange transactions entered into for hedging business
transactions cannot be disallowed as being “notional” or “speculative” in
nature.

Hence, no
substantial question of law arises and accordingly the appeal was dismissed.

shailesh.kwebmaker

5 TDS – Section 194C or 194J – subtitling and standard fee paid for basic broadcasting of a channel at any frequency

5. TDS – Section
194C or 194J – subtitling and standard fee paid for basic broadcasting of a
channel at any frequency

CIT (TDS) vs. UTV Entertainment Television Ltd. [ Income tax Appeal no.
525 of 2015 dated : 11/10/2017 (Bombay High Court)].

[UTV Entertainment Television Ltd. vs. ITO (OSD)(TDS) 3(1). [ITA No.
2699, 4204, 4205 & 2700/Mum/2012; Bench: F ; dated 29/10/2014 ; Mum. ITAT ]

The
assessee is a Public Limited Company carrying on business of broadcasting of
Television (TV) channels. The assessee operates certain entertaining channels.
During the survey, A.O found that certain amounts were paid by assessee on account
of ;

(i)
Carriage Fees / Placement Charges.

(ii)
Subtitling charges (Editing Expenses).

(iii)
Dubbing Charges.

Tax
was deducted on the said amounts as per section 194C of the Act. The A.O was of
the opinion that the carriage fees, editing charges and dubbing charges were in
the nature of fees payable for technical services and, therefore, tax should
have been deducted u/s. 194J of the Act. The A.O passed an order that the three
items were not covered by section 194C but by section 194J.

The
appeal preferred by the assessee before the CIT(A) was partly allowed holding
that there was no short deduction of tax by the assessee on account of payment
of placement charges, subtitling charges and dubbing charges. Further appeal
was before the ITAT where Revenue appeal was dismissed.

Being
aggrieved by the said order, an appeal was preferred by the Revenue before the
High Court. The Revenue submitted that the payments made by the assessee was
not contractual payments and, therefore, section 194C of the Act will not be
applicable. His contention was that the activity for which payments were made
by the assessee are either for professional or for technical services and,
therefore, section 194J will apply to the present case. As per the Agreements
these payments are given to MSO/Cable Operators to retransmit and/or carry the
service of the channels on ‘S’ Band in their respective territories. The
services provided by these MSOs/Cable Operators does not come within the
purview of section 194C of the Act, as placing the service of the channel on
‘S’ Band is a Technical Service for which the TDS is required to be deducted as
per the provisions of section 194J of the Act.

The
Hon. Court observed that as per the agreements entered into between the
assessee and the cable operators/ Multi System Operators (MSOs), the cable
operators pay a fee to the assessee for acquiring rights to distribute the
channels. It is pointed out that the cable operators face bandwidth constraints
and due to the same, the cable operators are in a state to decide which channel
will reach the end viewer at what frequency (placement). Accordingly,
broadcasters make payments to the cable operators to carry their channels at a
particular frequency. Fee paid in that behalf is known as “carriage fee” or
“placement fee”. The payment of placement fee leads to placement of channels in
prime bands, which in turn, enhances the viewership of the channel and it also
leads to better advertisement revenues to the TV channel. The placement charges
are consideration for placing the channels on agreed frequency bands. It was
found that, as a matter of fact, by agreeing to place the channel on any
preferred band, the cable operator does not render any technical service to the
distributor/ TV channel. Reference is made to the standard fee paid for basic
broadcasting of a channel at any frequency. It has considered clause (iv) of
the explanation to section 194C which incorporates inclusive definition of
“work”. Clause (iv) includes broadcasting and telecasting including production
of programmes for such broadcasting and telecasting.

The
subtitles are textual versions of the dialogs in the films and television
programmes which are normally displayed at the bottom of the screen. Sometimes,
it is a textual version of the dialogs in the same language. Reliance is placed
on the CBDT notification dated 12^th January 1977. The said
notification includes editing in the profession of film artists for the purpose
of section 44AA of the Act. However, the service of subtitling is not included
in the category of film artists. As noted earlier, subclause (b) of clause (iv)
of the explanation to section 194C covers the work of broadcasting and
telecasting including production of programmes for such broadcasting or telecasting.

The
High Court observed that when services are rendered as per the contract by
accepting placement fee or carriage fee, the same are similar to the services
rendered against the payment of standard fee paid for broadcasting of channels
on any frequency. In the present case, the placement fees are paid under the
contract between the assessee and the cable operators/ MSOs. Therefore, by no
stretch of imagination, considering the nature of transaction, the argument of
the Revenue that carriage fees or placement fees are in the nature of
commission or royalty can be accepted. Thus, the High court concur with the
view taken by the Appellate Tribunal. The Revenue appeals were dismissed.

shailesh.kwebmaker

4 Cessation of liability – waiver of loans availed by assessee from DEG, Germany – in nature of capital liability – hence, the provision of section 41(1) was not applicable.

4. Cessation of liability – waiver of loans availed by assessee from DEG,
Germany – in nature of capital liability – hence, the provision of section
41(1) was not applicable.

CIT-4 vs. Rieter India Pvt. Ltd. [ Income tax Appeal no 477 of 2015
dated : 18/08/2017 (Bombay High Court)].

[ACIT vs. Rieter India Pvt. Ltd. [dated 24/07/2014 ; AY : 2003-04 ;
Mum. ITAT ]

The
assessee company had obtained the term loan from DEG, Germany in the course of
the FY: 1994-95 and 1995-96. The term loan from DEG, Germany has been approved
by the RBI.

The
said RBI approval reveals that the assessee was permitted to raise foreign
currency loan from DEG, Germany for financing the import of capital equipments
for manufacturing of textile spinning machinery and components.

Further,
even the loan agreement with DEG, Germany reflects financing of the project
undertaken by the assessee of manufacturing textile spinning machinery and
components thereof. The said agreement also shows that the loan raised from
DEG, Germany was a long term means of finance for the purposes of funding assessee’s
project of manufacturing textile spinning machinery and components for textile
industries.

The
assessee had placed the list of machineries which have been acquired from
Spindle Fabrik Suessen, Germany and the respective invoices thereof. The
financial statements of the assessee as on 31.03.1995 reveals that a liability
of Rs.32.75 crore was outstanding as a part of current liabilities of Rs.42.60
crore against the name of Spindle Fabrik Suessen, Germany, against the
machineries acquired. The aforesaid position is not disputed by the Revenue.
The loan from DEG, Germany was received on 30.09.1995 and was utilised for
payment of the outstanding liability towards acquisition of fixed assets of
Rs.32.75 crore, apart from meeting other liabilities. It is not in dispute that
assessee has utilied the loan raised from DEG, Germany for payment of Rs.32.75
crore to Spindle Fabrik Suessen, Germany, which was a liability outstanding
against acquisition of fixed assets from the said concern.

The
Dept. contented that discharge of such liability of Spindle Fabrik Suessen,
Germany cannot be treated as utilisation of term loan from DEG, Germany for
acquisition of fixed assets, because the assets already stood acquired prior to
that date.

The
Tribunal held that the payment made by the assessee to Spindle Fabrik Suessen,
Germany towards outstanding liability against acquisition of fixed assets of
Rs.32.75 crore, which is out of the loan funds from DEG, Germany is to be understood as utilisation of loan funds towards
acquisition of capital assets. Therefore, it has to be understood that the loan
availed from DEG, Germany was utilised for the purposes of acquisition of
capital assets, to the above extent.

Further,
the Tribunal held that the subsequent waiver of such an amount, cannot be said to be waiver of a loan raised
for trading activity. The waiver of the principal amount of term loan granted
by DEG, Germany of Rs.29,63,27,000/- was with respect to a loan which was
granted as well as utilised for purchase of capital assets, namely, plant &
machinery. Considered in the aforesaid factual backdrop, the waiver of the
principal amount of loan utilised for acquisition of capital assets and not for
the purposes of trading activity and accordingly the issue was covered in
favour of the assessee by the judgment of the Hon’ble Bombay High Court in
the case of Mahindra and Mahindra Ltd. (2003) 261 ITR 501 (Bom).

The
High Court agreed with the conclusion arrived at by ITAT, the same to be in consonance with the
principle of law laid down by the Division Bench of this Court in the case of Mahindra
& Mahindra Ltd. vs. CIT, (2003) 261 ITR 501. The Revenue in support
of the appeal, however, urged that the Tribunal ignored the law laid down in
another Judgement reported in Solid Containers Ltd. vs. DCIT, 308 ITR 417.
However, the court held that the facts and circumstances involved in the
present case were not identical to those considered in Solid Containers (supra).
The court observed that such facts as
are disclosed in the records of the present case are closer to that of Mahindra
& Mahindra and not Solid Containers. The assessee relied upon a latest
order passed in ITXA No. 1803 of 2014 dated 07^th August 2017, Commissioner
of Income Tax9 vs. M/s. Graham Firth Steel Products (I) Ltd. In the
above view, the appeal of revenue was dismissed.

shailesh.kwebmaker

27 Sections 147 and 148 – Reassessment Sections 147 and 148 – A.Ys. 1999-00 to 2004-05 – Procedure – Failure to furnish copy of reasons recorded for reopening of assessments – Not mere procedural lapse – Notices and proceedings vitiated

27. Reassessment – Sections 147 and 148 – A.Ys.
1999-00 to 2004-05 – Procedure – Failure to furnish copy of reasons recorded
for reopening of assessments – Not mere procedural lapse – Notices and
proceedings vitiated

Principal CIT vs. Jagat Talkies Distributors; 398 ITR 13 (Del):

The
assessee did not file returns u/s. 139(1) of the Act, for the A.Ys. 1999-00 to
2004-05, but had filed returns for earlier years. On the basis of information
received from the banks to which the assessee had let out its property, it was
discovered by the Department that rent had been paid to the assessee by them
after deducting tax at source. The Assessing Officer recorded reasons for
reopening of the assessment u/s. 147 and issued notices u/s. 148 asking the
assessee to file the returns. Pursuant to the notice, the assessee filed
returns which disclosed the income from the property and the business income.
The Assessing Officer initiated the assessment proceedings by issuing notices
u/s. 143(2) and section 142(1) of the Act. The assessee sought supply of the
reasons recorded for the reopening of the assessments. The reasons were not
furnished by the Assessing Officer to the assessee. Since the assessment was
getting time barred, the Assessing Officer made additions on account of the
income from house property and passed separate reassessment orders in respect
of each of the assessment years in question. The Appellate Tribunal held that
the failure to supply the reasons u/s. 148 despite the request made by the
assessee, vitiated the entire reassessment proceedings.

On
appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal
and held as under:

i) The Appellate Tribunal was right in holding
that on account of failure on the part of the Assessing Officer to furnish the
copy of reasons recorded for reopening the assessments u/s. 147, to the
assessee, the reassessment proceedings stood vitiated. Failure by the Assessing
Officer to provide the assessee the reasons recorded for reopening the assessment
could not be treated as a mere procedural lapse.

ii) The assessments for the A.Ys 1999-00 onwards
for five years were sought to be reopened. Having contested those proceedings
for nearly two decades, the Department was not fair in making the offer to
consider the assessee’s objections to the reopening and pass orders thereon. No
reasons could be discerned why the Assessing Officer had failed to furnish to
the assessee the reasons for reopeniong the assessments. It was not disputed
that the assessee had made requests in writing for reasons in respect of each
of the assessment years in question.

iii) Merely because the assessee did not repeat
the request did not mean that it had waived its right to be provided with the
reasons for reopening the assessment. According to the provisions of section
292BB(1) there was no estoppels against the assessee, on account of
participating in the proceedings, as long as it had raised an objection in
writing regarding the failure by the Assessing Officer to follow the prescribed
procedure. No question of law arose.

shailesh.kwebmaker

26 Sections 200, 201 and 221 – Penalty – DS – A.Y. 2009-10 – Foreign company Expatriate employees – Failure to deposit tax deducted at source with Central Government within prescribed time – Penalty – Delay in depositing amount on account of lack of proper understanding of Indian tax laws and compliance required thereunder – Tax deducted at source deposited with interest before issuance of notice – Sufficient and reasonable cause shown by assessee – Deletion of penalty proper

26. Penalty – TDS – Sections 200, 201 and 221 – A.Y.
2009-10 – Foreign company Expatriate employees – Failure to deposit tax
deducted at source with Central Government within prescribed time – Penalty –
Delay in depositing amount on account of lack of proper understanding of Indian
tax laws and compliance required thereunder – Tax deducted at source deposited
with interest before issuance of notice – Sufficient and reasonable cause shown
by assessee – Deletion of penalty proper

Principal
CIT(TDS) vs. Mitsubishi Heavy Industries Ltd.; 397 ITR 521(P&H):

The assessee was a company
registered in Japan. For the F. Y. 2008-09, it deducted tax at source u/s. 200
of the Act, on the salaries paid to its employees sent on secondment to India.
The assessee failed to deposit the amount of tax deducted at source within the
prescribed time limit as laid down under rule 30 of the Income-tax Rules, 1962.
A notice u/s. 201 r.w.s. 221(1) was issued to the assessee for failure to
comply with the provisions of Chapter XVIIB. The assessee, inter alia,
submitted that the delay in depositing the amount was on account of lack of
proper understanding of Indian tax laws and the compliance required thereunder.
It further submitted that the tax deducted at source had been deposited along
with interest on 05/06/2009, before the issuance of the notice. By an order
dated 10/08/2010, the Assessing Officer held that the assessee is deemed to be
an “assessee in default” u/s. 201 and imposed penalty u/s. 221. The
Commissioner (Appeals) cancelled the penalty and held that there was sufficient
and reasonable cause before the Department for the assessee’s non-compliance
with the provisions of tax deducted at source as the deduction of tax at source
involved complexities and uncertainty and that therefore, the order passed by
the Assessing Officer imposing penalty was unsustainable. The Appellate
Tribunal upheld the decision of the Commissioner (Appeals).

On
appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of
the Tribunal and held as under:

The Department had not
been able to show any illegality or perversity in the findings recorded by the
Commissioner (Appeals) which had been affirmed by the Appellate Tribunal. No
question of law arose.

shailesh.kwebmaker

25 Sections 147 and 148 – Reassessment Notice after four years – Failure by assessee to disclose material facts necessary for assessment – No evidence of such failure – Notice not valid

25. Reassessment
– Sections 147 and 148 – A. Y. 2004-05 –
Notice after four years – Failure by assessee to disclose material facts
necessary for assessment – No evidence of such failure – Notice not valid

Anupam
Rasayan India Ltd. vs. ITO; 397 ITR 406 (Guj):

For the A.Y. 2004-05, the
assessment of the assessee company was completed u/s. 143(3) of the Act,
wherein the total income was computed at Nil and the company was allowed to
carry forward the unabsorbed depreciation of Rs. 3.81 lakh. Thereafter the
Assessing Officer issued a notice u/s. 148 dated 28/09/2009 seeking to reassess
the assessee’s income for the A. Y. 2004-05. The assessee filed writ petition
challenging the validity of the notice.

The Gujarat High Court
allowed the writ petition and held as under:

i) While
citing five different reasons for exercising the power of reassessment, the
Assessing Officer in each case had started with the preamble “on going through
the office record it is seen that …” or something similar to that effect. In
essence therefore, all the grounds of reopening emerged from the materials on
record.

ii) In
the background of the documents on record and the scrutiny previously
undertaken by the Assessing Officer it was clear that there was no failure by the
assessee to disclose material facts necessary for assessment. The notice for
reassessment was not valid.”

shailesh.kwebmaker

24 Income Computation and Disclosure Standards (ICDS) are intended to prevail over the judicial precedents that are contrary. Section 145 permits Central Government to notify ICDS but not to bring about changes to settled principles laid down in judicial precedents which seek to interpret and explain statutory provisions contained in the Income-tax Act (Act)

24. Income
Computation and Disclosure Standards (ICDS) are intended to prevail over the
judicial precedents that are contrary. Section 145 permits Central Government
to notify ICDS but not to bring about changes to settled principles laid down
in judicial precedents which seek to interpret and explain statutory provisions
contained in the Income-tax Act (Act)

Chamber of
Tax Consultants vs. UOI; [2017] 87 taxmann.com 92 (Delhi)

The Chamber of Tax
Consultants challenged the validity of Income Computation and Disclosure
Standards (ICDS)notified by the Department. The Delhi High Court held as under:

Article 265 of the
Constitution of India states that no tax shall be levied or collected except
under the authority of law. Section 145(2) does not permit changing the basic
principles of accounting that have been recognised in various provisions of the
Act unless, of course, corresponding amendments are carried out to the Act
itself.

In case the ICDS seeks to
alter the system of accounting, or to accord accounting or taxing treatment to
a particular transaction, then the legislature has to amend the Act to
incorporate desired changes.

The Central Government
cannot do what is otherwise legally impermissible. Therefore, the following
provisions of ICDS are held as ultra vires and are liable to be struck
down:-

(1) ICDS-I
: It does away with the concept of ‘prudence’ and is contrary to the Act
and to binding judicial precedents. Therefore, it is unsustainable in law.

(2) ICDS-II
: It pertains to valuation of inventories and eliminates the distinction
between a continuing partnerships in businesses after dissolution from the one
which is discontinued upon dissolution. It fails to acknowledge that the
valuation of inventory at market value upon settlement of accounts on a partner
leaving which is distinct from valuation of the inventory in the books of the
business which is continuing one.

(3) ICDS-III
: The treatment of retention money under Paragraph 10 (a) in ICDS-III will have
to be determined on a case-to-case basis by applying settled principles of
accrual of income.

a. By deploying ICDS-III in a manner that seeks
to bring to tax the retention money, the receipt of which is
uncertain/conditional, at the earliest possible stage, irrespective of the fact
that it is contrary to the settled position, in law, and to that extent para 10
(a) of ICDS III is ultra vires.

b. Para 12 of
ICDS III, read with para 5 of ICDS IX, dealing with borrowing costs, makes it
clear that no incidental income can be reduced from borrowing cost. This is
contrary to the decision of the SC in CIT vs. Bokaro Steel Limited
[1999] 102 Taxman 94 (SC).

(4) ICDS
IV : It deals with the bases for recognition of revenue arising in the
course of ordinary activities of a person from sale of goods, rendering of
services and used by others of the person’s resources yielding interest,
royalties or dividends.

a. Para 5 of ICDS-IV requires an assessee to
recognise income from export incentive in the year of making of the claim, if
there is ‘reasonable certainty’ of its ultimate collection. This is contrary to
the decision of the SC in Excel Industries [2013] 38 taxmann.com 100.

b. As far as para 6 of ICDS-IV is concerned, the
proportionate completion method as well as the contract completion method have
been recognized as valid methods of accounting under the mercantile system of
accounting by the SC in CIT vs. Bilhari Investment Pvt. Ltd. [2008] 168
Taxman 95. Therefore, to the extent that para 6 of ICDS-IV permits only one of
the methods, i.e., proportionate completion method, it is contrary to the above
decisions, held to be ultra vires.

(5) ICDS-VI
: It states that marked to market loss/gain in case of foreign currency
derivatives held for trading or speculation purposes are not to be allowed that
is not in consonance with the ratio laid down by the SC in Sutlej Cotton
Mills Limited vs. CIT [1979] 116 ITR 1.

(6) ICDS-VII
: It provides that recognition of governmental grants cannot be postponed
beyond the date of accrual receipt. It is in conflict with the accrual system
of accounting. To this extent, it is held to be ultra vires.

(7) ICDS-VIII
: It pertains to valuation of securities.

a. For those entities which aren’t governed by
the RBI to which Part A of ICDS-VIII is applicable, the accounting prescribed
by the AS has to be followed which is different from the ICDS.

b. In effect, such entities are required to
maintain separate records for income-tax purposes for every year, since the
closing value of the securities would be valued separately for income-tax
purposes and for accounting purposes.

shailesh.kwebmaker

23 Income or capital receipt – A. Y. 2004-05 – Sales tax subsidy – Is capital receipt

23. Income or capital receipt – A. Y. 2004-05 –
Sales tax subsidy – Is capital receipt

CIT vs.
Nirma Ltd.; 397 ITR 49 (Guj):

Dealing with the nature of
sales tax subsidy the Gujarat High Court held as under:

i) The
character of the subsidy in the hands of the recipient whether revenue or
capital will have to be determined having regard to the purpose for which the
subsidy is given. The source of fund is quite immaterial.

ii) Where
a subsidy though computed in terms of sales tax deferment or waiver, in essence
was meant for capital outlay expended by the assessee for setting up the unit
in the case of a new industrial unit and for expansion and diversification of
an existing unit, it would be a capital receipt.

shailesh.kwebmaker

22 U/s. 10A – Exemption – A.Y. 2005-06 – Newly established undertaking in free trade zone – Units set up with fresh investments – Units not formed by reconstruction or expansion of earlier business – Business of each unit independent, distinct, separate and not related with other – Assessee entitled to deduction u/s. 10A

22. Exemption
u/s. 10A – A.Y. 2005-06 – Newly established undertaking in free trade zone –
Units set up with fresh investments – Units not formed by reconstruction or
expansion of earlier business – Business of each unit independent, distinct,
separate and not related with other – Assessee entitled to deduction u/s. 10A

CIT vs.
Hinduja Ventures Ltd.; 397 ITR 139; (Bom):

The assessee had four units
engaged in the business of information technology and information technology
enabled services. For the A.Y. 2005-06, the assesee claimed deduction u/s. 10A
of the Act, in respect of unit II and unit III. The Assessing Officer did not
allow deduction u/s. 10A. Even though the remand report was in favour of the
assessee, the Commissioner (Appeals) confirmed the order of the Assessing
Officer. The Tribunal agreed with the remand report of the Assessing Officer
and held that unit II and unit III were entitled to the benefit u/s. 10A of the
Act.

On appeal by the Revenue,
the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The
Assessing Officer in his remand report had specifically observed that both
units were set up with fresh investment. The assessee purchased plant and
machinery for these units and it was not the case that these units were formed
by splitting or reconstructing existing business.

ii) Separate
books of account were maintained. The employees of each of the units were fresh
set of employees and were not transferred from the existing business. The
nature of activity of both units was totally different. The customers of each
unit were completely different and unrelated and both the units had new and
independent sources of income.

iii) Thus,
unit II and unit III were not formed by reconstruction of earlier business nor
were they expansions thereof. Though permission was sought by way of an
expansion, the facts on record categorically and succinctly establish that the
business of unit II and unit II was independent distinct and separate and they
were not related with each other or even with unit I. Therefore, the assessee
was entitled to benefit u/s. 10A of the Act.”

shailesh.kwebmaker

21 u/s. 11 – Charitable purpose – Exemption – A.Y. 2012-13 – Assessee incurring expenditure for upkeep of priests who belonged to particular community – Programmes conducted by assessee open to public at large – Activity of assessee not exclusively meant for one particular religious community – Assessee is entitled to exemption u/s. 11

21. Charitable
purpose – Exemption
u/s. 11 – A.Y. 2012-13 – Assessee incurring
expenditure for upkeep of priests who belonged to particular community –
Programmes conducted by assessee open to public at large – Activity of assessee
not exclusively meant for one particular religious community – Assessee is
entitled to exemption u/s. 11

CIT vs.
Indian Society of the Church of Jesus Christ of Latter day Saints.; 397 ITR 762
(Del):

The assessee was registered
u/s. 12A(a) of the Act. The main object of the assessee was to undertake the
dissemination of useful religious knowledge in conformity with the purpose of
the Church of Jesus Christ of Latter-Day Saints, to assist in promulgation of
worship in the Indian Union, to establish places of worship in the Indian Union,
to promote sustain and carry out programmes and activities of the Church, which
were among others, educational, charitable, religious, social and cultural. A
second amendment to the memorandum and articles of association was adopted by
the assessee and it included providing educational opportunities to its young
members who could not
afford to finance their education. For the A. Y. 2012-13, the
Assessing Officer held that the assessee was incurring expenditure for upkeep
of the priests who belonged to a particular community and did not pursue any
activity in the true nature of charity for the general public directly itself.
The Assessing Officer noted that the expenses incurred by the assessee included
donations for general public utility. However, on the ground that it
constituted “a very small part of the total expenditure”, the Assessing Officer
held that the assessee was not using its funds for public benefit but rather
for the benefit of specified persons u/s. 13(3) of the Act. He held that section
13(1)(b) of the Act would be attracted and it could not be granted exemption
u/s. 11 of the Act. The Tribunal granted exemption u/s. 11 of the Act.

On appeal by the Revenue
the Delhi High Court upheld the decision of the Tribunal and held as follows:

“The Tribunal found that
the programmes conducted by the society were open to the public at large
without any distinction of cast, creed or religion and the benefits of these
programmes held at the meeting house were available to the general public at large.
Since the activity if the assessee, though both religious and charitable, were
not exclusively meant for one particular religious community, the assessee was
rightly not denied exemption u/s. 11 of the Act.”

shailesh.kwebmaker

38. Revision – Scope of power of Commissioner – Section 264 1 – A. Y. 2006-07 – Record includes all records relating to any proceedings – Not confined to return of income and assessment order in case of assessee – Order passed on other party treating lease rent received by it from assessee as its income – Application by assessee for revision on basis of order – Order can be considered and applied to allow deduction in assessee’s hands – Remedy u/s. 264 appropriate

Selvamuthukumar vs. CIT; 394 ITR 247 (Mad):

The petitioner had entered into an agreement with S for the
purchase of its hostel buildings. The hostels were being managed by the
petitioner pending finalisation of sale and depreciation claimed thereupon in
respect of A. Ys. 2003-04 to 2005-06. The transaction could not be completed
and upon cancellation of the agreement the hostels reverted back to S in
December 2005. The petitioner received back only a sum of Rs. 8,63,70,652 as
against the consideration of Rs. 9,79,44,847 paid by it originally.
Accordingly, no depreciation was claimed in the A. Y. 2006-07. For the purpose
of taxability on the transaction, an order u/s. 144A of the Act, 1961 was
passed to the effect that the transaction was one of lease. The Assessing
Officer of S was directed to bring to tax the difference between the amount of
the original sale consideration received and the amount returned by it to the
assessee pursuant to the cancellation of the sale agreement, considering it as
lease rent to be spread over four years pro rata. The order u/s. 144A had
attained finality. Consequently, the assessee claimed the lease rentals paid by
it over the period of the four A. Ys. 2003-04 to 2006-07, as business
expenditure u/s. 37. Notices u/s. 148 were issued to the assessee for
reassessment in respect of the A. Ys. 2003-04 to 2005-06 and the claims for
depreciation and the claim of lease rentals as business expenditure were allowed
in the reassessment. The assessee filed revision petition u/s. 264 before the
Commissioner for deduction of lease rentals for the A. Y. 2006-07. The
Commissioner rejected the application on the ground, that, (a) the order u/s.
144A was passed in the case of S and as such was not relevant in the case of
any other assessee and, (b) the power to revise u/s. 264 was specific to
consideration of any issue discussed or decided in an order of assessment which
was not the case of the assessee. He was of the view that the contention raised
by the assessee did not emanate from either the return filed by him or the
order of assessment and therefore, jurisdiction u/s. 264 could not be invoked.

The Division Bench of the Madras High Court allowed the writ
petition filed by the assessee and held as under:

“i) The embargo placed on an Assessing Officer in
considering a new claim would not impinge on the power of the appellate
authority or revisional authority.

ii) Section 264 of the Act has been inserted as a
parallel and alternate remedy and relief available to an assessee. It provides
powers to the Commissioner to make or cause such enquiry to be made as he
thinks fit in dealing with an application for revision. The power u/s. 264 is
wide and extends to passing any order as the Principal Commissioner or
Commissioner may think fit after making an inquiry and subject to the
provisions of the Act, suo moto or on an application by the assessee.

iii) The order passed u/s. 144A of the Act in the
case of S had relevance in the assessment of the assessee for the reason that
the transaction dealt with in that order was one between S and the assessee.
Effect had been given to the directions in the order u/s. 144A in the
assessment of S as well as in the assessment of the assessee for the A. Ys.
2003-04 to 2005-06. There was no reason why a different conclusion was taken
for the A. Y. 2006-07, when the transaction, the facts, the circumstances and
the law remained identical and unchanged throughout. Even applying the
principle of consistency, the treatment accorded to an issue that arose in a
continuing transaction should be consistent for the entire period.

iv) Section 264 provides powers to the Commissioner
to make or cause such inquiry to be made as he thought fit while deciding an
application for revision which included taking into consideration, the relevant
material that had a bearing on the issue under consideration, which in the
assessee’s case, include the order issued to S u/s. 144A. The order u/s. 144A
ought to have been taken into consideration and applied.

v) The order u/s. 264 was appropriate and ought
to have been exercised in favour of the assessee by the Commissioner.”

shailesh.kwebmaker

37. Penalty – Block assessment – Sections 132(4), 158BC and 158BFA(2) – On mutual understanding with department, director of assessee – company filed return showing undisclosed income and assessee filed Nil return – Undisclosed income assessed finally partly in hands of director and partly in hands of assessee – Penalty not leviable on assessee

CIT vs. Saraf Agencies Ltd.; 394 ITR 444(Cal):

Pursuant to a search and seizure, the assessee company and
its director filed returns. On a mutual understanding with the Department, the
director of the assessee-company filed return showing undisclosed income of Rs.
2,02,66,971 and the assessee filed Nil return. The Assessing Officer assessed
the undisclosed income of the assessee company at Rs. 491.50 lakh and initiated
penalty proceedings u/s. 158BFA(2) of the Act, 1961. The undisclosed income of
the assessee was reduced to Rs. 37 lakh by the Commissioner (Appeals). The
Assessing Officer imposed penalty u/s. 158BFA(2) on the undisclosed income of
Rs. 37 lakh. The Commissioner (Appeals) deleted the penalty. The Commissioner
(Appeals) held that the developments in the course of the assessment
proceedings did not modify the quantum of undisclosed income but only the
proportion of distribution of the undisclosed sum between the assessee and the
director. He also held that the director was acting upon some kind of understanding
about the person who should make the declaration and that the levy of penalty
on the technical ground that the assessee declared nil undisclosed income u/s.
158BC of the Act and that there was some income found after the appellate
decision, was not justified and cancelled the penalty. The Tribunal upheld the
order of the Commissioner (Appeals).

On appeal by the Revenue, the Calcutta High Court upheld the
decision of the Tribunal and held as under:

“i) The imposition of penalty, when the returns of
undisclosed income were filed in consultation with the Department, was
inequitable. What had emerged after the search and seizure was that the
Department itself was unable to conclude whether the undisclosed income
belonged to the assessee or its director. It was on the basis of an
understanding arrived at between the parties that the director had made a
disclosure of Rs. 2.16 crore and the assessee filed a nil return. Finally, the
undisclosed income of the director was assessed at Rs. 2.02 crore approximately
and that of the assessee at Rs. 37 lakh.

ii) Both
the Commissioner (Appeals) and the Tribunal had held that in the facts of the
case no penalty should be levied upon the assessee. The understanding arrived
at between the Department, the assessee and the director had not been disproved
nor had that finding been assailed. The cancellation of penalty was justified.“

shailesh.kwebmaker

36. Income- Exempt income – A. Y. 1991-92 – When the royalty and interest income were claimed as exempt on accrual basis in earlier years, forex fluctuation gain or loss arising on receipt of such income in subsequent period could not also be considered as exempt. Such gain or loss could not be considered as part of royalty or interest income and it should be taxed on basis of AS-11

Ballarpur Industries Ltd. vs. CIT; [2017] 84 taxmann.com
61 (Bom)

Assessee-company had accounted for royalty and interest
income on accrual basis, which were exempt under the then India-Malaysia DTAA.
During the subsequent period (A. Y. 1991-92), the assessee had received such
income that was more than what was accounted in earlier years due to exchange
differences. The assessee argued that the exchange difference should be treated
as part of royalty and interest income. Accordingly, it would be exempt from
tax as per India-Malaysia DTAA. The Assessing Officer did not accept the
assessee’s claim and assessed the exchange difference as taxable income. The
Tribunal upheld the decision of the Assessing Officer.

On reference by the assessee, the Bombay High Court upheld
the decision of the Tribunal and held as under:

“i) Gain or loss arising on account of foreign
exchange variation could not bear the same character of exempt income

ii) The revenue had correctly placed reliance on
AS 11 which indicates that benefit derived on account of currency fluctuation
after the year of accrual is to be considered as income or expense in the
period in which they arise

iii) This gain/loss on account of foreign exchange
fluctuation is not part of royalty and interest nor is it any accretion to it.
In this case, it is the generation of further income which is taxable in the
subject assessment year when the variation in foreign exchange has resulted in
further income in India

iv) Thus,
differential amount arising on account of exchange fluctuation was an extra
income which would be subject to tax in the year in which it was received.”

shailesh.kwebmaker

Can Box Collection By Charitable/Religious Trusts Be In The Nature Of Corpus?

Issue for
Consideration

Voluntary contributions received by a
charitable or religious trust are taxable as its income, by virtue of the
specific provisions of section 2(24)(iia) of the Income-tax Act, 1961, subject
to exemption under sections 11 and 12. Section 12(1) provides that any
voluntary contribution received by a trust created wholly for charitable or religious
purposes (not being contributions made with a specific direction that they
shall form part of the corpus of the trust), shall be deemed to be income
derived from property held under trust wholly for charitable or religious
purposes for the purposes of section 11. Section 11(1)(d) provides for a
specific exemption for income in the form of voluntary contributions made with
a specific direction that they shall form part of the corpus of the trust.
Therefore, on a comprehensive reading of sections 2(24), 11 and 12, it can be inferred that corpus donations are
entitled to the benefit of exemption, irrespective of whether the trust has
applied 85% of the corpus donations for charitable or religious purposes, or not.

Many charitable or religious trusts keep
donation boxes on their premises for donors to donate funds to such trusts.
Such donation boxes can be seen in various temples, hospitals, etc. At
times, some of the donation boxes have an inscription or a sign nearby stating
that the donation made in that particular box would be for a particular capital
purpose, or that it is for the corpus of the trust. The question has arisen
before the various benches of the Tribunal as to whether such amounts received
through the donation boxes having such inscription or sign would either not be
regarded as income, being receipts in the nature of contributions to corpus, or
even otherwise be eligible for exemption as corpus donations u/s. 11(1)(d), or
whether such amounts of box collection would be voluntary contributions in the
nature of regular income of the trust.

While the Chandigarh bench of the Tribunal
has taken the view that such box collections are corpus donations, and
therefore not income of the trust, the Mumbai and Calcutta benches of the
Tribunal have taken the view that such box collections could not be regarded as
corpus donations.

Prabodhan Prakashan’s case

The issue first came up before the Bombay
bench of the Tribunal in the case of Prabodhan Prakashan vs. ADIT 50 ITD
135.

In that case, the main object of the
assessee was promotion and propagation of ideologies, opinions and ideas for
furtherance of national interest, and for this purpose, publishing of books,
magazines, weeklies, dailies and other periodicals, as also establishing and
running printing presses for this purpose. Contributions were invited by the
assessee from the public towards the corpus fund of the trust through an appeal
as under:

“Establishing a firm financial foundation
for Dainik Saamana and Prabodhan Prakashan is in your hands. For this strong
foundation, we are establishing a Corpus Fund. Offeratory boxes for the corpus
will be placed in today’s meeting and meetings to be held in future. In order
to assist our activities, which will always have a nationalistic fervour and social
relevance, it is our earnest request that you contribute to the Corpus Fund
Offeratory boxes to the best of your ability”.

The words “donations towards corpus” were
written on the offeratory boxes. The boxes were opened in the presence of
Trustees, and the amount of Rs. 13,77,465 found in these boxes was credited to
the account “Donations Towards Corpus”.

Before the assessing officer, it was claimed
that the donations were made to the corpus of the trust, and were therefore
exempt u/s. 11(1)(d). The assessee was asked to furnish specific letters from
the donors confirming that they had given directions that the donations were to
be utilised towards the corpus of the trust. Such letters could be furnished
only for donations of Rs. 3,90,277, but not for the balance of Rs. 9,86,188.
For such balance amount, it was submitted that the Income-tax Act did not
specify that the directions of the donors should be in writing. It was claimed
that in view of the appeal issued for donations, and the words “donations
towards corpus” on the offeratory boxes, it should be held that specific
directions were indeed given by the donors. The assessing officer did not
accept this contention, and treated donations of Rs. 9,86,188 as ordinary
contributions, which were taxable.

The Commissioner(Appeals) referred to the
provisions of section 11(1)(d), according to which, income in the form of
voluntary contributions made with the specific direction that they shall form
part of the corpus of the trust, would not be included in the total income of
the person in receipt of the income. According to him, a specific direction of
the donor was necessary, and the circumstances relevant to prove such direction
included the need to establish the identity of the donor, which was not established
in this case. According to the Commissioner(Appeals), merely writing “donations
towards corpus” on the offeratory boxes was not sufficient, since many of the
donors might not even know as to what was the corpus of the trust. The
Commissioner(Appeals) was of the view that the burden lay upon the assessee to
prove that the donations were received towards the corpus of the trust, and
that burden had not been discharged. He therefore, upheld the action of the
assessing officer in treating the donations of Rs. 9,86,188 as voluntary
contributions in the nature of income.

Before the Tribunal, on behalf of the
assessee, it was argued that the appeal had been issued for donations towards
the corpus, and the offeratory boxes had the inscription that the donations
were towards the corpus. The trust records of collection showed that the
donations were credited to the corpus account. It was argued that there was no
provision in the Act that the specific directions from the donor should be in
writing, and that the directions were to be inferred from the facts and
circumstances.

Considering the provisions of section
11(1)(d), the Tribunal noted that it was true that there was no stipulation in
that section that the specific directions should be in writing. It agreed that
it should be possible to come to a conclusion from the facts and circumstances
of the case, whether a specific direction was there or not, even where there
were no written directions accompanying the donation. However, according to the
Tribunal, at the same time, it needed to be kept in mind that the specific
direction was to be that of the donor, and not that of the donee. It was not
sufficient for the donee alone to declare that the voluntary contributions were
being allocated to the corpus, and there should be evidence to show that the
direction came from the donor.

In the opinion of the Tribunal, when there
was no accompanying letter to the effect that the donation was towards corpus,
at least such subsequent confirmation from the donor was a necessity. In the
case before it, such subsequent confirmation was also absent, and all that was
there, according to the Tribunal, was the intention of the donee and the actual
carrying out of that intention.

The Tribunal therefore held that the facts
did not fulfil the requirement of section 11(1)(d), and that it could not be
said that there was a specific direction from the donor to use the contribution
towards the corpus of the trust. It accordingly held that the amount was not
exempt u/s. 11(1)(d).

A similar view was taken by the Calcutta
bench of the Tribunal in the case of Shri Digambar Jain Naya Mandir vs. ADIT
70 ITD 121, which was the case of a religious trust running a temple, which
had kept two boxes in the premises of the temple, one marked “Corpus Donations”
and the other marked as “Donations”. In that case, the Tribunal held that the
assessee had not made out that the donors were able to give the direction
before/at the time of donation, and that for an ordinary devotee, it was not
possible to distinguish the corpus and non-corpus funds.

Shree Mahadevi Tirath Sharda Ma Seva Sangh’s
case

The issue again came up before the
Chandigarh bench of the tribunal in the case of Shree Mahadevi Tirath Sharda
Ma Seva Sangh vs. ADIT 133 TTJ 57(Chd.) (UO).

In the case, the assessee was a society
registered under the Societies Registration Act, 1860 and u/s. 12AA of the
Income-tax Act, 1961, running a temple, Vaishno Mata Temple, at Kullu. A
resolution had been passed whereby the different boxes were decided to be kept
in the temple premises for enabling the devotees to make donations according to
their discretion. It included keeping of a box for collection of donations,
which were to be used for undertaking construction of building. Any
devotee/donor desirous of making a donation towards construction of buildings
would put the money in this box. In the temple premises, donation boxes were
kept with different objectives. One donation box was kept for “Construction of
Building”, and other boxes for donations meant for langar and general purposes.
At specified intervals, the boxes were opened and the amounts collected were
put into respective accounts. The donations were duly entered in either the
building fund donation register or the normal donation account, and thereafter
entered in the books of account accordingly.

The return of income was filed, claiming
exemption for donations received in the box kept for donations for construction
of building. The donations were reflected in the balance sheet under the head
“Donation for Building Construction with Specific Directions from Individuals”.

The assessing officer however, treated such
donations of Rs. 40,55,480 as donations, and not as receipts towards corpus,
and included the donations in the total income liable to tax. It was done on
the reason that the assessee did not possess any evidence to show that the
donation credited under the Building Fund had been donated by donors with the
specific direction to utilise the same for building construction only.

The Commissioner(Appeals) rejected the
appeal of the assessee, on the ground that the assessee failed to provide the
requisite details or any documentary evidence to prove that the donations were
made with specific directions for construction of building.

Before the Tribunal, it was pointed out that
the assessee had collected donations earmarked for being spent on construction
of building in the same manner as in the past years. It was pointed out that
the amount was credited to the Building Fund in the balance sheet, which also
included the opening balance, and, on the assets side, the assessee had shown
the expenditure on construction of the building. The amount had been spent
exclusively towards construction of the building, on which there was no
dispute. The fact that the donation boxes were kept with different objectives
in the temple premises was demonstrated with the help of photographs and
certificates from the local gram panchayat, Councillor, etc. It was
claimed that the certificates testified the system evolved by the assessee
since earlier years for collection of donations towards construction of
building.

It was further argued that in view of the
nature of collection undertaken by the assessee, which was supported by past
history, the assessing officer was not justified in insisting on production of
specific names of donors.

On behalf of the revenue, it was pointed out
that the assessee could not furnish the complete names and addresses of the
donors who had made the donations with specific directions for building
construction, though such details were asked for during the course of
assessment proceedings. It was only because such information was not available
that the amounts had been treated as voluntary/general donations, and not as
corpus donations.

The Tribunal considered the various facts
placed before it, supported by photographs, testimony of the local gram
panchayat, resolution, the fact that different boxes were kept for separate
purposes, the utilisation of the Building Fund, etc. It noted the fact that the
assessee had received general donations of Rs. 19,53,094 and other incomes,
which were credited to the income and expenditure account.

Analysing the provisions of section 12(1),
the Tribunal noted that any voluntary contributions made with a specific
direction that they shall form part of the corpus of the trust were not to be
treated as income for the purposes of section 11. It observed that the moot
question was whether or not the manner in which the assessee had collected the
donations could be said to signify a direction from the donor that the funds
were to be utilised for the construction of building. It noted that the manner
in which the specific direction was to be made had not been laid down in the
Act or the Rules; there was no method or mode prescribed by law of giving such
directions. Therefore, according to the Tribunal, it was in the fitness of
things to deduce that the same was to be gathered from the facts and
circumstances of each case.

The Tribunal noted that the resolution of
the Society clearly showed that a donation box had been kept in the temple
premises with the appeal that the amount collected would be spent for building
construction. The devotees visiting the temple or other donors were depositing
money in the donation box, which was to be utilised for construction of
building only. The assessing officer had not disputed the manner in which such
donations had been collected by the assessee. The only dispute was that the
assessee could not provide the names and addresses of individual donors who had
contributed towards Building Fund. According to the Tribunal, since the
donations were being collected from the devotees at large, the insistence of
the assessing officer of production of individual names and addresses was not
justified. Further, the bona fides of such practice being carried out by the
assessee, either in the past or during the year under consideration, was not doubted.

Therefore, in the opinion of the Tribunal,
having regard to the facts and circumstances of the case, the donations of Rs.
40,55,480 collected by the assessee were to be considered as carrying specific
directions for being used for construction of the building. Ostensibly, the
devotees putting money in the donation box did so in response to the appeal by
the society that the amounts collected would be used for construction of
building. Under such circumstances, the Tribunal was of the view that the assessee’s
plea, that these amount should be taken as donations towards corpus, was
reasonable.

The Tribunal accordingly held that such
amounts received in the box for construction of building would form part of the
corpus of the Society, and would not constitute income for the purposes of
section 11.

Observations

When one analyses both these decisions
(Prabodhan Prakashan & Shree Mahadevi Tirath Sharda Ma Seva Sangh), one
realises that the common thread running through both these decisions is that
both confirm that the direction of the donors, that the amount of donation is
towards corpus need not be in writing, and that it is sufficient if the
surrounding circumstances indicate that the donors intended to give the funds
put in the boxes for corpus/capital purposes, for such amounts to be treated as
corpus donations. In Prabodhan Prakashan’s case, the Tribunal went further and
held that there should be evidence to show that the direction came from the
donor, while in Shri Digambar Jain Naya Mandir’s case, the Tribunal observed
that the assessee had not made out that the donors were able to give the
direction before or at the time of donation to the corpus funds. Both the
Bombay and Calcutta decisions, therefore, placed the onus on the assessee to
show the existence of the directions from the donors.

A view similar to the Chandigarh bench’s
view has been taken by the Karnataka High Court in the case of DIT vs. Sri
Ramakrishna Seva Ashrama 357 ITR 731, where the High Court held that it was
not necessary that a voluntary contribution should be made with a specific
direction to treat it as corpus. If the intention of the donor was to give that
money to a trust, which would be kept in a deposit, and the income from the
same was to be utilised for carrying on a particular activity, it satisfied the
definition part of the corpus. It further held that whether a donation was in
the nature of corpus or not was to be gauged from the intention of the donor
and how the recipient treated the receipt. In that case, the assessee had
received various donations for Rural Health Project, which were kept in fixed
deposits. The income derived from those deposits was utilised for carrying on
its various rural activities.

Similarly, in
the case of Shri Vasu Pujiya Jain Derasar Pedhi vs. ITO 39 TTJ (Jp) 337,
the receipts by the trust were issued under the head “Mandir Nirman”, and the
dispute was whether the donations could be said to be received with specific
directions that they shall form part of the corpus of the trust. It was held by
the Jaipur bench of the Tribunal that the donations were to be treated as
corpus donations.

In the case of Agnel Charities (Agnel
Sewa Sang) vs. ITO 31 TTJ (Del) 160, the assessee had staged a drama for
raising funds for construction of a school building. The circular issued
relating to the drama mentioned that the assessee was inviting subscriptions
and donations for school building. The Delhi bench of the Tribunal held that
such donations received were corpus donations, entitled to exemption.

In the case of N. A. Ramachandra Raja
Charity Trust vs. ITO 14 ITD 230 (Mad), the receipts given to the donors
had a rubber stamp “towards corpus only” on each of the receipts. In addition,
certificates were obtained from some of the donors confirming the fact that the
donations were towards corpus. In that case, the Madras bench of the tribunal
held that it was clear from the inception that the amounts received by the
assessee and held by it were under an obligation to appropriate the same
towards the corpus of the trust alone. While so holding, the tribunal relied
upon the decision of the Supreme Court in the case of CIT v. Bijli Cotton
Mills 116 ITR 60, whereof the Supreme Court confirmed that certain amounts
received by the assessee and shown in the bills issued to the customers in a
separate column headed “Dharmada” was not income of the assessee, since right
from inception, these amounts were received and held by the assessee under an
obligation to spend the same for charitable purposes only, being earmarked by
the customers for Dharmada.

In Prabodhan Prakashan’s case, the
Tribunal, perhaps, was not justified in inferring that the specific direction in that case was
that of the donee, and not that of the donor. Perhaps, in that case, the
tribunal was not convinced by the evidence placed before it that the donor was
aware of the fact that the donation was being given for a capital purpose.

The observation of the Tribunal in Shri
Digambar Naya Mandir’s case that, for an ordinary devotee, it was not
possible to distinguish the corpus and non-corpus funds did not seem to be
justified. While a devotee may not know what is the meaning of corpus, a
devotee would certainly be aware of the purpose for which his donation into a
particular box would be used, particularly when there are clear indications in
the form of inscription or signs on the box or near the box stating the
purpose. This would be all the more relevant when there are boxes for more than
one purpose placed in the same premises, some for corpus purposes and others
for non-corpus purposes. By putting his donation in a particular box, the
devotee should be regarded as having exercised his option as to how his
donation is to be used.

Therefore, where a trust receives certain
box collections for capital purposes, the surrounding circumstances clearly
indicate that the donor intended the amounts deposited in the box to be
utilised for such capital purposes, and such receipts are bona fide for
such capital purposes (as perhaps indicated by fairly large collection for
non-corpus purposes as well), such collections should certainly be
regarded as corpus
donations eligible for
exemption u/s. 11(1)(d).

All the above decisions were rendered in the
context of the law prior to the insertion of section 56(2)(x), and therefore
the Tribunals did not have the opportunity to consider taxation of such box
collections under that section. Section 56(2)(x) provides that where any person
receives any sum of money aggregating more than Rs. 50,000 in a year from any
persons, such amount is chargeable to income-tax as Income from Other Sources.
There is no exemption for amounts received by a charitable or religious trust.
After the insertion of section 56(2)(x), would such box collection be taxable
under that section?

If one looks at section 2(24)(iia) and
section 12(1), these operate specifically to tax voluntary contributions
received by a charitable or religious trust as its income. Being specific
sections, these would prevail over the general provisions of section 56(2)(x),
which apply to all assessees. Therefore, in our view, section 56(2)(x) would
not apply to a charitable or religious trust, the specific exclusions u/s.12(1)
cannot be taxed by roping in the general provisions of section 56(2)(x).

One more section which needs to be kept in
mind, in the context of box collections, is section 115BBC. This section, which
does not apply to wholly religious trusts, provides that, where the total
income of an assessee referred to in section 11, includes any anonymous
donations, such anonymous donations in excess of the specified limit, shall be
chargeable to tax at the rate of 30%. Box collection of wholly religious trusts
would not be taxable under this section, whereas only donations made for the
purposes of a medical institution or educational institution would be taxable
in case of partly charitable and partly religious trusts. While this section
would apply to normal box collections of charitable trusts, the issue is
whether it would apply to box collections for a capital purpose of such
charitable trusts, which would otherwise be regarded as corpus donations?

Given the specific exclusion in section
12(1) for corpus donations, a view is possible that such corpus donations (box
collections) are capital receipts, which do not fall within the domain of
income of a charitable trust at all, and that therefore, the provisions of
section 115BBC do not apply to such box collections for capital purposes. In
fact, in DCIT vs. All India Pingalwara Charitable Society 67 taxmann.com
338, the Amritsar bench of the Tribunal took a view that section 115BBC
does not apply at all to box collections of genuine charitable trusts.
According to the Tribunal, the object of the section was to catch the
‘unaccounted money’ which was brought in as tax free income in the hands of
charitable trusts, and this section was never meant for taxing the petty
charities. The Legislature intended to tax the unaccounted money or black money
which was brought in the books of charitable trusts in bulk, and not to tax the
small and general charities collected by genuine charitable trusts.

In Gurudev Siddha Peeth vs. ITO 59
taxmann.com 400, the Mumbai bench of the Tribunal also held that amount of
offerings put by various devotees in donation boxes of the assessee-trust, a
sidh peeth/deity, could not be treated as anonymous donations taxable u/s.
115BBC merely on ground that assessee had not maintained any records of such
offerings. According to the Tribunal, it is clear that the provisions of
section 115BBC(1) will not apply to donations received by the assessee in
donation boxes from numerous devotees who have offered the offerings on account
of respect, esteem, regard, reference and their prayer for the deity/siddha
peeth. Such type of offerings are made/put into the donation box by numerous
visitors and it is generally not possible for any such type of institutions to
make and keep record of each of the donors, with his name, address etc.
This section is meant to curb the flow of unaccounted money into the system,
with a modus operandi to introduce such black money into accounts of
institutions such as university, medical institutions, where there is a problem
relating to the receipt of capitation fees, etc.

Therefore, a view is possible that section
115BBC does not apply at all to box collections of genuine charitable trusts.

shailesh.kwebmaker

The Finance Act 2018

1. INTRODUCTION:

1.1 The Finance Minister, Shri Arun Jaitley, has
presented his last full Budget of the present Government for 2018-19 in the
Parliament on 1^st February, 2018. This Budget can be described as
Pro-Poor and Pro-Farmer Budget. The Budget contains several schemes for
Agriculture and Rural Economy, Health, Education and Social Protection,
Encouragement to Medium, Small and Micro Enterprises (MSME), Employment
Generation, Improving Public Service Delivery etc.

1.2 The Finance Minister has summarized his views
about economic reforms in Para 3 of his Budget Speech.

1.3 In the field of Direct Taxes he has made some
amendments in the Income-tax Act. These amendments can be classified under the
following heads.

(i) Tax Incentives for
promoting post-harvest activities of
agriculture;

(ii) Employment Generation;

(iii) Incentive for Real
Estate;

(iv) Incentive to MSMEs.

(v) Relief to Salaried
Taxpayers;

(vi) Relief to Senior
Citizens;

(vii) Tax Incentives for
International Financial Services Centre (IFSC)

(viii) Measures to Control cash
Economy,

(ix) Rationalisation of Long
term Capital Gains Tax.

(x) Health and Education Cess

(xi) E-Assessments

1.4 Out of the above, the
major amendment in the Income tax Act relates to levy of Long-term Capital
Gains Tax on Shares and Units of Equity Oriented Mutual Funds on which
Securities Transaction Tax (STT) is paid. Hitherto, this long term capital gain
was exempt from tax. This one proposal will bring in about Rs.20,000 crore
additional revenue to the Government. The logic for this new levy is explained
in Para 155 of the Budget Speech.

1.5 This year’s Budget and
the Finance Bill, 2018, has been passed, with some procedural amendments,
suggested by the Finance Minister, by the Parliament without any debate. The
Finance Act, 2018, has received the assent of the President on 29^th
March, 2018. Most of the amendments in the Income-tax Act have come into force
from 1.4.2018 i.e. F.Y. 2018-19 (A.Y. 2019-20). In this Article some of the
important amendments in the Income-tax Act have been discussed.

2. RATES OF TAXES:

2.1 There are no changes in
tax rates or tax slabs in the case of non-corporate assessees. There is no change
in the rates of surcharge applicable to all assessees. Similarly, there is no
change in the rebate from tax allowable u/s. 87A of the Income-tax Act.

2.2 The existing Education Cess (2%) and Secondary and Higher
Education Cess (1%) levied on tax payable has now been replaced from A.Y.
2019-20 by a new cess called “Health and Education Cess” at 4% of the tax
payable by all assessees.

2.3 In the case of domestic companies, there are some modifications
as under w.e.f. A.Y. 2019-20:

(i) At present, where the
total turnover or gross receipts of a company does not exceed Rs. 50 cr., in
F.Y. 2015-16, the rate of tax is 25%. From A.Y. 2019-20, it is provided that
where the turnover or gross receipts of a company does not exceed Rs. 250 cr.,
in F.Y. 2016-17, the rate of tax will be 25%. This will benefit many small and
medium size companies.

(ii) In the case of a
Domestic company which is newly set up on or after 1.3.2016, which complies
with the provisions of section 115BA, the rate of tax is 25% at the option of
the company.

(iii) In all
other cases, the rate of tax will be 30%.

2.4 There are no changes in the rates of tax and
surcharge chargeable to foreign companies. The rate of education cess is
increased from 3% to 4% as stated above.

2.5 As stated earlier, one major amendment this
year relates to levy of tax on long term capital gain on transfer of shares and
units of equity Oriented Mutual Funds on which STT is paid. Hitherto, this
capital gain was exempt from tax. By insertion of a new section 112A, it is now
provided that in respect of transfer of such shares or units on or after
1.4.2018, the long term capital gain in excess of Rs. 1 Lakh will be taxable at
the rate of 10% plus applicable surcharge and cess.

2.6 There is no change in the rate of Minimum
Alternate Tax (MAT) chargeable to companies. However, in the case of a Unit
owned by a non-corporate assessee located in an International Financial
Services Centre (IFSC), the rate of AMT payable u/s. 115 JC in respect of
income derived in foreign currency has been reduced from 18.5% to 9% plus
applicable Surcharge and Cess.

2.7 Section 115-O is amendment to levy tax at
the rate of 30% plus applicable
surcharge and cess on a closely held company in respect of any loan given to a
related party to whom section 2(22) (e) applies. Hitherto, tax was payable by
the person receiving such loan u/s. 2(22)(e). This burden is now shifted to the
company giving such loan and the person receiving such will not be liable to
pay any tax from A.Y. 2019-20.

2.8 Section 115R has been amended to provide for
levy of tax on Mutual Fund in aspect of income distributed to Unit holders of
equity oriented mutual fund. This tax is at the rate of 10% plus applicable
surcharge and cess.

2.9 In view of the above, the effective maximum
marginal rate of tax (including surcharge and Health & Education Cess) for
A.Y. 2019-20 will be as under:

Assessee

Up to Rs. 50 lakhs

Above Rs.50 lakhs and up to Rs.1 crore.

Above Rs. 1 cr., and up to Rs.10 cr.

Above
Rs.10 cr.

Individual,
HUF etc.

31.2%

34.32%

35.88%

Firms
(including LLP)

31.2%

34.944%

Domestic
Companies with turnover / gross receipts in F.Y.2016-17 not exceeding Rs. 250
cr.

26%

27.82%

29.12%

New
Domestic Companies complying with the conditions of section 115BA

26%

27.82%

29.12%

Other
Domestic Companies

31.2%

33.384%

34.944%

Foreign
Companies

41.6%

42.432%

43.68%

2.10 Commodities
Transaction Tax:

The Finance
Act, 2013, has been amended to provided that the Commodities Transaction Tax
(CTT) shall be payable at the following Rates w.e.f. 1.4.2018.

Sr. No.

Taxable
Commodities Transaction

Rate

Tax payable
by

Sale of a
Commodity derivative

0.01%

Seller

Sale of an
option on Commodity derivative

0.05%

Seller

Sale of an
option on commodity derivative, where option is exercised

0.0001%

Purchaser

3. TAX DEDUCTION AT SOURCE:

(i) 7.75% Savings (Taxable) Bonds, 2018 – Section 193

It is now provided
tax shall be deducted at source on interest exceeding Rs. 10,000/- payable on
the above Bonds at the rates provided in section 193.

(ii) Interest on Deposits by Senior Citizens – Section
194A

Section 194A has
been amended w.e.f. 1.4.2018 to provide that tax will not be deducted at source
by a Bank, Co-operative Bank or Post Office in respect of interest upto Rs.
50,000/- on a deposit made by a Senior Citizen.
It may be noted that under the newly inserted section 80TTB, it is now
provided that in the case of a Senior Citizen, deduction of interest up to Rs.
50,000/- received from a bank, co-operative bank or post office on all deposits
will be allowed for computing the Total Income.

4. EXEMPTIONS
AND DEDUCTIONS:

4.1 Exemption
on withdrawal from NPS – Section 10(12A)

At present,
withdrawal by an employee contributing to National Pension Scheme (NPS),
referred to in section 80CCD, on closure of account or opting out of the Scheme
is exempt from tax to the extent of 40% of the amount withdrawn on closure of
the account or opting out of the scheme.

The benefit of
this exemption u/s. 10(12A) is now extended to all other persons who are
subscribers to the NPS from the A.Y. 2019-20 (F.Y. 2018-19). It may be noted
that the exemption given for partial withdrawal from NPS to employees u/s.
10(12B) from A.Y. 2018-19 has not been extended to other assessees.

4.2 Exemption from Long term Capital Gains Tax –
Section 10(38)

At present, long
term capital gain on transfer of equity shares of a company or units of equity
oriented Mutual Fund is exempt from tax u/s. 10(38) if STT is paid. This
exemption is now withdrawn by amendment of this section w.e.f. 1.4.2018. This
issue is discussed in detail in Para 9 under the head “Capital Gains.”

4.3 Deduction
from Gross Total Income – Section 80AC

At present,
Section 80AC provides that deductions u/s. 80 – IA, 80-IAB, 80-IB, 80-IC, 80-ID
or 80-IE will not be allowed if the assessee has not filed the return of Income
before the due date mentioned u/s. 139(1) of the Income tax Act. This section
is now amended w.e.f. A/Y: 2018-19 (F.Y:2017-18) to provide that deduction in
respect of Income under sections 80 H to 80 RRB (Part “C” of Chapter VIA) will
not be allowed if the return of Income is not filed within the time allowed
u/s. 139(1).

4.4 Deduction
for Health Insurance Premium – Section 80D

At present, the amount paid for health
insurance premium, preventive health
check-up or medical expenses is allowed to Senior Citizens upto Rs.
30,000/. This limit is increased, by
amendment of Section 80D from A.Y. 2019-20 (F.Y. 2018-19), to Rs. 50,000/-.
This amendment applies to all Senior Citizens (including Very Senior Citizens).

A new subsection
(4A) is added to provide that where the amount has been paid in Lump Sum to
keep in force an Insurance Policy on the health of the specified person for
more than a year, then deduction will be allowed in each year, on proportionate
basis, during which the insurance is in force.

4.5 Deduction for
medical treatment for Special Diseases – Section 80DDB

At present,
Section 80DDB provides for deduction for medical expenses in respect of certain
critical illness, as specified in Rule 11DD. In the case of a Senior Citizen
this deduction is allowable upto Rs. 60,000/-. In the case of a very Senior
Citizen, the limit for this deduction is Rs. 80,000/-. By amendment of this
section from A.Y. 2019-20 (F.Y.
2018-19), this limit for Senior Citizens (including very Senior Citizens) is
increased to Rs.1,00,000/-.

4.6 Incentives
to Start – Ups – Section 80 IAC

Section 80IAC
provides for 100% deduction of profits of an eligible start-up for three
consecutive years out of seven years beginning from the year of its
incorporation. This section is amended
with retrospective effect from A.Y. 2018-19 (F.Y. 2017-18). Some of the
conditions for eligibility of this exemption have been relaxed as under.

(i) At present, this benefit is available to an
eligible start-up incorporated between 01.04.2016 to 31.03.2019. Now it is
provided that this benefit can be claimed by a start-up incorporated between
01.04.2016 to 31.03.2021.

(ii) At present, this benefit is available to an
eligible start-up only if the total turnover of the business does not exceed
Rs. 25 crore during any of the years between F.Y. 2016-17 to F.Y. 2020-21. It
is now provided that this benefit can be claimed if the total turnover of the
business in the year for which the deduction is claimed does not exceed Rs. 25
crore.

(iii) The definition of the term “Eligible
Business” has been substituted by a new definition as under;

“Eligible
Business” means a business carried out by an eligible start-up engaged in
innovation, development or improvement of Products or processes or services or
a scalable business model with a high potential of employment generation or
wealth creation.”

From the above,
it will be noticed that the existing requirement of development of ‘new
products’ and of the business being driven by technology or intellectual
property is now removed.

4.7 Incentives
for Employment Generation – Section 80 JJAA

(i) Section 80JJ
AA has been amended from A.Y. 2019-20 (F.Y. 2018-19). This section provides for
an additional deduction of 30% in respect of salary and other emoluments paid
to eligible new employees who are employed for a minimum period of 240 days
during the year. At present, this requirement of 240 days of employment in a
year is relaxed to 150 days in the case of Apparel Industry. This concession
has now been extended to “Footwear and Leather” industry.

(ii) The above deduction is available for a period
of 3 consecutive years from the year in which the new employee is employed. The
amendment in the section now provides that where the new employee is employed
in a particular year for less than 240 /
150 days but in the immediately succeeding year such employee is employed for
more than 240/150 days, he shall be deemed to have been employed in the
succeeding year. In such a case, the benefit of this section can be claimed in
such succeeding year and also in the two immediately succeeding years.

4.8 Incentive to
Producer Companies – New Section 80 PA

(i) Section 80PA is a new section inserted from
A.Y. 2019-20 (F.Y. 2018-19). This section provides that a Producer Company (as
defined in section 581 A (l) of the Companies Act, 1956) shall be entitled to
claim deduction of 100% of its profits from eligible business during 5 years
i.e. A.Y. 2019-20 to A.Y. 2024-25. This benefit can be claimed by such a
company only in the year in which its turnover is less than Rs.100 crore.

For this
purpose, the eligible business is defined to mean-

(a) The
marketing of Agricultural Produce grown by its members;

(b) The purchase
of agricultural implements, seeds, livestock or other articles intended for
agriculture for the purpose of supplying to its members.

(ii) It may be noted that the provisions of
section 581A to 581 ZT of the Companies Act, 1956 are applicable also to
Producer Companies registered under the Companies Act, 2013, by virtue of
section 465 of the Companies Act, 2013. The term ‘Producer Company’ is defined
in section 581A(l) and the term “Member” of such company is defined in section
581A (d).

(iii) It may be noted that the above deduction u/s.
80PA will be allowed in respect of the above 100% income included in the Gross
Total Income after reducing any other deduction claimed under Chapter VIA of
the Income-tax Act. It may further be noted that the above benefit of deduction
of 100% income is not available while computing book profits u/s.115 JB.
Therefore, such producer company will be required to pay MAT under Section 115
JB.

(iv) Further, it may be noted that the above
benefit given under sections 80IAC, 80 JJAA or 80 PA will not be available if
the assessee does not file its return of income before the due date as provided
in section 139(1) in view of the fact that section 80AC is amended from A.Y. 2019-20.

4.9 Deduction
of Interest on Bank Deposits by Senior Citizens New Section 80TTB

(i) At present, interest received on savings
account with a bank, co-operative bank or post office upto Rs. 10,000/- is
allowed as deduction in the case of an individual or HUF u/s. 80TTA. By an
amendment of section 80TTA, it is now provided that the said section shall not
apply to a Senior Section from A/Y:2019-20 (F.Y:2018-19).

(ii) To give additional benefit to a Senior
Citizen (An Individual whose age is 60 years or more), a new section 80TTB is
inserted from A.Y. 2019-20 (F.Y. 2018-19). This section provides that in the
case of a Senior Citizen deduction can be claimed upto Rs. 50,000/- in respect
of interest on any deposit (savings, recurring deposit, fixed deposit etc.)
with a bank, co-operative bank or post office. This deduction cannot be claimed
by a Senior Citizen who holds any such deposit on behalf of a Firm, AOP or BOI
in which he is a partner or member. As stated earlier, the bank, co-operative
bank or post office will not be required to deduct tax at source u/s. 194A from
the interest upto Rs. 50,000/- on such deposit.

5. CHARITABLE
TRUSTS:

Sections 10(23C)
and 11 have been amended w.e.f. A.Y. 2019-20 (F.Y2018-19) to provide for
certain restrictions while computing the income applied for objects of the
Trust. These sections apply to Educational Trusts, Hospitals and other Public
Charitable or Religious Trusts, which claim exemption u/s. 10(23C) or Section
11. It is now provided that restrictions on cash payment u/s. 40A(3) / (3A) and
consequences of non-deduction of tax at source u/s. 40 (a)(ia) will apply to
these Trusts. In other words, any payment in excess of Rs. 10,000/- made to a
person, in a day, otherwise than by an account payee cheque / bank draft will
not be considered as application of income to the objects of the Trust. Similarly,
if any payment is made to a person by way of salary, brokerage, interest,
professional fees, rent etc., on which tax is required to be deducted at
source under Chapter XVII of the Income-tax Act, and is not so deducted or paid
to the Government, the same will not be considered as application of income to
the extent provided in section 40(a)(ia). It may be noted that u/s. 40(a) (ia),
it is provided that 30% of such payment will not be allowed as deduction. Thus,
30% of the amount paid by the Trust without deduction of tax will not be
considered as application of income to the objects of the Trust. Therefore, all public trusts claiming
exemption under the above sections will have to be careful while making
payments for scholarships, donations, professional fees, rent and other
expenses as they have to make sure that they comply with the provisions of
section 40A(3), 40A(3A) and 40(a) (ia).

6. INCOME
FROM SALARY:

Sections 16 and
17 have been amended from A.Y. 2019-20 (F.Y. 2018-19). The effect of these amendments
is
as under:

(i) All salaried employees will now be allowed
standard deduction of Rs. 40,000/- while computing income from salary u/s 16
and 17. This deduction can be claimed by persons getting pension from the
employer.

(ii) At present, exemption is given to the
employee in respect of reimbursement of medical expenses incurred upto Rs.
15,000/- while computing perquisites u/s 17. This exemption is withdrawn from
A.Y. 2019-20 as standard deduction is now allowed.

(iii) At present, u/s. 10(14)(i) read with Rule
2BB, an employee can claim deduction upto Rs. 1,600/- P.M. by way of transport
allowance while computing the income from salary. As stated in Para 151 of the
Budget Speech, this benefit will be withdrawn from A.Y. 2019-20 as standard
deduction is now allowed.

The above
amendment will reduce compliance burden of providing and maintaining records
relating to medical expenditure incurred by the employees. The net effect of
the above amendment will be that a salaried employee will get additional
deduction of Rs. 5800/- in the computation of Salary Income.

7. INCOME
FROM BUSINESS OR PROFESSION:

7.1 Compensation
or termination or modification of contracts – Section 28(ii)

Section 28(ii)
is now amended from A.Y. 2019-20 (F.Y. 2018-19) to provide that any
compensation or other payments (whether of a revenue or capital nature) due to
or received by an assessee on termination of a contract relating to its
business will now be treated as its business income. Similarly, any such amount
due or received on modification of the terms and conditions of such contract
shall also be considered as business income.

7.2 Trading
in Agricultural Commodity Derivatives

At present,
section 43(5) considers a transaction of trading in commodity derivatives
carried on a recognised association which is chargeable to Commodities
Transactions Tax (CTT) as non-speculative. Since no CTT is payable on
transactions of Agriculture Commodity Derivatives, this section is amended from
A.Y. 2019-20 (F.Y. 2018-19) to provide that in case of trading in Agricultural
Commodity Derivatives the condition of chargeability of CTT shall not apply.

7.3 Full Value of
Consideration for Transfer of assets

Section 43CA,
50C and 56(2)(X) have been amended from A/Y:2019-20 (F.Y:2018-19) giving some relief in
computation of full value of consideration for transfer of Immovable Property.
Briefly stated, the effect of these amendments is as under:

(i) At present, section 43CA(1) provides that in
case of transfer of any land or building or both, held as stock-in-trade, the
value adopted or assessed or assessable by Stamp Duty Authority (Stamp Duty
Value) shall be deemed to be the full value of the consideration, if the actual
consideration is less. Similarly, section 50C, dealing with transfer of land,
building or both held as capital asset and section 56(2) (X) dealing with
receipt of consideration by any person on transfer of land, building or both
contains a similar provision.

(ii) In order to provide some relief in cases of
such transactions, the above sections are amended to provide that where Stamp
Duty Value does not exceed the actual consideration by more than 5% of the
actual consideration, no adjustment under these sections will be made and
actual consideration will be considered as full value of the consideration.
Thus, if the sale consideration is Rs.1,00,000/- and the stamp duty value is
Rs. 1,04,000/- the sale consideration will be considered as full value of the
consideration.

(iii) If, however, the Stamp Duty Value is more
than 5% of the actual consideration, the Stamp Duty Valuation will be
considered as the full value of the consideration. Thus, if the sale
consideration is Rs. 1,00,000/- and the stamp duty value is Rs. 1,06,000/-, the
stamp duty value will be considered as full value of the consideration.

7.4 Presumptive Taxation – Section 44 AE

Section 44 AE
provides for computation of income on a presumptive basis in the case of
business of plying, hiring or leasing of goods carriers carried on by an
assessee who owns not more than 10 goods carriers at any time during the year.
At present, this section does not provide for presumptive income rates based on
capacity of vehicles. Therefore, this section is amended effective from A.Y.
2019-20(F.Y. 2018-19) to provide that in respect of heavy goods vehicles (i.e.
where gross vehicle weight is more than 12000 Kilograms) the presumptive income
u/s. 44AE will be computed at the rate of Rs. 1,000/- per tonne of gross
vehicle weight or Unladen weight, as the case may be, for every month or part
of the month or such higher amount as earned by the assessee. In the case of
vehicles, other than heavy vehicles, the presumptive income shall be Rs.
7,500/- from each goods vehicle for every month or part of the month during
which the vehicle is owned by the assesse or such higher income as earned by
the assessee. The other conditions of the existing section 44 AE will continue
to apply to the assesse who opts to be assessed on presumptive income under
this section.

7.5 Carry forward
and set-off of Losses – Section 79

At present,
section 79 allows carry forward and set off of loses by a closely held company
only if the beneficial ownership of shares carrying at least 51% of the voting
power, as on the last day of the year in which the loss is incurred, is
continued.

In order to give
relief to cases covered by Insolvency and Bankruptcy Code, 2016, (IBC-2016)
this section is amended retrospectively from A.Y. 2018-19 (F.Y. 2017-18). The
effect of the amendment is that the carry forward and set off of losses shall
be allowed, even if the change in the beneficial ownership of shares carrying
voting power is more than 51% as a result of the Resolution Plan under
IBC-2016, after providing an opportunity of hearing to the concerned
commissioner of Income tax.

7.6 Taxation of
Book Profits – Section 115JB

(i) Section 115 JB is amended from A.Y. 2018 – 19
(F.Y. 2017-18). – By this amendment, relief is given in the case of a company
against which an application for insolvency resolution has been admitted by the
Adjudicating Authority under IBC-2016. By this amendment it is now provided
that, from A.Y. 2018-19, the aggregate of unabsorbed depreciation and brought
forward losses, as per the books, shall be reduced in computing book profit.

(ii) At present, the provisions of section 115JB
apply to Foreign Companies. Exception is made for companies which have no
permanent establishment in India and which are residents of countries with whom
India has entered into Double Tax Avoidance Agreement (DTAA). The exception is
also made with regard to companies resident of other countries with which there
is no DTAA and which are not required to seek registration under any applicable
laws. The section is now amended retrospectively from A.Y. 2001-02 to provide
that this section will not apply to foreign companies opting for presumptive
taxation under sections 44B, 44BB, 44BBA or 44BBB, where total income of such
companies comprises solely of income from business referred to in these sections
and such income has been offered for tax at the rates specified in those
sections.

8. INCOME computation AND DISCLOSURE
STANDARDS (ICDS):

8.1 Section 145(2) of the Income-tax Act
authorised the Central Government to notify ICDS. Accordingly, CBDT notified 10
ICDS by a Notification No. 87/2016 dated 29.09.2016. These ICDS came into force
from A.Y. 2017-18 (F.Y. 2016-17). Under section 145(2), it is provided that
income from Business or Profession or Income from Other Sources should be
computed in accordance with ICDS. Further, ICDS applies to all assessees (other
than an Individual or HUF who is not required to get their accounts audited
u/s. 44AB) who follow the Mercantile System of Accounting for computation of
Income from Business or Profession or Income from Other Sources.

8.2
The Delhi High Court, in the case of Chamber of Tax Consultants vs.
Union of India (252 Taxman 77) have struck down some of the ICDS fully and
read down some of the ICDS partially holding them to be contrary to the
judicial precedents or the provisions of the Income-tax Act.

8.3 It may be noted that in the above judgement
of Delhi High Court ICDS –I (Accounting Policies) ICDS II (Valuation of
Inventories), ICDS VI (Effects of Changes in Foreign Exchange Rates), ICDS VII
(Government Grants), and Part “A” of ICDS VIII (Securities) have been held to
be Ultra vires the Income-tax Act and have been struck down. Further,
Para 10(a) and 12 of ICDS III (Construction Contracts), Para 5 and 6 of ICDS IV
(Revenue Recognition) and Para 5 of ICDS IX (Borrowing Costs) have been held to
be Ultra Vires the Act and therefore struck down.

8.4 In order to overcome the effect of the above
judgment of Delhi High Court specific provisions are made in sections 36(1)
(xviii), 40A(13), 43 AA, 43CB, 145A and 145B with retrospective effect from
A.Y. 2017-18 (F.Y. 2016-17). In other words, these new provisions now validate
the objectionable provisions of ICDS which were struck down by the Delhi High
Court. The provisions of the above sections are as under:

(i) Deduction
of marked-to-market loss

A new clause
(xviii) has been inserted in section 36(1) to provide for deduction of
marked-to-market loss or other expected loss as computed in accordance with the
ICDS VI. Further, a new sub-section (13) is inserted in Section 40A, to provide
that no deduction/ allowance of any marked-to market loss or other expected
loss shall be allowed, except those which are allowable as per the provisions
of section 36(1) (xviii).

(ii) Foreign Exchange Fluctuations – Section 43AA

New Section 43AA
has been inserted to provide that any gain or loss arising on account of any
change in foreign exchange rates shall be treated as income or loss, as the
case may be. Such gain or loss shall be computed in accordance with ICDS VI and
shall be in respect of all foreign currency transactions, including those
relating to –

(a) Monetary
items and non-monetary items

(b) Translation
of financial statements of foreign operations

(d) Foreign
currency translation reserve

The provisions
of this section are subject to the provisions of section 43A.

(iii) Income from Construction and Services Contracts –
Section 43 CB

New section 43CB
has been inserted to provide that –

(a) Profits and gains arising from a construction
contract shall be determined on the basis of percentage of completion method in
accordance with ICDS III, notified under section 145(2).

(b) In respect of contract for providing services
–

(i) Where the duration of contract is not more
than 90 days, profits and gains from such service contract shall be determined
on the basis of project completion method;

(ii) Where the
contract involves indeterminate number of acts over a specific period of time,
profits and gains from such contract shall be determined on the basis of
straight line method;

(iii) In respect
of contracts not covered by (i) or (ii) above, profits and gains from such
service contract shall be determined on percentage of completion method in
accordance with ICDS III.

(c) For the
purpose of project completion method, percentage of completion method or
straight line method revenue shall include retention money and accordingly
retention money will be considered for the above purposes. Further, contract
costs shall not be reduced by any incidental income in the nature of interest,
dividend or capital gains.

(iv) Inventory valuation – section 145A

The existing
section 145A has been replaced by a new section 145A from A.Y. 2017-18 (F.Y.
2016-17) to provide as under:

(a) The valuation of inventory shall be made at
lower of actual cost or net realisable value computed in accordance with the
ICDS II. In case of securities held as inventory, it shall be valued as
follows:

Type of
Securities

Method of
Valuation

Securities
not listed on a recognised stock exchange or listed but not quoted on a
recognised stock exchange with regularity from time-to-time

At actual
cost initially recognised in accordance with the ICDS II

Securities
listed and quoted on a recognised stock exchange with regularity from
time-time

At lower of
actual cost or net realisable value in accordance with the ICDS II. The
comparison of actual cost and net realisable value shall be made category
wise.

In the case
of securities held as Inventory by a Scheduled Bank or a Public Financial
Institution

The
valuation shall be made as provided in ICDS II after taking into account the
applicable guidelines issued by the RBI

(b) The existing
section 145A provides for inclusion of the amount of any tax, duty, cess or fee
actually paid or incurred by the assesse to bring the goods to the place of its
location and condition as on the date of valuation of purchase and sale of
goods and inventory. The new section 145A retains the above provision and also
extends it to valuation of services. Therefore, services are required to be
valued inclusive of taxes which have been paid or incurred by the assesse.

(v) Year of
taxability of certain Income – New section 145B

The applicable
ICDS provides for taxability of certain incomes even before they have accrued.
In order to validate such provisions of ICDS, the corresponding provisions have
also been incorporated in the new section 145B from the A.Y. 2017-18
(F.Y.2016-17) as follows:-

Type of
Income

Previous
year in which it shall be taxed

Any claim
for escalation of price in a contract or export incentives

Previous
year in which reasonable certainty of its realisation is achieved

Income
referred to in section 2(24) (xviii) i.e., subsidy, grant etc.

Previous
year in which it is received, if not charged to tax in any earlier previous
year.

Interest
received by the assessee on any compensation or on enhanced compensation

Previous
year in which such interest is received

9. CAPITAL
GAINS:

9.1 Long Term
Capital Gains On Transfer Of Quoted Shares And Securities

At present, long
term Capital Gain on transfer of quoted shares and Securities is exempt if
Securities Transaction Tax (STT) is paid on acquisition as well as on transfer
through Stock Exchange transactions. Now, under the new section 112A tax on
such long term capital gains on transfer of such shares and securities, on or
after 1.4.2018, will be payable at the rate of 10%. The rationale for this
proposal is explained by the Finance Minister in Para 155 of his Budget Speech.

9.2 Impact of New
Section 112A

The New Section
112A is inserted in the Income tax Act effective from A.Y. 2019-20 (i.e F.Y.
2018-19). Briefly stated, this new section provides as under.

(i) This section
will apply to transfer of following long term assets (hereinafter referred to
as “specified assets”) if the following conditions are satisfied.

(a) Quoted
Equity Shares on which STT is paid on acquisition as well as on sale. If such
shares are acquired before 1.10.2004 the condition for payment of STT on
acquisition will not apply. The Central Government will notify the cases where
the condition for payment of STT on acquisition will not apply.

(b) Units of
Equity Oriented Fund of a Mutual Fund and Business Trust on which STT is paid
at the time of redemption of the units. The above condition of payment of STT
will not apply where the transaction is entered into in an International
Financial Services Centre.

(ii) The rate of
tax on such Long term capital gains is 10% plus applicable surcharge and Health
and Education Cess on the capital gain in excess of Rs. 1 Lakh. If the capital
gain in any F.Y. is less than Rs. 1 Lakh no tax is payable on such capital gain

(iii) The cost
of acquisition of specified assets for computing capital gain in such cases
shall be computed as provided in section 55(2) (ac). This provision is as
under:-

If the above
specified assets are acquired before 1.2.2018 the cost of acquisition shall be
computed as per formula, given in section 55(2)(ac). According to this formula,
the cost of acquisition of the specified assets acquired on or before 31.1.2018
will be the actual cost. However, if the actual cost is less than the fair
market value of the specified assets as on 31.1.2018, the fair market value of
the specified assets as on 31.1.2018, will be deemed to be the cost of
acquisition.

Further, if the
full value of consideration on sale/transfer is less than the above fair market
value, then such full value of consideration or the actual cost, whichever is
higher, will be deemed to be the cost of acquisition.

Illustration to explain the above formula

	A	B	C	D
Actual Cost –Purchase prior to 1.2.2018	100	550	300	500
Market Value as at 31/1/2018	150	350	450	300
Sale Price	500	600	350	450
	——	——	——-	—–
Deemed Cost	150	550	350	500
Sale Price	500	600	350	450
	——-	——-	——-	——
Capital Gain	350	50	Nil	(50)
	——	——-	——-	——

Actual Cost
–Purchase prior to 1.2.2018

100

550

300

500

Market Value
as at 31/1/2018

150

350

450

300

Sale Price

500

600

350

450

——

——-

—–

Deemed Cost

150

550

350

500

Sale Price

500

600

350

450

——-

——

Capital Gain

350

Nil

(50)

——

——-

——

(iv) No
deduction under Chapter VI A shall be allowed from the above Capital Gain.
Therefore, if Gross Total Income includes any such capital gain, deduction
under chapter VIA will be allowed from the gross total income after reducing
the above long term capital gain.

(v) Similarly,
tax Rebate u/s. 87A will be allowed from income tax on the total income after
deduction of the above long term capital gain.

(vi) For the
purpose of applicability of the above provisions for taxation of such long term
capital gains, the expression “Equity Oriented
Fund” means a fund set up by a Mutual
Fund specified u/s. 10(23D) which satisfies the following conditions-

A. If such a Fund invests in Units of another
Fund which is traded on the recognised Stock Exchange-

– A minimum of 90% of the
proceeds are invested in units of such other Fund and

– Such other Fund has invested 90% of its Funds in Equity Shares of
listed domestic companies.

B. In cases of
Mutual Funds, other than “A” above, minimum 65% of the total proceeds of the
Fund are invested in Equity Shares of listed domestic companies.

(vii) The expression” Fair Market Value” as at
31.1.2018 for the Formula stated in (iii) above is defined in Explanation below
section 55 (2) (ac) to mean the highest price quoted on the Recognised Stock
Exchange. If there was no trading of a particular script on 31.1.2018 then the
highest price quoted for that script immediately prior to 31.1.2018. In the
case of Units of Equity Oriented Fund not quoted on the Stock Exchange the NAV
as on 31/1/2018 will be considered as fair market value.

(viii) It is not clear from the above definition as
to how the highest price of a quoted script will be considered when the script
is quoted in two or more recognised Stock Exchanges. Whether highest of the
closing prices in these Stock Exchanges is to be considered or the highest
price quoted during the day in any one of the Stock Exchanges is to be
considered. This requires clarification.

(ix) It may be noted that in respect of the
specified assets purchased on or after 1.2.2018, the Formula given in (iii)
will not apply for determining the actual cost of such specified assets. In
such a case, the actual cost of the specified assets will be deducted from the
sale price and, as stated in the third proviso to section 48, benefit of
Indexation will not be available.

(x) It may also be noted that the above tax on
long term Capital Gain is not payable if the specified assets are sold on or
before 31.03.2018. This tax is payable only on sale of such specified assets on
or after 1.4.2018.

(xi) Section 115 AD dealing with tax on income of
FII on Capital Gain has also been amended. It is clarified that any FII to
which section 115AD applies will have to pay tax on long term Capital Gain
arising on sale of quoted shares/units as provided in section 112A. In the case
of FII also, the rate of tax on such capital gain will be 10% in respect such
capital gain in excess of Rs. 1 Lakh in the A/Y:2019-20 (F.Y:2018-19) and
onwards.

(xii) The exemption given to such long term capital
gain u/s. 10(38) has now been withdrawn w.e.f. 1.4.2018.

(xiii) It may be
noted that the above provisions of the new section 112A will not apply to
equity shares of a listed company acquired by an assessee after 1.10.2004 under
an off market transaction and no STT is paid.
Similarly, where such equity shares are acquired prior to 1.10.2004 or
after that date and STT is paid at the time of acquisition, the above provisions
of section 112A will not apply if the shares are sold on or after 1.4.2018 in
an off market transaction. In such cases the normal provisions applicable to
computation of capital gain will apply and the assessee can claim the benefit
of indexation u/s 48 for computing cost of acquisition. Tax on such long term
capital gains will be payable at the rate of 20%. Therefore, the assessee will
have to ascertain, before selling the equity shares on or after 1.4.2018, the
tax impact under both the methods and decide whether to sell the shares in an off
market transaction or through Stock Exchange.

9.3 Capital Gains
Bonds

At present,
an assessee can
claim deduction upto Rs. 50 lakh from
long term Capital Gain on sale of any capital asset by making an Investment in
specified bonds u/s. 54EC within 6 months of the date of sale. There is a
lock-in period of 3 years for such investment. In order to restrict this
benefit the following amendments are made in section 54EC.

(i) The benefit of section 54EC can be claimed
only if the long term capital gain is from sale of immovable property (i.e.
land, building or both) on or after 1.4.2018. Thus, this benefit cannot be
claimed in respect of long term capital gain on any other capital asset in A.Y.
2019-20 or thereafter. The effect of this amendment will be that benefit of
section 54EC will not now be available in respect of long term capital gain
arising on or after 1-4-2018 in respect of compensation received on surrender
of tenancy rights or sale/transfer of shares, units of Mutual Fund, goodwill or
other movable assets.

(ii) The
lock in period for this investment made on or after 1.4.2018 will be 5 years
instead of 3 years. From the wording of the amendments in section 54EC it
appears that investment in Bonds of National Highway Authority of India or
Rural Electrification Corporation Ltd., or other notified bonds made before
31.3.2018 will have a lock-in period of 3 years. In respect of investment in
bonds made on or after 1.4.2018 the lock-in period will be 5 years. Therefore,
it appears that even in respect of long term capital gain made on or before
31.3.2018 if the investment in such bonds is made within 6 months of the date
of sale but on or after 1.4.2018, the Lock-in period will be 5 years.

9.4 Conversion Of
Stock-In –Trade Into Capital Asset

(i) The concept of conversion of a capital asset
into stock-in-trade is accepted in section 45(2) at present. It is provided in
this section that on such conversion there will be no tax liability. The tax is
payable only when the stock-in-trade is sold.

(ii) New clauses (via) is now added in section 28
w.e.f. AY. 2019-20 (F.Y. 2018.19) to provide that “the fair market value of
inventory as on the date on which it is converted into, or treated as, a
capital asset determined in the prescribed manner” shall be chargeable to
income tax under the head “ Profits and gains of business or profession”. This
will mean that on conversion of stock-in-trade (inventory) into a capital
asset, the difference between the cost and the market value on the date of such
conversion will be taxable as business income. This will be the position even
if the stock-in-trade is not sold. It may be noted that by insertion of clause
(xiia) in section 2(24) it is now provided that such notional difference
between the fair market value and cost of stock-in-trade shall be deemed to be
income liable to tax.

(iii) Further, section 49 is also amended by
addition of clause (9) w.e.f. A.Y. 2019-20 (F.Y. 2018-19) to provide that where
capital gain arises on sale of the above capital asset (i.e. stock-in-trade
converted into capital asset) the cost of acquisition of such capital asset
shall be deemed to be the fair market value adopted under section 28(via) on
conversion of the stock-in-trade into capital asset. By an amendment in section
2(42A), it is also provided that in such a case, the period of holding such
capital asset shall be reckoned from the date of conversion of stock-in-trade
into capital asset.

(iv) A new Explanation (1A) has been added in
section 43 (1) to provide that, if the above capital asset (after conversion of
stock-in-trade to capital asset) is used for the business or profession, the
fair market value on the date of such conversion shall be treated as cost of
the capital asset. Depreciation on such cost can be claimed by the assessee.

9.5 Exemption Of
Specified Securities From Capital Gain

Section 47 has
been amended by insertion of a new clause (viiab) w.e.f. AY. 2019-20
(F.Y.2018.19). It is now provided that any transfer of a capital asset viz (i)
Bond or Global Depository Receipt mentioned in section 115AC(1), (ii) Rupee
Denominated Bond of an Indian Company or (iii) a Derivative made by a
non-resident on a recognised Stock Exchange located in an International
Financial Services Centre shall not be considered as transfer. In other words,
any capital gain arising by such a transaction will be exempt from capital gain
tax.

9.6 Full Value of
consideration – Section 50C

As discussed in
Para 7.3 above, concession is now given from A/Y:2019-20 (F.Y:2018-19) for the
computation of full value of consideration on transfer of Immovable
Property. Section 50C is amended to
provide that if the difference between the actual consideration and stamp duty
value is less than 5% the same will be ignored.

9.7 Tax On
Distributed Income Of Unit Holders Of Equity Oriented Fund – Section 115-R

(i) Section 115R dealing with tax on distributed
income to holders of units in Mutual Funds has been amended w.e.f. 1.4.2018. At
present any income distributed to a unit holder of equity oriented fund is not
chargeable to tax. Since new section 112A now provides for levy of 10% tax on
the capital gains arising to unit holders of equity oriented funds, in excess
of Rs.1 lakh, section 115R has now been amended to provide for Dividend
Distribution Tax (DDT) at the rate of 10% by the Mutual Fund at the time of
distribution of income by an equity oriented fund.

(ii) It is stated that this amendment is made with
a view to providing a level playing field between growth oriented funds and
dividend paying funds, in the wake of the new capital gains tax regime for unit holders of equity oriented funds.

10. INCOME FROM OTHER SOURCES:

10.1 Transfer of
Capital Asset by a Holding Company to its wholly owned subsidiary company –
Section 56(2) (x)

Section 56(2)(x) of the Income tax Act provides
that if any person receives any property without consideration or for a
consideration which is less than its fair market value the difference between
the fair market value and the value at which the property is received will be
taxable as income from other sources in the hands of the recipient. There are
certain exceptions to this rule as provided in the Fourth Proviso. Clause IX of
this Fourth Proviso is now amended from the A.Y. 2018-19 (F.Y. 2017-18) to
provide that the provisions of section 56(2) (x) will not apply to any transfer
of a capital asset by a holding company to its wholly owned subsidiary company
or any transfer of a capital asset by a wholly owned subsidiary company to its
holding company.

10.2 Gift of
Immovable Property

As discussed in
Para 7.3 above, concession is now given from A/Y:2019-20 (F.Y:2018-19) for the
computation of full value of consideration on transfer of Immovable Property.
Section 56(2)(x) is amended to provide that if the difference between the
actual consideration and stamp duty value is less than 5% the same will be
ignored for the purpose of taxation in the hands of the recipient of Immovable
Property.

10.3 Compensation
on termination /modification of any contract of employment – Section 56(2) (xi)

A   new
clause (xi)   is   inserted
in   section 56(2) from A.Y. 2019-20
(F.Y. 2018-19) to provide that any compensation received by any employee on
termination or modification of the terms and conditions of the contract of
employment on or after 1.4.2018 shall be taxable as Income from Other Sources.

10.4 Deemed
Dividend

(i) Dividend Income is taxable under the head
Income from Other Sources – Section 2(22) defines the term “Dividend”. Under section 2(22) (a) to (e) it is provided
that distribution by a company to its members under certain circumstances shall
be deemed to be Dividend to the extent of its “accumulated profits”. The
definition of the term “accumulated profits” is given in the Explanation to the
section 2 (22). From the A.Y. 2018-19 (F.Y. 2017-18), a new explanation (2A)
has been added to provide that the accumulated profits (whether capitalised or
not) or loss of the amalgamated company, on the date of amalgamation, shall be
added / deducted to/from the accumulated profits of the amalgamating company.

(ii) At present, section 2(22) (e) provides that
any loan or advance given by a closely held company to a Related Party, as
defined in that section, shall be taxable as deemed dividend in the hands of
that related party to the extent of the accumulated profits of the Company.
There was some debate whether this deemed dividend can be taxed in the hands of
the related party if it is not a share holder of the company.

To eliminate
this doubt, it is now provided that the company giving such loan or advance
will pay tax at the rate of 30% plus applicable surcharge and Cess w.e.f.
1.4.2018. Thus, the shareholder or
related party receiving such loan will not be required to pay tax on such
deemed dividend.

11. TAXATION OF NON-RESIDENTS:

11.1 Expansion of scope of Business Connection –
Section 9

At present,
Explanation 2 to section 9(1)(i) defines the concept of “Business connection”
through dependent agents. With an
objective to align with Article 12 of the Multilateral Instrument (MLI) forming
part of the BEPS Project to which India is a signatory, Explanation 2(a) has
been amended. By this amendment the term “business connection” will include any
business activity carried on through an agent who habitually concludes contract
or habitually plays a principal role leading to conclusion of contracts by the
non-resident where the contracts are:

– In the name of
that non-resident; or

– For the
transfer of ownership of, or for granting the right to use of, the property
owned by that non-resident or that non-resident has the right to use; or

– For the
provision of services by that non-resident.

11.2 Significant
economic presence resulting in Business Connection

(i) At
present, section 9(1) (i) provides for physical presence based nexus for
establishing business connection of the non-resident in India. A new
Explanation (2A) to section 9(1)(i) now provides a nexus rule for emerging
business models such as digitized business which do not require physical
presence of the non-resident or his agent in India. This amendment is made from
A/Y:2019-20 (F.Y:2018-19).

(ii) Accordingly, this amendment provides that a
non-resident shall be deemed to have a business connection on account of his
significant economic presence in India. This amendment would apply irrespective
of whether the non-resident has a residence or place of business in India or
renders services in India. The following shall be regarded as significant
economic presence of the non-resident in India.

– Any transaction in respect of any goods,
services or property carried out by non-resident in India including provision
of download of data or software in
India, provided that the transaction value exceeds the threshold as may be
prescribed; or

– Systematic and continuous soliciting of
business activities or engaging in interaction with number of users in India
through digital means, provided such number of users exceeds the threshold as
may be prescribed.

In such cases,
only so much of income as is attributable to the above transactions or
activities shall be deemed to accrue or arise in India.

(iii) It is further clarified in this section that
the transactions or activities shall constitute significant economic presence
in India, whether or not

(a) the agreement for such transactions or
activities is entered in India, or

(b) the
non-resident has a residence or place of business in India, or

11.3 Exemption to
Royalty etc. under section 10(6D)

New clause (6D)
is added in section 10 from A/Y: 2018-19(F.Y. 2017-18) to grant exemption to a
non-resident. This clause provides that
any income of a non-resident or a Foreign Company by way of Royalty from, or
fees for technical services rendered in or outside India to National Technical
Research Organisation will be exempt from tax. In view of this exemption no tax
will be deductible at source from this Royalty or Fees u/s 195.

11.4 Global
Depository Receipts – Section 47 (viiab)

As discussed in
Para 9.5 above transfer of a Bond or Global Depository Receipts (GDR) referred
to in section 115AC(1), or Rupee Denominated Bond of any Indian company, or
Derivative, executed by a non-resident on a recognized stock exchange located
in any International Financial Services Center (IFSC) shall not be considered
as a transfer under newly inserted section 47(viiab), if the consideration for
the transfer is paid in foreign currency. As a result of this amendment,
capital gains from such transaction will not be taxable.

12. TAX ON INCOME REFERRED TO IN SECTIONS 68 TO
69D AND SECTION 115BBE:

(i) Section 115BBE provides that income referred
to in sections 68,69,69A, 69B,69C or 69D shall be charged to tax at the rate of
60%. Section 115BBE(2) provides that no deduction in respect of any expenditure
or allowance or set off of any loss shall be allowed to the assessee under any
provision of the Act in computing his income referred to in the above sections.
However, sub-section (2) applied only to cases where such income is declared by
the assesse in the return of income furnished u/s. 139.

(ii) Section 115BBE(2) has now been amended with
retrospective effect from A.Y.2017-18 (F.Y. 2016-17) to provide that even in
cases where income added by the Assessing Officer includes income referred to
in the above sections, no deduction in respect of any expenditure or allowance
or setoff of any loss shall be allowed to the assessee under any provision of
the Act in computing the income referred to in these sections.

13.
ASSESSMENTS AND APPEALS:

13.1 Obtaining Permanent Account Number (PAN) in
certain cases – Section 139A

To expand the
list of cases requiring the application for PAN and to use PAN as Unique Entity
Number (UEN), amendment has been made w.e.f. 01.04.2018 by way of insertion of
clause (v) and clause (vi) in section 139A as under:

(i) A resident, other than an individual, which
enters into a financial
transaction of an
amount aggregating to Rs. 2,50,000 or
more in a financial year is required to apply for PAN.

(ii) Managing
director, director, partner, trustee, author, founder, Karta, chief executive
officer, principal officer or office bearer or any person competent to act on
behalf of such entities is also required to apply for PAN.

It may be noted
that the term “financial transaction” has not been defined.

13.2 Verification
of Return in case of a company under insolvency resolution process – Section
140

Section 140 has
been amended w.e.f. 1.4.2018 to provide that, during the resolution process
under the Insolvency and Bankruptcy Code, 2016 (“IBC”), the return of Income
shall be verified by an insolvency professional appointed by the Adjudicating
Authority.

13.3 Assessment
Procedure – Section 143

(i) Section 143 (1)(a) provides that at the time
of processing of return, the total income or loss shall be computed after
adding income appearing in Form 26AS or Form 16A or Form 16 which has not been
included in the total income disclosed in the return of Income, after giving an
intimation to the assessee. A new proviso to section 143(1)(a) has been
inserted to provide that no such adjustment shall be made in respect of any
return of Income furnished for Ay 2018-19 and subsequent years.

13.4 New Scheme for
scrutiny Assessments – New Section 143(3A) 143(3B)

A new
sub-section (3A) is inserted in section 143 w.e.f 01.04.2018. This new section
143(3A) authorises the Government to notify a new scheme for “e-assessments” to
impart greater efficiency, transparency and accountability. It is stated that
this will be achieved by-

(i) Eliminating
the interface between the Assessing Officer and the assesse in the course of
proceedings to the extent of feasibility of technology.

(ii) Optimising
utilisation of the resources through economics of scale and functional
specialisation.

(iii)
Introducing a team-based assessment with dynamic jurisdiction.

For giving
effect to the above scheme, section 143(3B) authorizes the Government to issue
a Notification directing that the provisions of the Income-tax Act relating to
assessment procedure shall not apply or shall apply with such exceptions,
modifications and adaptations as may be specified in the notification. No such
notification can be issued after 31.03.2020. The Government has set up a
technical study group to advise about the Scheme for e-assessments.

13.5 Appeal to
Tribunal against the order passed under section 271J – Section 253

Section 253 has
been amended w.e.f. 01.04.2018 to provide for filing of an appeal by the
assessee before the ITA Tribunal against an order passed by the CIT(A) levying
penalty u/s. 271J on an accountant, a merchant banker or a registered valuer
for furnishing incorrect information in their report or certificate.

13.6 Increase in
penalty for failure to furnish statement of financial transaction or reportable
account – Section 271FA

Section 271FA
has been amended w.e.f. 01.04.2018 to enhance the penalty for delay in
furnishing of the statement of financial transaction or reportable account as
required u/s. 285BA to ensure greater compliance:

Particulars

Penalty

Delay in
furnishing the statement

Increased
from Rs.100 to Rs. 500 for each
day of default

Failure to
furnish statement in pursuance of notice issued by tax authority

Increased
from Rs. 500 to Rs. 1000 for
each day of default

13.7 Failure to
furnish return of income in case of companies –Section 276CC

Section 276CC
provides that if a person willfully fails to furnish the return of income
within the due date, he shall be punishable with imprisonment and fine.
Immunity from prosecution is granted inter alia in a case where the tax
payable on the total income determined on regular assessment, as reduced by the
advance tax, if any paid, and any withholding tax, does not exceed Rs. 3,000
for any assessment year commencing on or after 1st April 1975. By amendment of this section, w.e.f.
1.4.2018, it is now provided that this immunity will not apply to companies.

14. TO SUM UP:

14.1 It is rather unfortunate that this year’s
Finance Bill has been passed in the Parliament without any discussion. Various
professional and commercial organisations had made post budget representations
and expressed concerns about some of the amendments proposed in the Finance
Bill. As there was no discussion in the Parliament, it is evident that these
representations have not received due consideration.

14.2 The Finance Act has provided some relief to
salaried employees, small and medium sized companies, senior citizens, other
assessees who have invested in NPS, start-up industries, producer companies and
to employers for employment generation. There are some provisions in the
Finance Act which will simplify some procedural requirements.

14.3 Last year, several amendments were made to
tighten the provisions relating to taxation of capital gains. Most of the
assessees have not yet understood the impact of the new sections 45(5A), 50CA,
56(2)(x) etc., introduced last year. This year, the introduction of new
section 112A levying tax on capital gain on sale of quoted shares and units of
equity oriented funds is likely to create some complex issues. There will be
some resistance to this levy as there is no reduction in the rates of STT. The
levy of tax on Mutual Funds on distribution of income by equity oriented funds
will affect the yield to the unit holders. Let us hope that the above impact on
the tax liability of the investors is accepted by all assessees as this
additional burden is levied in order to provide funds for various Government
Schemes for upliftment of poor and down trodden population of our country.

14.4 The concept
of Income Computation and Disclosure Standards (ICDS) was introduced from A.Y.
2017-18. The assessees have to maintain books of accounts by adopting
Accounting Standards issued by the Institute of Charted Accountants of India.
Recently the Government has notified Ind-AS which is mandatory for large
companies. Therefore, compliance with Ten ICDS notified u/s. 145(2) of the
Income tax Act was considered as an additional burden. When Delhi High Court
struck down most of the ICDS the assessees felt some relief. Now the Finance
Act, 2018, has amended the relevant sections of the Income-tax Act with
retrospective effect from A.Y. 2017-18 to revalidate some of the provisions of
ICDS. With these amendments the responsibility of professionals assisting tax
payers in the preparation of their Income tax Returns will increase. Similarly,
Chartered Accountants conducting tax audit u/s. 44AB will now have report in
the tax audit report about compliance with ICDS.

14.5 Section 143
of the Income-tax Act has been amended authorising the Government to notify a
new scheme for “e-assessments” to impart greater efficiency, transparency and
accountability. Under this scheme, it is proposed to eliminate the interface
between the assessing officer and the assessee, optimise utilisation of
resources and introduce a team based assessment procedure. There is
apprehension in some quarters as to how this new scheme will function.
Considering the present infrastructure available with the Government and the
technical facilities available with the assessees, it will be advisable for the
Government to introduce the concept of ‘e-assessment’ in a phased manner. In
other words, this scheme should be made applicable in the first instance in
cases of large listed companies with turnover exceeding Rs. 500 crore. After
ascertaining the success, the scheme can be extended to other corporate assessees
after some years. There will be many practical issues if the scheme is
introduced for all assessees immediately.

14.6 Taking an overall view of the amendments
discussed in this Article, it can be concluded that the provisions in the
Income-tax Act are getting complex. There is a talk about replacing this six
decade old law by a new simplified law. We have seen the fate of the Direct Tax
Code which was introduced in 2009 but not passed by the parliament.
Let us hope that we get a new simplified tax law in the coming years.

shailesh.kwebmaker

10 Section 142(2A) – Special audit – Direction for special audit without application of mind – Objection of assessee not considered – Order for special audit not valid

1.
(2018) 401 ITR 74 (Kar)

Karnataka
Industrial Area Development Board vs. ACIT

A.Ys.:
2013-14 & 2014-15,

Date
of Order: 02^nd January, 2018

The
petitioner is a Government of Karnataka undertaking, engaged in the activities
of development of industrial areas within the State of Karnataka. The relevant
period is A. Ys. 2013-14 and 2014-15. The petitioner is already subject to
audit at the hands of the Controller and Auditor General of India (C & AG)
as well as the independent chartered accountant, and also under the provisions
of the KIADB Act itself and had already produced these two audit reports for
the said two years before the Assessing Officer. For the relevant years, the
petitioner assessee had raised its objections for the proposal for special
audit u/s. 142(2A) of the Income-tax Act, 1961. However, without application of
mind the Assessing Officer issued directions for the special audit.

The
petitioner assessee filed writ petition and challenged the said directions for
special audit. The Karnataka High Court allowed the writ petition and held as
under:

“i) The purpose of section 142(2A) of the
Income-tax Act, 1961 is to get a true and fair view of the accounts produced by
the assessee so that the special audit conducted at the instance of the Revenue
may yield more revenue in the form of income-tax and it is not expected to be a
mere paper exercise or a repetitive audit exercise. Therefore, the special
circumstances must exist to direct the “special audit” u/s. 142(2A) of the Act
and such special circumstances or the special reasons must be discussed in
detail in the order u/s. 142(2A) itself.

ii) It prima facie appeared that the assessing
authority had not only directed the special audit in the case of the assessee,
a Government undertaking already subject to audit at the hands of the C &
AG as well as the independent chartered accountant under the provisions of the
Act under which it was constituted, rather mechanically, but at the fag end of
the limitation period, perhaps just to buy more time to pass the assessment
order in the case of the assessee, which admittedly for the period in question
enjoyed exemption from income-tax under section 11.

iii) The orders neither disclosed the discussion on the
objections of the assessee to the special audit and at least in one case for
the A. Y. 2013-14, the assessing authority did not even wait for the objections
to be placed on record and before they were furnished on 29/03/2016,he had already passed the order on 28/03/2016 while the limitation for passing the
assessment order was expiring on 31/03/2016. The orders u/s. 142(2A) could not be sustained.

shailesh.kwebmaker

9 Section 264(4) of I. T. Act, 1961 – Revision – Scope of power of Commissioner – Waiver of right to appeal by assessee – Appeals filed on similar issue for other assessment years – Not ground for rejection of application for revision – Revision petition maintainable

1.
(2018) 400 ITR 497 (Del)

Paradigm
Geophysical Ltd. vs. CIT

A.Y.:
2012-13, Date of Order: 13^thNov.,
2017

The
assessee was a non-resident company and a tax resident of Australia. It
provided and developed software enabled solutions and annual maintenance
services to the solutions supplied by it. For the A. Y. 2012-13, the assessee,
inter alia applied the provisions of section 44BB of the Income-tax Act, 1961
and filed its return. Pursuant to the scrutiny assessment, the Assessing
Officer issued a draft assessment order treating the receipts as royalty or fee
from technical services. No objections were filed u/s. 144C(2) of the Act, by
the assessee and therefore, no directions were issued by the DRP. Consequently,
the Assessing Officer passed a final order dated 11.05.2015, u/s. 144C(3)(b)
r.w.s. 143(3) of the Act confirming the adjustments made in the draft
assessment order. He applied the provisions of section 44DA and computed the
total income of the assessee. The assessee did not file any appeal against the
order of the Assessing Officer.

On
01.02.2016, the assessee filed a revision petition u/s. 264 of the Act, before
the Commissioner on the ground that the Assessing Officer had wrongly not
applied section 44BB and had incorrectly invoked and applied section 44DA. The
assessee submitted that for the A. Y. 2012-13, it had not availed of the remedy
of appeal and had invoked the alternative remedy under section 264. The
Commissioner declined to interfere with the order primarily on the ground that
on similar issue which arose in the A. Ys. 2011-12 and 2013-14, the assessee
had filed appeals before the appellate authority, and therefore, the revision
petition u/s. 264 for A. Y. 2012-13 was not maintainable.

The
assessee filed writ petition and challenged the order of the Commissioner. The
Delhi High Court allowed the writ petition and held as under:

“i) The Commissioner could not refuse to
entertain a revision petition filed by the assessee u/s. 264, if it was
maintainable, on the ground that a similar issue arose for consideration in
another year and was pending adjudication in appeal before another forum.

ii) The time for filing appeal had expired. The
assessee had waived its right to file appeal and had not filed any appeal
against the order in question before the Commissioner (Appeals) or Tribunal.
Therefore, the negative stipulations in clause (a), (b) and (c) of section
264(4) were not attracted.

iii) When a statutory right was conferred on an
assessee, it imposes an obligation on the authority. New and extraneous
conditions, not mandated and stipulated, expressly or by implication, could not
be imposed to deny recourse to a remedy and right of the assessee to have his
claim examined on merits. The Commissioner could not refuse to exercise the
statutorily conferred revisional power because the Assessing Officer was his
subordinate and under his administrative control.

iv) The Commissioner while exercising power under
section 264 exercised quasi-judicial powers and he must pass a speaking and a
reasoned order. The reasoning could not be sustained for it was contrary to the
Legislative mandate of section 264.

v) The matter is remanded to the
Commissioner to decide the revision petition afresh and in accordance with
law.”

shailesh.kwebmaker

2 Section 43(1) – Grant / subsidy received for research – Assessee in books of account reduced it from the cost of plant and machinery but depreciation claimed on the original cost – Tribunal upheld the assessee’s action of claiming depreciation on the cost of fixed assets without deducting the grant / subsidy amount.

1.
Spectrum Coal & Power Ltd.
vs. ACIT (Mumbai)

Members: P. K. Bansal (V. P.) and Pawan
Singh (J. M.)

ITA Nos.: 1295 and 1296 / Mum / 2012.

A.Ys.: 2000-01 and 2001-02, Date of Order: 3^rdAugust,
2017

Counsel for Assessee / Revenue: Salil Kapoor
/ Ram Tiwari

FACTS

The assessee
had received a sum of Rs. 9.97 crore from US Aid through ICICI under the
Program for Acceleration of Commercial Energy Research in the years 1996-97 and
1997-98, which was credited to the capital reserve in the balance sheet of the
Company’s accounts. In the F.Y. 1999-2000, the assessee company had adjusted
this amount against the investment in plant and machinery. However, the cost of
plant & machinery was not reduced to this extent while calculating the
written down value (WDV) for the purpose of determining the depreciation as per
the provisions of the Income-tax Act. The Assessing Officer treated the grant
received by the assessee from US Aid through ICICI as cost met directly or
indirectly by any other person or authority as per the provisions of Section
43(1) and in computation of WDV of the plant and machinery for the purpose of
calculation of depreciation the amount of grant received was reduced from the
cost of plant and machinery. On appeal, the CIT(A) confirmed the order of the Assessing
Officer.

Before the
Tribunal, the assessee submitted that the grant was not given to meet the cost
of any specific asset but to create an institutional environment for the
technology innovation in the energy sector. Further, it was pointed out that
this grant was repayable by the assessee. The repayment had to be made @2% of
the gross annual sales. The Revenue on the other hand, supported the decision
of the lower authorities and argued that the true nature of the amount received
by the assessee was not loan, but it was a grant. The ICICI had merely turned
this assistance into a conditional grant while extending this amount to the
assessee, repayable amount being twice the amount of conditional grant given as
royalty linked to the sales. It was contended that the assessee had merely
returned a sum of Rs 20 lakh. Thereafter, neither the ICICI Ltd. has recovered
the amount from assessee company nor the assessee has provided for any royalty
payable to ICICI Ltd. in its books of account. The conduct of the assessee
shows that it has treated this amount given by ICICI Ltd. as aid / assistance /
grant / subsidy and not as a loan.

HELD

The Tribunal
went through the agreement entered into between the assessee and ICICI Ltd.
under which the assessee was given the said amount. Based thereon, it noted
that the assessee was required to repay the said grant subject to the condition
that the maximum repayment amount will not exceed 200% of the grant received
and till then the assessee was to pay 2% of the gross annual sales of the coal
beneficiated under the proposed commercial project.

According to
the Tribunal, the grant from this agreement was conditional. It was a financial
arrangement and cannot be regarded to be a subsidy / grant. The Tribunal also
observed that the grant was to create an institutional environment for
technological innovations in the energy sector. Therefore, even if the grant is
not treated as the financial arrangement and was treated as a subsidy, as
contended by the revenue, it was not for a specific plant & machinery.

The Tribunal
further relied on the decision of the Visakhapatnam Tribunal in the case of Sasisri
Extractions Limited vs. ACIT (122 ITD 428) and noted that even after
insertion of Explanation 10 to section 43(1), the Tribunal has categorically
held that the basic principle underlying the decision of the Apex Court in the
case of CIT vs. P. J. Chemicals (210 ITR 830), still holds good.
Accordingly, it was held that financial grant received by the assessee could
not be reduced from the actual cost of fixed assets for computing the
depreciation under the Income-tax Act.

shailesh.kwebmaker

1 Section 11 – (i) Depreciation allowed on fixed assets cost of which was allowed as application of income; (ii) Assessee allowed the benefit of carry forward of deficit for future set-off.

1.
DCIT vs. Gharda Foundation
(Mumbai)

Members: G. S. Pannu (A. M.) and Amarjit
Singh (J. M.)

ITA Nos.: 5962 & 5963/MUM/2016

A.Ys.: 2011-12 and 2012-13,

Date of Order: 30^thAugust, 2017

Counsel for Revenue / Assessee: Saurabh
Deshpande / Hiro Rai

FACTS

The assessee
being a charitable organisation registered u/s. 12A was engaged in carrying on
activities of charitable nature. The dispute involved in the appeal was on two
issues – firstly, the Revenue was aggrieved by the decision of the CIT(A) in
directing the AO to allow the benefit of depreciation and secondly, the action
of the CIT(A) in allowing the assessee the benefit of carry forward of the
deficit of Rs. 3.5 crore for future set-off.

Before the
Tribunal, the revenue justified the AO’s action pleading that the decision of
the Bombay High Court in the case of CIT vs. Institute of Banking Personnel
Selection (264 ITR 110), which was relied on by the assessee, had not been
accepted by the Department on merits and on a similar issue, SLP (Civil) no.
9891 of 2014 has been filed before the Supreme Court in the case of Maharashtra
Industrial Development Corporation. Further, it was contended that allowing of
depreciation would amount to a double deduction, which was impermissible having
regard to the judgment of the Supreme Court in the case of Escorts Ltd. (199
ITR 43).

HELD

The Tribunal
noted that the decision in the case of Escorts Ltd. being relied upon by the
Revenue had been considered by the Delhi High Court in the case of Indraprastha
Cancer Society, (112 DTR 345), wherein it opined that the allowance of
depreciation in similar situation would not amount to a double deduction.
Further, it was noted that the Delhi High Court in the case of Vishwa Jagriti
Mission, ITA No. 140/2012 dated 29.3.2012 also allowed a similar claim after
analysing the judgment of the Supreme Court in the case of Escorts Ltd. It also
noticed that the Supreme Court had dismissed the SLP filed by the Department
against the said decision of the Delhi High Court vide SLP No. 19321 of 2013.
The Tribunal further noted that the Bombay High Court, subsequent to the
decision in the case of Institute of Banking Personnel Selection, had
considered a similar argument of the Revenue in the case of Mumbai Education
Trust, ITA No. 11/2014 dated 03.05.2016 and had allowed the claim of the
assessee. Therefore, the Tribunal dismissed the appeal filed by the revenue on
this ground and allowed the depreciation as claimed by the assessee.

As regards the
issue relating to carry forward of the deficit of Rs.3.50 crore to be set-off
against the future income, the Tribunal upheld the order of the CIT(A) relying
on the judgements of the Bombay High Court in the case of Mumbai Education
Trust.

shailesh.kwebmaker

3 Section 115BBE– Amendment made by the Finance Act, 2016 to section 115BBE(2), with effect from 01.04.2017, whereby set-off of loss against the income referred to in sections 68, 69, 69A, 69B, 69C or 69D is denied, is prospective and is effective from 01.04.2017.

1.
[2017] 84 taxmann.com 138
(Jaipur- Trib.)

ACIT vs. Sanjay Bairathi Gems Ltd.

ITA No. : 157 (Jp.) of 2014

A.Y.: 2013-14, Date of Order: 8^th
August, 2017

FACTS

The assessee-company was engaged in carrying
on business of export, import and manufacture of precious and semi-precious
stones and jewellery. In the course of survey action at the business premises
of the assessee-company which action was converted into search, excess stock of
Rs. 231.41 lakh was surrendered.

The AO assessed the income on account of
excess stock u/s. 69B. However, he denied set-off of business loss against
excess stock by applying the provisions of section 115BBE and relied on the
decision of the Punjab & Haryana High Court in the case of Kim Pharma
(P.) Ltd. vs. CIT [2013] 35 taxmann.com 456 and Liberty India vs. CIT
[2007] 293 ITR 520.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who relying on the ITAT, Jaipur Bench in the case of DCIT vs.
Ramnarayan Birla [IT Appeal No. 482 (JP) of 2015, dated 30.9.2016] held
that the excess stock so found is part of regular business, the same is to be
taxed as business income. He further held that the amendment to the proviso of
section 115BBE wherein the word “or set off of any loss” is introduced by the
Finance Act, 2016 w.e.f. 1.4.2017, set-off of business loss during the year
against the excess stock found in the search operation is allowable. The CIT(A)
allowed the appeal filed by
the assessee.

Aggrieved, the Revenue preferred an appeal
to the Tribunal where, on behalf of the Revenue, it was argued that the
provisions of section 115BBE come under Chapter XII providing for determination
of rate of tax in certain special cases and accordingly, it relates to
quantification of amount of tax and not to the computation of total income and
therefore, the amendment brought in by the Finance Act, 2016 would not affect
the computation of total income. It was, accordingly, contended that the
business loss in the instant case cannot be allowed to be set-off against the
amount brought to tax u/s. 69B in terms of undisclosed investment in stock of
stones, gold and jewellery.

HELD

The Tribunal having noted the amendment
brought in section 115BBE(2) by the Finance Act, 2016, observed that if the
contentions made by CIT(DR) are accepted, the question that arises is would the
interpretation render sub-section (2) otiose and what was the necessity
for bringing in such amendment. It observed that the intention of the
legislature has been provided in the memorandum explaining the amendment.

The Tribunal held that given the fact that
the AO has invoked the provisions of section 115BBE in the instant case, the provisions
of sub-section (2) to section 115BBE are equally applicable. The amendment
brought in by the FA, 2016 whereby set-off of losses against income referred to
in section 69B has been denied is stated clearly to be effective from 1.4.2017
and will accordingly, apply AY 2017-18 onwards. Accordingly, for the year under
consideration, there is no restriction to set-off of business loss against
income brought to tax u/s. 69B of the Act.

The Tribunal observed that the matter could
be looked at from another perspective. The provisions relating to set-off of
losses are contained in Chapter VI relating to aggregating of income and
set-off of losses. Whenever legislature desires to restrict set-off of loss or
allowance of loss, in a particular manner, usually, the provisions are made in
Chapter VI such as non-allowance of business loss against salary income as
provided in section 71(2A), and treatment of short-term or long-term capital
losses. There is no specific provision which restricts set-off of business losses
against income brought to tax u/s. 69B. Interestingly, both section 69B and
section 71 fall under the same Chapter VI. In the absence of any provisions in
section 71 falling under Chapter VI which restrict set-off, in the instant
case, set-off of business losses against income brought to tax u/s. 69B cannot
be denied.

The Tribunal dismissed the appeal filed by
the revenue.

shailesh.kwebmaker

Section 37– Expenses on account of provident fund contribution of employees employed through the sub-contractor of the assessee-contractor are allowable if the same are incurred as per the conditions of contract entered into by the assessee-contractor and rendering of services by labourers of sub-contractors for the purposes of business of assessee was not doubted.

1.
[2017] 82 taxmann.com 292 (Pune- Trib.)

Ratilal
Bhagwandas Construction Co. (P.)
Ltd. vs. ITO

ITA No.:
1698 (Pune) of 2014

A.Y.:
2009-10, Date of Order: 31^stMay, 2017

FACTS

The assessee-company was engaged in the
business of industrial concern. It filed its return of income declaring a total
income of Rs. 4,82,49,120. In the course of assessment proceedings, the
Assessing Officer (AO) on perusing the `Office and Administration Expenses
Account’, noticed that assessee had debited Rs. 20,78,557 on account of
provident fund for employees of the contractors of the assessee company. He
noticed that this amount of Rs. 20,78,557 comprised of Rs. 9,73,953 being
employees’ contribution to PF and Rs. 11,04,624 being employers’ contribution.

The AO asked the assessee to justify this
claim of Rs. 20,78,557. The assessee submitted that under the agreement entered
into by the assessee with its various clients, the assessee is liable for
provident fund expenditure. It also submitted that many of the sub-contractors
do not have PF registration and hence, the assessee has paid their PF
contribution and therefore the same is claimed as an expenditure. The AO
considering the fact that in respect of assessee’s own employees, assessee has
contributed only employers’ contribution and had deducted the portion of
employees’ contribution from their wages / salaries, but in respect of
employees of the sub-contractors which were engaged by the assessee, no such deduction
was made from the wages / salaries of the concerned employees. The AO
disallowed Rs. 9,73,953 (being employees contribution to PF in respect of
employees of sub-contractor).

Aggrieved, the assessee preferred an appeal
to the CIT(A) who apart from upholding the order of the AO also enhanced the
disallowance by directing the AO to disallow further Rs. 11,04,124 being
employer’s contribution pertaining to contractor’s employees.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that under the terms
of the contract entered into by the assessee with its customers, it is the
responsibility of the assessee to comply with the requirements of the Employees
Provident Fund Act. Under the contract, it was the duty of the assessee to
cover all employees (including that of sub-contractor) under the Provident Fund
Act.

The Tribunal held that a perusal of sections
of Employees Provident Fund & Miscellaneous Provisions Act, 1952 and
Employees Provident Fund Scheme 1952 together with the clauses of the agreement
that the assessee had entered into with his clients show that the assessee is
responsible for the deduction of provident fund dues of the employees,
including those employed through sub-contractor and its deposit with the
appropriate authorities. It observed that in the present case, the rendering of
services by the labourers of the sub-contractors for the purpose of business of
the assessee has not been doubted by the revenue. It observed that statutorily,
the assessee could have recovered the Provident Fund dues from the
subcontractors, but when the assessee is not in a position to recover the
amounts paid as provident fund contribution for the respective contract
labourers, or considering the business exigencies when the assessee bears the
expense on account of Provident Fund contribution, then whether in such a
situation the expense can be disallowed? It held that the same cannot be
disallowed as an expenditure, more so when the rendering of services by the
subcontractors for the business of the assessee is not in doubt and in such a
situation, the expenditure can be allowed u/s. 37(1) of the Act.

Section 37(1) does not curtail or prevent an
assessee from incurring an expenditure which he feels and wants to incur for
the purpose of business. Expenditure incurred may be direct or may even
indirectly benefit the business in the form of increased turnover, better
profit, growth, etc. The AO cannot question the reasonableness by
putting himself in the arm-chair of the businessman and assume status or
character of the assessee and that it is for the assessee to decide whether the
expenses should be incurred in the course of his business or not. Courts have
also held that if the expenditure is incurred for the purposes of the business,
incidental benefit to some other person would not take the expenditure outside
the scope of section 37(1) of the Act.

It observed that it is a settled law that
the commercial expediency of a businessman’s decision to incur a particular
expenditure cannot be tested on the touchstone of strict legal liability to
incur such expenditure.

The Tribunal held that the disallowance of
employees contribution of PF (as made by the AO) and that of employers
contribution of PF (as enhanced by CIT(A)) was uncalled for. The appeal filed
by the assessee was allowed.

The Tribunal allowed the appeal filed by the
assessee.

shailesh.kwebmaker

1 Section 153C – AO cannot assume jurisdiction u/s. 153C on the basis of loose paper, seized in the course of search on a person (other than the assessee), which loose paper neither makes any reference to the assessee company, nor of any transaction entered into by the assessee. Amendment made by the Finance Act, 2015 to section 153C is prospective and is applicable w.e.f. 1.6.2015.

1.
[2017] 85 taxmann.com 87 (Mumbai – Trib.)

DCIT vs. National Standard India Ltd.

ITA Nos. 4055 to 4060 (Mum.) of 2015

A.Ys.: 2005-06 to 2010-11, Date of Order: 28^th July, 2017

FACTS

The management of the assessee company
changed in May 2010 and consequently, the assessee company became a part of
Lodha Group of companies. At the time of search on Lodha Group of entities on
10.1.2011, premises of the assessee company at Wagle Estate, where the project
of Lodha Group viz. Lodha Excellencia was coming up, was covered u/s.
133A.

In the course of the search, minutes of SCUD
meeting giving details of projects, customers, flats booked by them, area of
the flat, consideration and deviation from the listed price were seized. These
minutes had a remarks column which explained the deviation and indicated in
many cases payment in cash euphemistically referred to as “payment in other
mode”.

Further, in the course of search, Mr.
Abhinandan Lodha, key person of Lodha Group, in his statement recorded u/s.
132(4) of the Act, came up with a disclosure of Rs. 199.80 crore and offered
the same as additional income. From the
entity wise details of unaccounted income, furnished by Mr. Lodha, it was found
that it included Rs. 110.25 lakh in respect of sale of parking space in the
hands of assessee company in AY 2011-12.

The Assessing Officer, based on these
minutes and the statement recorded u/s.132(4), assumed jurisdiction u/s.153C of
the Act and issued a notice requiring the assessee to furnish return of income.

Vide order dated 31.3.2013 passed u/s.153A
r.w.s. 153C/143(3) the Assessing Officer (AO) assessed the loss to be Rs.
6,40,575 as against the returned loss of Rs. 3,62,51,460.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who observed that the seized document on the basis of which the
AO assumed jurisdiction u/s. 153C of the Act indicated the modus operandi
of the Lodha Group of receiving money, but did not make any reference to any
project of the assessee. It also did not bear any reference to the transactions
entered into by the assessee. The CIT(A) held that the AO had wrongly assumed
jurisdiction u/s. 153C of the Act. Accordingly, he quashed the assessment
framed by the AO u/s. 153A r.w.s. 153C/143(3) of the Act.

Aggrieved, the Revenue preferred an appeal
to the Tribunal.

HELD

A reference to the provisions of section
153C of the Act reveals beyond any doubt that upto 30^th May, 2015,
the requirement, as per mandate of law, for the purpose of assumption of
jurisdiction u/s. 153C was that the AO of the person searched should be
satisfied that money, bullion, jewellery or other valuable article or thing or
books of accounts or documents seized `belonged’ to a person other than the
person referred to in section 153A. Section 153C excludes from its scope and
gamut such seized documents which though were found to pertain or relatable to
such `other person’, but however not found to be `belonging’ to the latter.

The legislature realising the fact that the
usage of the aforesaid terms seriously jeopardised the assumption of
jurisdiction by the AO in a case where any `books of account’ or `documents’
which though pertained to or any information contained therein related to such
other person, but were not found to be `belonging’ to him, amended the
provisions of section 153C, by the Finance Act, 2015, with effect from 1.6.2015
and dispensed with the terms `belongs’ or `belong to’ and instead included
within its sweep books of account or documents which pertain or pertains to or
any information contained therein, relates to such other person.

The Tribunal held that the aforesaid
amendment to section 153C is not retrospective in nature and is applicable only
w.e.f. 1.6.2015. This observation stands fortified by the judgment of the Bombay
High Court in the case of CIT vs. Arpit Land (P.) Ltd. [2017] 393 ITR 276
(Bom.). It held that the case of the assessee would be governed by the
pre-amended law as was applicable upto 30.6.2015.

It observed that a bare perusal of the
seized documents does neither make any reference of the assessee company, nor
of any transaction entered into by the assessee company, which could go to
justify the assumption of jurisdiction by the AO u/s. 153C.

The Tribunal held that in the absence of any
document belonging to the assessee having been seized during the course of
search proceedings in the case of Lodha Group, the assumption of jurisdiction
by the AO u/s. 153C by referring to the above referred seized documents is
highly misplaced.

It also observed that the statement of Shri
Abhinandan Lodha recorded u/s. 132(4) in the course of search and seizure
proceedings conducted in the case of Lodha group cannot be construed as a
`seized document’, therefore, the reliance placed by the AO on the same to
justify the validity of jurisdiction assumed u/s. 153C in the hands of the
assessee company, cannot be accepted.

The Tribunal held that the AO had clearly
traversed beyond the scope of his jurisdiction u/s. 153C and therein proceeded
with and framed assessment u/s. 153A r.w.s. 153C/143(3) in the hands of the
assessee company.

The Tribunal upheld the order of CIT(A) and
dismissed the appeal filed by the revenue.

shailesh.kwebmaker

1 Section 147 – Reassessment – After the expiry of four years – No failure by assessee to truly and fully disclose all material facts – reopening is bad in law

ACIT vs. Kalyani Hayes Lemmerz Ltd.
ITA No: 802 of 2015 (Bom. HC)
A.Y.: 2003-04 Dated: 29th January, 2018
[ACIT vs. Kalyani Hayes Lemmerz Ltd.
ITA No.2476/PN/2012;
Dated: 24th Aug., 2014 ; Pune. ITAT]

The Assessee Company was
incorporated in 1996 with the Kalyani Group (Indian Partner), holding 75% and
Lemmerz Werke GMBH Germany (German Partner) holding remaining 25% share in it.
Thereafter, the share holding of the Assessee company, underwent a change with
the German Partners, increasing its share holding to 80% in the Assessee
Company by acquiring shares from M/s. Kalyani Group.

The Assessment was
completed u/s. 143 (3) of the Act after having discussed the shareholding
pattern, allowed the carried forward loss under section 79 of the Act.
Thereafter, the assessment was reopened on the point of shares holding pattern
of the company i.e in the assessment
order, applicability of provisions of section
79 of I.T. Act has not been considered by the AO.

Thereafter, the A.O passed
an order u/s. 143 read with 147 of the
Act, rejected the Petitioner’s objection, and thereafter, inter alia,
disallowed the carry forward of business losses u/s. 79 of the Act.

The CIT(A) allowed the
Assessee’s appeal, inter alia, holding that when all facts including the
change in shareholding pattern, had been disclosed during the regular
assessment proceedings, as is evident from the Assessment Order passed in the
regular assessment proceedings, then merely because the Assessing Officer
choose not to apply section 79 of the Act, it could not be said that the
Assessee had failed to disclose fully and truly all material facts, necessary
for assessment. This was a case where the first proviso to section 147 of the
Act will apply as the reopening notice is beyond a period of four years from
the end of the relevant AY.

Being aggrieved, Revenue
filed an appeal to the Tribunal. The Tribunal held that, where an assessment
order u/s. 143(3) of the Act was passed in regular assessment proceedings,
evidencing full and true disclosure of all material facts necessary for the purpose
of assessment. Then mere non consideration of section 79 of the Act by the A.O
cannot lead to the conclusion that the Assessee had failed to disclose all
material facts truly and fully, which were necessary for Assessment. The
Tribunal relied upon the Apex Court’s
decision in Calcutta Discount Company Ltd. vs. CIT 41 ITR 191 – wherein
it has been held that obligation of the Asssessee is to disclose all primary
facts truly and fully to the extent relevant for the purpose of Assessment. The
Assessee is under no obligation to inform the Assessing Officer of the
interference of fact or law to be drawn from the material facts which had been
disclosed fully and truly by the Assessee.

Being aggrieved, Revenue
filed an appeal to the High Court. The grievance of the Revenue is that it was
obligatory on the part of the Assessee to invite the attention of the A.O to
section 79 of the Act during regular assessment proceedings. Thus, not having
done so, it is submitted that the first proviso to section 147 of the Act, can
have no application.

The Hon. High Court
observed that it is an undisputed fact that the regular Assessment Order had
been passed u/s. 143(3) of the Act. The reopening notice has been issued beyond
the period of four years from the end of the relevant AY. Therefore, the first
proviso to section 147 of the Act is applicable and reopening notice can only
be sustained in cases where there is failure to disclose fully and truly all
material facts necessary for assessment. The reasons in support of the impugned
notice itself records the fact that the issue of shareholding pattern of the
company was discussed by the A.O in his Assessment order passed in the regular
assessment proceedings. The only basis of reopening is that the A.O in the
regular assessment did not apply provisions of section 79 of the Act, to
determine the taxable income. This non application of mind by the A.O while
carrying out assessment cannot lead to the conclusion that there has been any
failure on the part of the Assessee to truly and fully disclose all material
facts necessary for Assessment. The Tribunal correctly placed reliance upon the
decision of the Supreme Court in Calcutta Discount Company Ltd., (supra) to
hold that not pointing out the inference to be drawn from facts will not amount
to failure to disclose truly and fully all material facts, necessary for
assessment. In view of the above the, Appeal of dept was dismissed.

shailesh.kwebmaker

17 Search and seizure – Presumption as to seized documents – Can be raised in favour of assessee -– Documents showing expenditure incurred on account of value addition to property – Failure by AO to conduct enquiry or investigation regarding source of investment or genuineness of expenditure – Expenditure to extent supported by documents allowable

CIT vs. Damac Holdings Pvt. Ltd. 401 ITR 495 (Ker); Date of Order: 12/12/2017:
A. Ys. 2007-08 and 2008-09:
Sections 37, 132 and 132(4A)

The two
assessee companies, D and R, were involved in the business of real estate,
purchased landed property and developed and sold it. D purchased a piece of
land for about Rs. 5 crore which he sold for about Rs. 13 crore and R purchased
property for about Rs. 4 crores and sold it for about Rs. 9 crore. Both
incurred certain expenditure on developing the land in order to make it fit for
selling. D’s transactions took place in the A. Ys. 2007-08 and 2008-09 and R’s
in A. Y. 2008-09. Assessments were initiated on the basis of searches conducted
u/s. 132 of the Income-tax Act, 1961, in the residence of the directors of both
the assessee-companies. The assessee’s claimed the deduction of the expenditure
incurred on developing the properties in order to make them fit for selling.
The claims were supported by the various documents seized from the assesses
during the searches conducted. The assesses claimed the benefit of presumption
u/s. 132(4A) of the Act. The Assessing Officer worked out the total expenditure
and apportioned it to the total area and computed the cost expended. However,
he disallowed the claim for deduction. He was of the view that the vendors of
the property had incurred and claimed expenditure for leveling the property and
hence, there was no requirement for the assesses to make the expenditure to the
extent claimed.

The
Commissioner (Appeals) allowed the claims of both assesses to the extent of the
cheque payments as disclosed from the documents seized from the premises and
disallowed the balance. The Tribunal allowed the entire expenses as claimed by
the assessee.

On appeal
by the Revenue, the Kerala High Court held as under:

“i) Section 132(4A) of the Income-tax Act, 1961
provides for presumption, inter alia, of contents of the books of
account and other documents found in the possession and control of any person
in the course of a search, u/s. 132, to be true, and the presumption applies
both in the case of the Department and the assessee and could be rebutted by
either.

ii) The presumption u/s. 132(4A) applied in
favour of the assessee in so far as the expenditure being supported by the documents
seized at the time of search was concerned. There was no need for further proof
u/s. 37, since the Assessing Officer did not endeavour to carry out an enquiry
and investigation into the source of investment or the genuineness of the
expenditure made. However, the presumption could have effect only to the extent
of the documents seized and nothing further.

iii) There was no basis for the Assessing
Officer’s computation of the leveling expenditure. His finding that the vendors
of the property had spent for leveling the property and hence, there was no
requirement for the assessee to make the expenditure to the extent claimed,
could not be sustained. He had proceeded on mere conjectures and had ignored
the seized documents which contained the evidence of cheque payments and
vouchers of cash payments effected for the development of the lands. He also
did not verify the source of income for such expenditure. The fact that the
sale price was astronomical as against the purchase price raised a valid
presumption in favour of the contention of the assesses that, but for the
development of the property to a considerable extent that would not have been
possible, especially when there is no unusual spurt in the land prices during that short period.

iv) The Commissioner (Appeals) had considered the
documents produced and had allowed the claim to the extent that there were cheque
payments, as was discernible from the documents seized. Therefore, in the teeth
of the presumption as to the truth of the documents seized, no further proof
was required u/s. 37, the Department having failed to rebut such presumption.

v) The allowance of expenditure for leveling the
land was to be confined to the documents revealed from the seized documents,
whether it was cash or cheque payments.”

shailesh.kwebmaker

55 TDS – Section 194J – A. Ys. 2009-10 to 2012-13 – Fees for professional and technical services – Scope of section 194J – State Development Authority newly constituted getting its work done through another existing unit – Reimbursement of expenses by State Development Authority – Not payment of fees – Tax not deductible at source

Princ. CIT vs. H. P. Bus Stand Management and Development Authority; 400 ITR 451 (HP):

The assessee, the H. P. Bus Stand Management and Development Authority, an entity established for development and management of bus stands within the State of Himachal Pradesh, was established w.e.f. April 1, 2000. Prior thereto, such work was being carried out by the State Road Transport Corporation itself. Since the assesee had no independent establishment and infrastructure of its own to carry out the objects, a decision was taken to have the same executed through the employees of the Corporation. This arrangement was to continue till such time as the assessee developed its own infrastructure. Since ongoing projects were required to be executed, which was so done in public interest, as per the arrangement arrived at, certain payments were released by the assessee in favour of the Corporation. The expenditure was to be shared by way of reimbursement. Since the assesee did not deduct any amount in terms of section 194J of the Act, with respect to the amount paid to the Corporation, the Assessing Officer disallowed the deduction of the amount paid to the Corporation for failure to deduct tax at source. The Commissioner (Appeal) and the Tribunal deleted the addition.

On appeal by the
Revenue, the Himachal Pradesh High Court upheld the decision of the Tribunal
and held as under:

“i) The
arrangement arrived at between the two entities could not be said to be that of
rendering professional services. No legal, medical, engineering, architectural
consultancy, technical consultancy, accountancy, nature of interior decoration
or development was to be rendered by the Corporation. Similarly, no service,
which could be termed to be technical service, was provided by the corporation
to the Development Authority, so also no managerial, technical or consultancy
services were provided.

ii) The arrangement was
simple. The staff of the corporation was to carry out the work of development and management of the
Development Authority till such time as, the assessee developed its
infrastructure and the expenditure so incurred by the Corporation was to be
apportioned on agreed terms. It was only pursuant to such arrangement, that the
assessee disbursed the payment to the Corporation and no amount of tax was
required to be deducted at source on the payment.” _

shailesh.kwebmaker

54 Special deduction u/s. 80-IA – A. Y. 2008-09 – Development or operation and maintenance of infrastructure facility – Scope – Deduction is profit linked – Ownership of undertaking is not important – Successor in business can claim deduction

Kanan Devan Hills Plantation Co. P. Ltd. vs. ACIT; 400 ITR 43 (Ker):

The assessee took over the going concern, a tea estate with all its incidental business. A power distribution system with a network of transmission lines was part of that acquisition. The assessee maintained that in 2007-08, it renovated and modernised the transmission lines by investing huge amounts. So for the A. Y. 2008-09, it claimed tax benefits u/s. 80-IA of the Income-tax Act, 1961. The Assessing Officer disallowed the claim for deduction u/s. 80-IA of the Act. Commissioner (Appeals) and the Tribunal upheld the disallowance.

On appeal by the assessee, the Kerala High Court reversed the decision of the Tribunal and held as under:

“i) Section 80-IA applies to an “undertaking” referred to clause (ii) or clause (iv) or clause (vi) of sub-section (4) if it fulfills the enumerated conditions. The assessee’s undertaking fell in clause (iv) of sub-section (4). In accordance with the conditions stipulated, the assessee ought not to have formed the undertaking by splitting up or reconstructing an existing business. Here there was neither splitting up nor reconstructing the existing business. The assessee had produced an audited certificate that the written down value of the plant and machinery as on April 1, 2004 was Rs. 89,39,340. It claimed that it spent for the A. Y. 2008-09 Rs. 50.31 lakhs to renovate and modernise its transmission network. So, the amount spent was over 50% of the then existing establishment book value. The undertaking squarely fell u/s. 80-IA(4)(iv)(c) of the Act.

ii) The renovation or modernisation, admittedly took place between April 1, 2004 and March 31, 2011. In the circumstances the Assessing Officer’s disallowing Rs. 58,91,000 u/s. 80-IA of the Act, as affirmed by the appellate authority and the Tribunal, could not be sustained. So we answer the question of law in the assessee’s favour. As a corollary, we set aside the Tribunal’s impugned order and allow the appeal.”

shailesh.kwebmaker

53 Reassessment – Sections 147 and 148- A. Y. 2008-09 – Notice on ground that shareholders of company were fictitious persons – Shareholders other public registered companies – Notice based on testimony of two individuals who had not been cross-examined – Notice not valid

Princ. CIT vs. Paradise Inland Shipping P. Ltd.; 400 ITR 439 (Bom):

For the A. Y. 2008-09, the assessment of the assessee company was reopened on the ground that the shareholders of the assessee – company were fictitious persons. The Commissioner (Appeals) and the Tribunal held that the reopening was not valid.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The notice of reassessment had been issued on the ground that the shareholders of the assessee-company were fictitious persons. The shareholders were other companies. The documents which had been produced were basically from public offices, which maintain records of companies. The documents also included the assessment orders of such companies for the three preceding years. Besides the documents also included the registration of the companies which disclosed their registered addresses.

ii) The Commissioner (Appeals) as well as the Tribunal on the basis of the appreciation of the evidence on record, concurrently came to the conclusion that the existence of the companies was based on documents produced from public records.

iii) The Revenue was seeking to rely upon the statements recorded of two persons who had admittedly not been subjected to cross-examination. Hence the question of remanding the matter for re-examination of such persons would not at all be justified. The notice was not valid and had to be quashed. The appeal stands rejected.”

shailesh.kwebmaker

52 Penalty – Concealment of income – Section 271(1)(c) – A. Y. 2009-10 – Claim for deduction – Difference of opinion among High Courts regarding admissibility of claim – Particulars regarding claim furnished – No concealment of income – Penalty cannot be levied

Principal CIT vs. Manzoor Ahmed Walvir; 400 ITR 89 (J&K):

For the A. Y. 2009-10, the assessee had made a claim and had disclosed the relevant facts. The claim involved the interpretation of section 40(a)(ia) of the Act, and in particular the word “payable. There were different judgments of the High Courts both in favour of the assessee and against the assessee. The claim was disallowed by the Assessing Officer. On that basis, the Assessing Officer also imposed penalty u/s. 271(1)(c) of the Act for concealment of income. The Tribunal deleted the penalty.

On appeal by the Revenue, the Jammu and Kashmir High Court upheld the decision of the Tribunal and held as under:

“i) There had been disallowance by interpreting the word “payable” in section 40(a)(ia) to include payments made during the year. Some High Courts had taken the view that the expression “payable” did not include amounts paid, while others had taken the view that the expression “payable” included amounts paid during the year. The Supreme Court finally resolved the controversy in Palam Gas Services vs. CIT; 394 ITR 300 (SC) holding that the expression “payable” included not only the amounts which remained payable at the end of the year, but also the amounts paid during the year.

ii) When the assessee made the claim, this issue was debatable and, therefore, in so far as the deduction of tax at source on amounts paid was concerned, the position was that, while it could be made the subject of disallowance, it could not form the basis for imposing a penalty. The deletion of penalty by the Tribunal was justified.”

shailesh.kwebmaker

51 Loss – Carry forward and set off – Section 72(1) – A. Y. 2005-06 – Loss of current year and carried forward loss of earlier year from non-speculative business can be set off against profit of speculative business of current year

CIT vs. Ramshree Steels Pvt. Ltd.; 400 ITR 61 (All)

The assessee filed Nil return for A. Y. 2005-06, after setting off loss of the earlier year to the extent of profit. The Assessing Officer computed the total income at Rs. 2,17,46,490, treating the share trading business as speculative profit to an amount of Rs. 3,84,09,932. The Commissioner (Appeals) enhanced the income and held that the amount of Rs. 3,84,09,932 was to be taxed and the business loss of Rs. 1,66,63,443 was to be carried forward after verification by the assessing authority. The Tribunal allowed the assessee’s appeal and directed the Assessing Officer to allow the set off of loss from non-speculative business against profit from speculative business.

On appeal by the Revenue, the Department contended that section 72(1) provided that the non-speculative business loss could be set off against “profit and gains, if any, of any business or profession” carried on by the assessee and was assessable in that assessment year, and when it could not be so set off, it should be carried forward to the following assessment year.

The Allahabad High Court upheld the decision of the Tribunal and held as under:

“The order of the Tribunal, based on material facts and supported by the decisions of Supreme Court and the High Court, need not be interfered with. The appeal filed by the Department is accordingly dismissed.”

shailesh.kwebmaker

50 Recovery of Tax – Company in liquidation – Liabilities of directors – Section 179 – A. Ys. 2006-07 to 2011-12 – Assessee was a director of private limited company – She filed instant writ petition contending that order passed against her u/s. 179(1) was without jurisdiction because no effort was made by revenue to recover tax dues from defaulting private limited company – Held: Assessing Officer can exercise jurisdiction u/s. 179(1) against assessee only when it fails to recover its dues from Private Limited Company, in which assessee is a director – Such jurisdictional requirement cannot be said to be satisfied by a mere statement in impugned order that recovery proceedings had been conducted against defaulting private limited company – Since, in instant case, show cause notice u/s. 179(1) did not indicate or give any particulars in respect of steps taken by department to recover tax dues from defaulting private limited company, impugned order was to be set aside

Madhavi Kerkar vs. ACIT; [2018] 90 taxmann.com 55 (Bom)

The assessee was a director of private limited company. The Assessing Officer passed an order u/s. 179(1) against her for recovery of the tax dues of the company from her. She filed a writ petition challenging the validity of the said order u/s. 179(1). According to the assessee, in terms of section 179(1) the revenue was clothed with jurisdiction to proceed against directors of a private limited company to recover its dues only where the tax dues of the Private Limited Company could not be recovered from it. It was the case of the assessee that no effort was made to recover the tax dues from the defaulting private limited company.

The Bombay High Court allowed the writ petition and held as under:

“i) The revenue would acquire/get jurisdiction to proceed against the directors of the delinquent Private Limited Company only after it has failed to recover its dues from the Private Limited Company, in which the assessee is a director. This is a condition precedent for the Assessing Officer to exercise jurisdiction u/s. 179 (1) against the director of the delinquent company. The jurisdictional requirement cannot be said to be satisfied by a mere statement in the impugned order that the recovery proceedings had been conducted against the defaulting Private Limited Company but it had failed to recover its dues. The above statement should be supported by mentioning briefly the types of efforts made and its results.

ii) Therefore, appropriately, the notice to show cause issued u/s. 179 (1) to the directors of the delinquent Private Limited Company must indicate albeit, briefly, the steps taken to recover the tax dues and its failure. In cases where the notice does not indicate the same and the assessee raises the objection of jurisdiction on the above account, then the assessee must be informed of the basis of the Assessing Officer exercising jurisdiction and the notice’/directors response, if any, should be considered in the order passed u/s. 179 (1) of the Act.

iii) In this case the show-cause notice u/s. 179 (1) did not indicate or give any particulars in respect of the steps taken by the department to recover the tax dues of the defaulting Private Limited Company and its failure. The assessee in response to the above notice, questioned the jurisdiction of the revenue to issue the notice u/s. 179 (1) and sought details of the steps taken by the department to recover tax dues from the defaulting Private Limited Company. In fact, in its reply, the assessee pointed out that the defaulting company had assets of over Rs.100 crore.

iv) Admittedly, in this case no particulars of steps taken to recover the dues from the defaulting company were communicated to the assessee nor indicated in the impugned order. In this case except a statement that recovery proceedings against the defaulting assessee had failed, no particulars of the same are indicated, so as to enable the assessee to object to it on facts. In the above view, the impugned order is set aside.”

shailesh.kwebmaker

49 Income – Expenditure – Sections 2(24) and 36(1)(v) : A. Ys. 2002-03 and 2003-04 – Grant received from Government – Assessee a sick unit, receiving grant for disbursement of voluntary retirement payments – Grant received by assessee from Government cannot be treated as income – Payment to employees towards voluntary retirement scheme from grant allowable as deduction – Payment of gratuity from fund granted by Government is deductible u/s. 36(1)(v)

Scooters India Ltd. vs. CIT; 399 ITR 559 (All):

The assessee, a company owned by the Government of India, manufactured and marketed three wheelers. The assessee was a sick unit and was implementing revival or rehabilitation approved by the Board for Industrial and Financial Reconstruction. The Government of India remitted a grant out of the national renewal fund for implementation of a voluntary retirement scheme. Payment was made by the assessee to the employees towards the voluntary retirement scheme out of the grant. For the A. Y. 2002-03, the assessee furnished the return showing income at Rs. 2,51,25,472 for the current year and setting off part of brought forward losses against the income. The Assessing Officer treated the grant as income of the assessee and disallowed the expenditure incurred by it on voluntary retirement scheme and also disallowed gratuity. The Commissioner (Appeals) and the Tribunal confirmed this.

On appeal by the assessee, the Allahabad High Court reversed the decision of the Tribunal and held as under:

“i) The grant or subsidy was forwarded by the Government of India to help the assessee in its revival by making payment to employees towards voluntary retirement scheme. It was a voluntary remittance fund by the Government of India to the assessee. The Department failed to show anything so as to bring “grant” or “subsidy” it within any particular clause of section 2(24) of the Act. The amount of grant received by the assessee from the Government of India could not be treated as income.

ii) The payment to employees towards voluntary retirement scheme was to be allowed. The narrow interpretation straining language of section 36(1)(v) of the Act so as to deny deduction to the assessee should not be followed since the objective of the fund was achieved. The payment of gratuity was to be allowed.”

shailesh.kwebmaker

48 Export business – Special deduction u/s. 10B – A. Y. 2008-09 – Gains derived from fluctuation in foreign exchange rate – Receipt on account of export – Is in nature of income from export – Entitled to deduction u/s. 10B

Princ. CIT vs. Asahi Songwon Colors Ltd.; 400 ITR 138 (Guj):

For the A. Y. 2008-09, the Assessing Officer disallowed the deduction u/s. 10B of the Act, on profits arising due to the foreign exchange rate fluctuation on the ground that it was not income derived from the Industrial undertaking. The Commissioner (Appeals) deleted the disallowance and the deletion was confirmed by the Tribunal.

On appeal by the Revenue, the Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) The income or loss due to fluctuation in the exchange rate of foreign currency that arose out of the export business of the assessee did not lose the character of income from assessee’s export business. Deduction u/s. 10B was permissible if profit and gains were derived from export. The exact remittance in connection with such export depended on the precise exchange rate at the time when the amount was remitted.

ii) The receipt was on account of the export made, and therefore, the fluctuation thereof must also be said to have arisen out of the export business. Merely because of fluctuation in the international currencies, the income did not get divested of the character of income from export business.
iii) Therefore, the Tribunal did not commit any error in deleting the addition made on account of fluctuation in foreign exchange rates from the deduction u/s. 10B. No question of law arose.”

shailesh.kwebmaker

13 Section 12A(2) – First proviso to section 12A(2) inserted by the Finance Act, 2014, with effect from 1.10.2014, being a beneficial provision intended to mitigate hardships in case of genuine charitable institutions, has to be applied retrospectively.

[2017] 87
taxmann.com 113 (Amritsar – Tribunal.)

Punjab
Educational Society vs. ITO

ITA No. :
459/Asr/2016

A.Y. : 2011-12
Date of Order: 20^thNovember, 2017

FACTS

The assessee, an educational institution,
filed its return of income for AY 2011-12 on 29.09.2011, declaring total income
at Rs. Nil. During the course of assessment proceedings the Assessing Officer
(AO) observed that the assessee society during the year under consideration had
shown excess of income over expenditure of Rs. 34,31,521 which was transferred
to its Reserves and Surplus account. Since the gross receipts of the assessee
society, which was neither registered u/s. 12A nor approved u/s. 10(23C)(vi) of
the Act had during the previous year relevant to assessment year 2011-12
exceeded Rs. One crore, the AO called upon the assessee to explain why the same
may not be brought to tax in his hands.

The assessee submitted that it was
registered u/s. 12AA(1)(b)(i) of the Act with the competent authority with
effect from AY 2012-13, therefore, it being a charitable society which was
running an educational institution, could not be denied exemption for the
reason that its gross receipts had exceeded Rs. One crore. It also submitted
that it had applied its income purely for accomplishment of its objects as per
section 11(5), therefore, its income could not be subjected to tax.

The AO taxed the sum of Rs. 34,31,521 as the
assessee society had not applied for the grant of registration u/s. 12AA with
the prescribed authority nor was approved u/s. 10(23C)(vi) or (via) for AY
2011-12.

Aggrieved, the assessee preferred an appeal
before the CIT(A) who confirmed the action of the AO.

HELD

The Tribunal observed that the issue
involved in the present appeal lies in a narrow compass viz. as to whether the
CIT(A) was right in concluding that the first proviso of section 12A(2) would
be applicable to the facts of the present assessee or not. It noted that the
first proviso of section 12A(2) had been made available on the statute vide
the Finance (No. 2) Act, 2014, with effect from 01.10.2014. It also observed
that a perusal of the Explanatory notes of the Memorandum to Finance (No. 2)
bill, 2014 explaining the objects and reasons for making available the first
proviso to section 12A(2) on the statute reveals that it was in order to
mitigate the hardships caused to charitable institutions, which despite having
satisfied the substantive conditions rendering them eligible for claim of
exemption, however, for technical reasons were saddled with tax liability in
the prior years, due to absence of registration u/s. 12AA.

It noted that the issue as to whether the
beneficial provisions made available on the statute by the legislature in all
its wisdom, vide the Finance (No. 2) ‘Act’, 2014 with effect from
01.10.2014 were to be given a retrospective effect, or not, had already
deliberated upon and adjudicated by this Tribunal in bunch matters of St.
Judes Convent School vs. Asstt. CIT [2017] 164 ITD 594/77 taxmann.com 173
(Asr.).

The Tribunal, having given a thoughtful
consideration to the aforesaid observations of the Tribunal, found itself to be
in agreement with the view taken therein. The Tribunal held that the first
proviso of section 12A(2) as had been made available on the statute vide
the Finance (No. 2) ‘Act’. 2014, with effect from 01.10.2014, being a
beneficial provision intended to mitigate the hardships in case of genuine
charitable institutions, would be applicable to the case of the present
assessee. It set aside the order of the CIT(A) and consequently deleted the
addition of Rs.34,31,521/- sustained by her.

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

12 Sections 115JAA, 234B – For the purposes of calculating the levy of interest u/s. 234B of the Act, amount of “assessed tax” is to be determined after reducing the entire MAT credit (including surcharge and cess) u/s. 115JAA.

2017] 88 taxmann.com 28 (Kolkata – Trib.)

Bhagwati Oxygen Ltd. vs. ACIT

ITA No. : 240(Kol) of 2016

A.Y.: 2011-12
Date of Order: 15^th November,
2017

FACTS

The assessee, a private limited company,
electronically filed its return of income for the assessment year 2011-12
disclosing total income of Rs. 1,41,26,460/. The assessee computed the tax
liability at Rs. 46,92,789/- including surcharge and cess under the normal
provisions of the Act. The assessee
computed the book profit u/s. 115JB of the Act at Rs. 92,42,889/- and
determined the tax payable thereon at Rs. 17,13,632/- including surcharge and
cess. The assessee computed the MAT credit u/s. 115JAA of the Act to be
adjusted in future years at Rs. 29,79,157/- ( 46,92,789 – 17,13,632).

This return was processed u/s. 143(1) by
Centralized Processing Centre, Bangalore (in short “CPC”) wherein the
total income under normal provisions of the Act was determined at Rs.
1,41,27,460/- and tax @ 30% thereon was determined at Rs. 42,38,238/-. In the
said intimation u/s. 143(1) the book profit u/s. 115JB of the Act was
determined at Rs. 92,42,889/- and tax @ 18% was determined at Rs. 16,63,720/-.
Accordingly, the CPC in the intimation u/s. 143(1) of the Act determined the
MAT credit u/s. 115JAA of the Act at Rs. 25,74,518/- (4238238 – 1663720). While
determining the MAT credit u/s. 115JAA CPC completely ignored the surcharge
portion and cess portion computed by the assessee, both under normal provisions
of the Act as well as under computing the tax liability u/s. 115JB of the Act.
In view of this, the assessee was fastened with a demand payable.

Aggrieved, the assessee preferred an appeal
to CIT(A). In the course of appellate proceedings the assessee placing reliance
on the decision of the Hon’ble Supreme Court in the case of CIT vs. K.
Srinivasan [1972] 83 ITR 346, among other decisions, pleaded that surcharge
and cess are nothing but a component of tax. The CIT (A) however, was not
convinced with the argument of the assessee and upheld the demand raised by the
CPC in the intimation u/s. 143(1).

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that –

(i) the issue under dispute
has been addressed against the assessee by the decision of Delhi Tribunal in
the case of Richa Global Exports (P.) Ltd. vs. Asstt. CIT [2012] 25
taxmann.com 1/54 SOT 185;

(ii) the issue under dispute
is covered in favour of the assessee by the Co-ordinate Bench of Hyderabad
Tribunal in the case of Virtusa (India) (P.) Ltd. vs. Dy. CIT [2016] 67
taxmann.com 65/157 ITD 1160;

(iii) the Hyderabad Tribunal
after considering the decision of Delhi Tribunal (supra) and after
considering the decision of the Apex Court in the case of K. Srinivasan
(supra) had held that tax includes surcharge and cess and accordingly the
entire component of taxes including surcharge and cess shall have to be
reckoned for calculating the MAT credit u/s. 115JAA of the Act;

(iv) the Hon’ble Apex Court had
in the case referred to supra, had held that meaning of word ‘surcharge’
is nothing but an ‘additional tax’.

It held that this understanding of surcharge
and cess being included as part of the tax gets further sanctified by the
amendment which has been brought in section 234B of the Act in Explanation 1
Clause 5, while defining the expression ‘assessed tax’. Having considered the
language of Explanation 1 to section 234B of the Act it observed that from the
said provisions it could be inferred that the legislature wanted to treat the
payment of entire taxes (including surcharge and cess) eligible for MAT credit
u/s. 115JAA while calculating the interest on ‘assessed tax’ u/s. 234B of the
Act, meaning thereby, the assessed tax shall be determined after reducing the
entire MAT credit u/s. 115JAA of the Act for the purpose of calculating
interest u/s. 234B of the Act. It observed that this is clinching evidence of
the intention of the legislature not to deprive any credit of any payment of
surcharge and cess made by the assessee either in the MAT or under the normal
provisions of the Act. It noted that it is not in dispute that the surcharge
and cess portion was not paid by the assessee along with the tax portion. The
bifurcation of the total payment of taxes by way of tax, surcharge and cess is
only for the administrative convenience of the Union of India in order to know
the purpose for which the said portion of amounts are to be utilised for their
intended purposes. Hence, the bifurcation is only for utilisation aspect and
does not change the character of payment in the form of taxes from the angle of
the assessee. As far as assessee is concerned, it had simply discharged the
statutory dues comprising of tax, surcharge and cess to the Union of India and
hence if paid in excess, would be eligible for either refund or adjustment as
contemplated u/s. 115JAA of the Act. It observed that if the version of the
CIT(A) is to be accepted, then it would result in an situation wherein if the
assessee is entitled for refund, he would not be entitled for refund on the
surcharge and cess portion. This cannot be the intention of the legislature and
it is already well settled that the tax is to be collected only to the extent
as authorised by law in terms of Article 265 of the Constitution and the
department cannot be unjustly enriched with the surcharge and cess portion of
the amounts actually paid by the assessee. It held that the reliance placed on
behalf of the assessee on the decision of Hyderabad Tribunal is well founded
and squarely applies to resolve the dispute in the present case.

The Tribunal allowed this ground of appeal
filed by the assessee.

shailesh.kwebmaker

11 Section 201(1A) – Interest u/s. 201(1A), on delay in deposit of TDS, is to be calculated for the period from the date on which tax was deducted till the date on which the tax was deposited.

[2017] 88 taxmann.com 103 (Ahmedabad)

Bank of Baroda vs. DCIT

ITA No. : 1503/Ahd./2015

A.Y.: 2014-15
Date of Order: 30^th November,
2017

FACTS

The assessee, a branch of a nationalised
bank, deposited tax deducted at source, u/s. 194A of the Act, for the month of
September 2014 on 8^thOctober, 2014. While processing the TDS return
u/s. 200A, a sum of Rs. 2,78,607 was charged as interest for delay in
depositing the tax at source, for a period of two months, i.e. September and
October 2014. This interest amount of Rs.2,78,607/- was sought to be recovered
by the Assessing Officer.

Aggrieved, by the action of levying interest
for a period of two months, assessee carried the matter in appeal before the
CIT(A) who observed that the issue in dispute is whether the day on which tax
was deducted is to be excluded or not. Relying on the decision of the Hon’ble
Apex Court in Criminal Appeal No.1079 of 2006 in case of Econ Antri Ltd. vs.
Ron Industries Ltd. & Anr, in order dated 26-03-2013 he held that for
the purpose of calculating period of one month, the period has to be reckoned
by excluding the date on which the cause of action arose. He held that the
assessee was liable to pay interest for a period of one month.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that the time limit
for depositing the tax deducted at source u/s. 194A, as set out in rule
30(2)(b) – which applies in the present context, is “on or before seven
days from the end of the month in which the deduction is made”. It noted
that since the TDS was deposited on 8^th of October 2014, admittedly
there was clearly a delay in depositing tax at source. It noted that the
contention on behalf of the assessee is that the levy of interest should be
reduced to actual period of delay in depositing the tax at source, i.e. from
the date on which tax was deducted and till the date on which tax was
deposited. It is only if such a period exceeds one month, then the question of
levy of interest will arise. It observed that what has been done in the present
case is that the interest has been charged for two calendar months, i.e.
September and October. It held that the question of levy of interest for the
second month can arise only if the period of time between the date on which tax
was deducted and the date on which tax was paid to the Government exceeds one
month. The Tribunal directed the Assessing Officer to re-compute the levy of
interest u/s. 201(1A) accordingly.

shailesh.kwebmaker

10 Section 201(1)/201(1A) r.w.s 191- Before treating the payer as an assessee in default u/s. 201(1), since the ITO(TDS) did not requisition information from the recipients of income to ascertain whether or not taxes have been paid by them, there is violation of mandate of explanation to section 191 and thus invocation of jurisdiction u/s. 201(1)/(1A) is void.

Aligarh Muslim University vs. ITO

(2017) 158 DTR (Agra) (Trib) 19

ITA No: 191/Agra/2016

A.Y.:2015-16
Date of Order: 15^th May, 2017

FACTS

The assessee/deductor university paid salary
to its employees after deducting tax u/s. 192. The ITO (TDS) noticed that the
assessee was allowing exemption u/s. 10(10AA)(i) on the payment of leave salary
at the time of retirement/superannuation to its employees, considering them as
employees of Central Government. The Assessing Officer treated the assessee as
an assessee in default u/s. 201/201(1A) for short deduction of tax due to
allowing the exemption u/s. 10(10AA)(i) beyond the maximum limit of Rs. 3 lakh.

On appeal to the CIT(A), the CIT(A) directed
the ITO(TDS) to allow the assessee to adduce evidence that the deductees had
themselves paid due tax on their leave salary and then, to recompute the
amounts in respect of which the assessee would be an assessee in default u/s. 201(1).

The assessee preferred an appeal to the
Tribunal and argued that in order to declare the assessee as assessee in default,
the condition precedent is that the payee had failed to pay tax directly and it
is only after the finding that the payee had failed to pay tax directly, that
the assessee could be deemed to be an assessee in default in respect of such
tax.

HELD

A bare perusal of the Explanation to section
191 itself makes it clear that it is only when the employer fails to deduct the
tax and the employee has also failed to pay tax directly, that the employer can
be deemed to be an assessee in default. In other words, in order to treat the
employer as an assessee in default, it is a pre-requisite that it be
ascertained that employee has also not paid the tax due.

The CIT (A) has stated that before him, no
evidence was produced to show as to which of the employees of the University
had paid due taxes in respect of leave salary income on which TDS was not made
properly and that it was therefore, that he was unable to quantify the relief
that can be allowed in respect of such employees.

The Tribunal held that it was not within the
purview of the CIT(A) to fill in the lacuna of the ITO (TDS). In fact,
it was for the ITO (TDS) to ascertain the position, as prescribed by the
Explanation to section 191, that is, as to whether the deductee had failed to
pay the due tax directly, and only thereafter to initiate proceedings to deem
the assessee as an assessee in default u/s. 201(1) of the Act. As observed by
the Allahabad High Court in the case of Jagran Prakashan Ltd vs. DCIT
reported in 345 ITR 288, this is a foundational and jurisdictional matter
and therefore, the Appellate Authorities cannot place themselves in the
position of the ITO (TDS) to ratify a jurisdiction wrongly assumed.

The only prerequisite was that the details
of the persons to whom payments were made, should be available on record. And
once that is so, i.e., the assessee has submitted the requisite details to the
ITO (TDS), it is for the ITO (TDS), to ascertain, prior to invoking section
201(1) of the Act, as to whether or not the due taxes have been paid by the
recipient of the income.

The show cause notice issued to the
University contains the names of 237 persons with full details of payments made
to them by the University. Therefore, it is amply clear that at the time of
issuance of notice dated 02.03.2015, u/s. 201/201(1A) to the University, the
ITO (TDS) was in possession of the requisite details of the recipients of the
income. As such, the legislative mandate of the Explanation to section 191 of
the Act was violated by the ITO (TDS), by not requisitioning, before issuing
the show cause notice to the University, information from the recipients of the
income, as to whether or not the taxes had been paid by them, nor seeking such
information from the concerned Income-tax Authorities.

As observed, this is a foundational
jurisdictional defect going to the root of the matter. Violation of the mandate
of the Explanation to section 191 is prejudicial to the invocation of the
jurisdiction of the ITO (TDS) under sections 201/201(1A). In absence of such
compliance, the invocation of the jurisdiction is null and void ab initio.

As a consequence, the order under appeal no
longer survives and it is cancelled.

shailesh.kwebmaker

8. Depreciation – trial production – even if final production is not started – as the expenses incurred thereafter will have to be treated as incurred in the course of business and on the same basis the depreciation is admissible.: Section 32

The Pr.CIT-4
vs. Larsen and Toubro Ltd. [Income tax Appeal no 421 of 2015 dt : 06/11/2017
(Bombay High Court)].

[Larsen and
Toubro Ltd. vs. The Pr.CIT-4. [ITA No. 4771 & 4459/Mum/2005; Bench : J ;
dated 27/08/2014 ; AY 1997-98 Mum. ITAT ]

The assessee
had claimed depreciation in respect of the machineries which were stated to
have been installed and put to use in the production of clinker which is
intermediates stage for production of cement. The AO observed that even if the
assessee had produced 100 MT of clinker it was only a trial run for one day and
this quantity was minuscule compared to the intended production capacity and
that the assessee was not able to prove that after the trial run, commercial
production of clinker was initiated within reasonable time. The AO pointed out
that the trial runs continued till October 1997 before the reasonable quantity
of clinker was produced. The AO held that use of machinery for trial production
cannot be deemed to be user for the purpose of business and therefore
depreciation on plant and machinery used in production of clinker cannot be
allowed. The AO disallowed the claim of depreciation of Rs. 34,79,40,576/-.

The CIT(A) confirmed the disallowance by
observing that as per section 32 the depreciation can be allowed, only if the
assets have been used for the purpose of business carried on during the year.
The expression ‘used for the purpose of business or profession means that the
assets were capable of being put to use and were used for the purpose of
enabling the owner to carry on the business or profession. The user of assets
during the year should be actual, effective and real user in the commercial
sense. In the case of the appellant as has been pointed out by the AO, even if
it is accepted that plant and machinery used for production of intermediate
stages are eligible for depreciation, is accepted, the trial production took
place only for one day. It appears that some technical snag developed in the
plant and, therefore, immediately the trial run was stopped. The AO has stated
that the trial run continued at least till October, 1997.

The appellant has not produced any evidence
to show as to when exactly the commercial production started. In the present
case, the trial production by the assessee cannot be considered as the date of
user by the assessee. One cannot ignore the facts that there was substantial
gap between the first trial run and subsequent trial runs and commercial
production. From the long gap between the first trial run and subsequent trial
runs it can be said that the installation of plant and machinery even for
production of clinkers was not satisfactorily completed and was still in installation
stage. The CIT(A) confirmed the action of the AO.

The assessee
filed appeal before ITAT. The Tribunal observed that there is no merit in the
action of the lower authorities for denial of claim of depreciation in respect
of plant and machinery which has been put to use even for trial production,
which is also for the purpose of assessee’s business of manufacture of clinker.
The Hon’ble Gujarat High Court in the case of ACIT vs. Ashima Syntex, 251
ITR 133 (Guj) held that even trial production of a machinery would fall
within the ambit of “used for the purpose of business” .Further, it
was held that as the statute does not prescribe a minimum time limit for
“use” of the machinery, the assessee cannot be denied the benefit of
depreciation on the ground that the machinery was used for a very short
duration for trial run. Furthermore, the Hon’ble Bombay High Court in the case
of CIT vs. Industrial Solvents & Chemicals Pvt. Ltd., (Mumbai) (119
ITR 615) held that once the plant commences operation and reasonable
quantity of product is produced, the business is set up. This is so even if the
product is sub-standard and not marketable.

Industrial
Solvents & Chemicals Pvt. Ltd. was entirely a new company. The Court held
that once the business is set up, the expenses incurred thereafter will have to
be treated as incurred in the course of business and on the same basis, the
depreciation and development rebate admissible to the assessee company would
have to be determined. Even use of machine for one day will entitled the
assessee for claim of depreciation. Since it is not clear from the record as to
the period for which machinery was actually used by assessee, we direct the AO
to verify the period of used and restrict the claim of depreciation to 50%, if
he finds that machinery was used for less than 180 days during the year under
consideration.

The Revenue filed appeal before High Court. The Court observed that the issue is no longer res integra in view of the decision of Industrial Solvents & Chemicals (P) Ltd. (supra). The court observed that the Order of the Tribunal cannot be faulted inasmuch as the jurisdictional High Court has already held that once plant commences operation and even if product is substantial and not marketable, the business can said to have been set up. Mere breakdown of machinery or technical snags that may have developed after the trial run which had interrupted the continuation of further production for a period of time cannot be held ground to deprive the assessee of the benefit of depreciation claimed. In the above view, the appeal was dismissed. _

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