BCAJ | Bombay Chartered Accountant Journal

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.”

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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. _

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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.

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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.

shailesh.kwebmaker

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. _

shailesh.kwebmaker

7. Revision – Difference of view – it is not open to CIT to revise it – Further CIT has considered wrong facts – revision not permissible : Section 263

Commissioner
of Income Tax-III, Pune vs. V. Raj Enterprises. [Income tax Appeal no 1335 of
2014 dt : 31/01/2017 (Bombay High Court)].

[V. Raj
Enterprises vs. Commissioner of Income Tax, [dated 30/09/2013 ; A Y: 2007-08
.Pune ITAT ]

The Assessee is
engaged in the business of arbitrage and jobbing through various share broking
firms. For the subject AY in its ROI, assessee returned an income of Rs.2.10
crore. The AO by an order dated 30/11/2009 u/s. 143(3) of the Act, determined
the income at Rs.2.11 crore.

Thereafter, the
CIT in exercise of its powers u/s. 263 of the Act, by order dated 30/3/2012
revised the assessment order. The CIT held that the Assessee was not entitled
to rebate u/s. 88E of the Act in respect of STT (Security Transaction Tax) paid
as it was a share broker. Moreover, it helds that this aspect was not examined
by the AO while passing the Assessment Order.

Being aggrieved,
the Assessee carried the issue in appeal to the Tribunal. The Tribunal held
that the AO while passing the Assessment Order u/s. 143(3) of the Act had
verified and examined the Contract Notes, Bills of respective brokers etc.,
before granting the rebate of STT paid u/s. 88E of the Act as claimed by the
Assessee. Further, on same set of facts, the Assessee’s claim for rebate u/s.
88E of the Act had been allowed by the Revenue in the earlier Assessment Years.
Further, the order also notes that the CIT while revising the order of
Assessment proceeded on an incorrect assumption of fact that the Assessee is a
share broker. This is contrary to the facts on record as the Assessee was doing
the work of jobbing through different share brokerage firm. Thus, for the above
reasons, the Tribunal allowed the appeal and set aside the CIT order dated
30/3/2012 , passed in exercise his powers u/s. 263 of the Act.

The grievance
of the Revenue in appeal before High Court was that the Assessee is not
entitled to the benefit of rebate of STT u/s. 88E of the Act. The High Court
noted that the issue arising in the appeal was a jurisdictional issue of the
powers of the CIT to exercise his powers of Revision u/s. 263 of the Act in the
present facts. The grievance of Revenue on merits of the dispute would merit
examination only if the exercise of jurisdiction u/s. 263 of the Act, is
proper. As noted by the Tribunal, the entire basis of exercising jurisdiction
u/s. 263 of the Act is on the basis of assumption of incorrect fact that the
Assessee is a share broker. This, in fact, is not so. Where the basic facts
have been misunderstood by the CIT, the exercise of powers of Revision is not
sustainable.

Moreover, the
same issue also arose for the earlier AYs i.e. 2005-06 and 2006-07. The Revenue
had accepted the Assessee’s claim for rebate u/s. 88E of the Act to the extent
STT is paid. Last but not the least, Revenue is not able to dispute the fact
that the AO while passing the Assessment Order dated 30^th November,
2009 had granted the claim of the Petitioner for benefit u/s. 88E of the Act on
examination and verification of the Contract Notes, Bills of respective brokers
etc. Thus, on the basis of the records available and examination by the
AO, a view has been taken by the AO and it is not open to CIT to revise it
merely because his view on the same facts, is different, as held by the Apex
Court in Malbar Industrial Co. Ltd., vs. CIT 243 ITR 83 (SC).

In view of the
above, the revenue Appeal was dismissed.

shailesh.kwebmaker

36. Section 144C and CBDT Circulars No. 5 of 2010 dated 03/06/2010 and Circular No. 9 of 2013 dated 19/11/2013- International transactions – A. Y. 2009-10 – Transfer pricing – Arm’s length price – Assessment order – Procedure to be followed – Issuance of draft assessment orders by AO mandatory – Failure to do so – Not mere procedural error – Failure makes assessment order invalid – Circular clarifying that requirement u/s. 144C applies to all orders passed after 01/10/2009 irrespective of A. Y. – Department not entitled to rely on earlier circular saying provision applicable for A. Y. 2010-11 onwards

CIT vs. C-Sam (India) Pvt. Ltd.; 398 ITR 182 (Guj):

For the A. Y. 2009-10, upon a scrutiny
assessment and applying transfer pricing on account of assessee’s international
transactions with associated persons against the nil returned income, the
Assessing Officer computed the assessee’s income at Rs. 2.86 crores making
various additions and deletions according to the order of the Transfer Pricing
Officer (TPO). In appeal before the Commissioner (Appeals) the assessee
challenged the validity of the assessment order and the additions on the ground
that the procedure laid down u/s. 144C of the Income-tax Act, 1961, was not
followed by the Assessing Officer. The Commissioner (Appeal) allowed the
assessee’s claim and quashed the assessment order passed u/s. 143(3) of the Act
without complying with the requirement of section 144C(1) of the Act. The
Tribunal dismissed the Department’s appeal and confirmed the order of the
Commissioner (Appeal).

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

“i) The
procedure laid down in section 144C of the Act, is mandatory. Before the
Assessing Officer can make variations in the returned income of an eligible
assessee, section 144C(1) lays down the procedure to be followed
notwithstanding anything to the contrary contained in the Act. This non
obstante clause thus gives an overriding effect to the procedure. When an
Assessing Officer proposes to make variations in the returned income declared
by an eligible assessee he has to first pass a draft order, provide a copy
thereof to the assessee and only thereupon the assessee could exercise his
valuable right to raise objections before the Dispute Resolution Panel (DRP) on
any of the proposed variations. In addition to giving such opportunity to an
assessee, the decision of the DRP is made binding on the Assessing Officer. It
is therefore not possible to say that such requirement is merely procedural.
The requirement is mandatory and gives substantive rights to the assessee to
object to any additions before they are made and such objections have to be
considered not by the Assessing Officer but by the DRP. The legislative desire
is to give an important opportunity to an assessee who is likely to be
subjected to upward revision of income on the basis of transfer pricing
mechanism. Such opportunity cannot be taken away by treating it purely
procedural in nature.

ii) Circular dated June 3,
2010 was an explanatory circular issued by the Finance Ministry in which it was
provided that the amendments (which include section 144C of the Act) are made
applicable w.e.f. October 1, 2009 and will accordingly apply in relation to A.
Y. 2010-11 and subsequent years. In the clarificatory circular dated November
19, 2013, it was provided that section 144C would apply to any order which is
being passed after October 1, 2009 irrespective of the assessment year. The
latter circular clarified what all along was the correct position in law.
Section 144C(1) itself in no uncertain terms provides that the Assessing
Officer shall forward a draft order to the eligible assessee, if he proposes to
make any variation in the income or loss which is prejudicial to the interest
of the assessee on or after October 1, 2009. The statute was thus clear,
permitted no ambiguity and required a procedure to be followed in case of any
variation which the Assessing Officer proposed to make after October 1, 2009.
The earlier circular dated June 3, 2010 did not lay down the correct criteria
in this regard.

iii) The upward revision was
made in the income of the assessee on the basis of the order of the TPO and was
done without following the mandatory procedure laid down u/s. 144C. When the
statute permitted no ambiguity and required the procedure to be followed in
case of any variation which the Assessing Officer proposed to make after
October 1, 2009 the assessee could not be made to suffer on account of any
inadvertent error which ran contrary to the statutory provisions.

iv) No question of law arises.
Tax appeal is therefore dismissed.”

shailesh.kwebmaker

35. Sections 144C(1), 156 and 271(1)(c) – International transactions – A. Ys. 2007-08 and 2008-09 – Transfer pricing – Arm’s length price – Scope of section 144C(1) – Issuance of draft assessment orders by AO mandatory – Condition not fulfilled – Assessment orders, consequent demand notices and penalty proceedings invalid

Turner International India Pvt. Ltd. vs.
Dy. CIT; 398 ITR 177 (Del):

The assessee was a wholly owned subsidiary
of T engaged in the business of sub-distribution of distribution rights and
sale of advertisement inventory on satellite delivered channels. For A. Ys.
2007-08 and 2008-09, the Assessing Officer made a reference u/s. 92CA of the
Act, to the Transfer Pricing Officer (TPO) who passed separate orders in
respect of the distribution activity segment. On that basis, the Assessing
Officer passed orders. The Dispute Resolution Panel (DRP) concurred with the
orders of the TPO and the final orders were passed by the Assessing Officer.
The Tribunal held that neither the assessee nor the TPO had considered the
appropriate comparables and therefore, the determination of the arm’s length
price (ALP) was not justifiable. It set aside the orders of the DRP and
remanded the matter to the Assessing Officer for undertaking a transfer pricing
study afresh and accordingly make the assessments. The TPO issued fresh notices
u/s. 92CA(2) and passed separate orders proposing upward adjustments.
Subsequently, the Assessing Officer passed orders in respect of both assessment
years confirming the additions proposed by the TPO. He also issued demand
notices u/s. 156 and notices u/s. 271(1)(c) initiating penalty proceedings.

The assessee filed writ petitions and
challenged the assessment orders, demand notices u/s. 156 and the notices u/s.
271(1)(c). The assessee contended that there was non-compliance with the
provisions of section 144C(1) which required the Assessing Officer to first
issue draft assessment orders.

The Delhi High Court allowed the writ
petitions and held as under:

“i) The legal position is
unambiguous. The failure by the Assessing Officer to adhere to the mandatory
requirement of section 144C(1) and first pass draft assessment orders would
result in invalidation of the final assessment orders and the consequent demand
notices and penalty proceedings.

ii) The final assessment
orders dated 31/03/2015 passed by the Assessing Officer for the A. Ys. 2007-08
and 2008-09, the consequent demand notices issued by the Assessing Officer and
the initiation of penalty proceedings are hereby set aside.”

shailesh.kwebmaker

6 Section 54B – Deduction u/s. 54B cannot be denied on the ground that entering into agreement to sell does not amount to `purchase’.

6
[2017] 86 taxmann.com 217 (Chandigarh- Trib.)

Anil Bishnoi vs. ACIT

ITA No. : 1459 (Chd.) of 2016

A.Y.: 2014-15 Date of Order: 27^thSeptember, 2017

The word `purchase’ cannot
be interpreted and detached from the definition of word `transfer’ as given
u/s. 2(47) of the Act.

FACTS

The assessee, during the
year under consideration, sold land for a consideration of Rs. 1,29,00,000 and
claimed deduction u/s. 54B claiming purchase of following agricultural lands –

(i) Agricultural land
at Kiratpur Rotwara,
Jaipur, of Rs. 28,84,500 through a registered sale deed dated 6.5.2013;

(ii) Agricultural land
at Village Dudu,
Jaipur for Rs. 1,00,00,000 through an agreement to sell dated 16.4.2014.

The Assessing Officer,
allowed deduction for purchase of land mentioned at S. No. (i) above but in
respect of land mentioned at (ii) above he asked the assessee to show cause why
deduction claimed should not be disallowed on the ground that the sale deed is
not registered, but only an agreement to sell is entered into.

The assessee submitted that
the entire payment for purchase of land was made through cheques and the
possession was handed over to the assessee by the seller with all the rights to
use the said land or to sell it further. The name of the assessee had also been
entered in Khasra Girdawari, a document showing the possession and cultivation
of the land. The assessee also submitted that at the time of execution of the
agreement to sell, the assessee was not aware of the Stay Order to the sale of
land issued by ADM and hence, the sale deed could not be registered.

The AO held that the word
used in section 54B is `purchase’ and not `transfer’ as defined in S. 2(47).
The purchase, according to the AO, could be only through a registered sale
deed. He disallowed the claim for deduction u/s. 54B with reference to the land
for which only an agreement to sell was entered into.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee
preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the
assessee paid consideration through cheques and also obtained possession of the
property in question. The claim of deduction was denied on the ground that the
deed of purchase / sale had not been registered with the competent authority.

The Tribunal having noted
the ratio of the decisions of the Supreme Court in the case of Sanjeev Lal
vs. CIT (2014) 269 CTR 1 (SC); CIT vs. T. R. Arvinda Reddy (1979) 12 CTR 423
(SC) and the decision of the Bombay High Court in the case of CIT vs.
Dr. Laxmichand Narpal Nagda (1995) 211 ITR 804 (Bom.), held as follows –

If capital gains are deemed
to have been earned by the assessee on transfer of land as per the provisions
of section 2(47) of the Act, as per which registration of the sale deed is not
necessary, the consequences are that the seller of the assessee is said to have
transferred his right in property and consequently, those rights are acquired
by the transferee; if in the case of transferor, the same is to be treated as
sale, then, we do not find any reason to give a different meaning to the word
`purchase’. If someone has sold a property, consequently the other person has
purchased the said property.

If the transfer of property
is complete as per the definition of transfer u/s. 2(47) of the Act, the
assessee is made liable to pay tax on the capital gains earned by him, on the
same analogy, the transfer is also complete in favour of the purchaser also.
The provisions cannot be interpreted in a manner to say that transfer vis-à-vis
selling is complete, but vis-à-vis purchase is not complete in respect
of same transaction. In view of this, the word `purchase’ cannot be interpreted
and detached from the definition of word `transfer’ as given u/s. 2(47) of the
Act.

When the transfer takes
effect as per the provisions of section 2(47) of the Act, if a liability to pay
tax arises in the case of the seller, the consequent right to get deduction on
the purchase of property accrues in favour of the purchaser, if he otherwise is
so eligible to claim it as per the relevant provisions of the Act. The Tribunal
directed the AO to give the benefit of deduction u/s. 54B of the Act in respect
of the purchase of property at Village Dadu.

The Tribunal allowed the
appeal filed by the assessee.

shailesh.kwebmaker

5 Section 54 – Investment made upto due date of filing return u/s. 139(4) of the Act qualifies for deduction u/s. 54 provided the investment is made upto date of filing of return of income.

5 TS-443-ITAT-2017 (Ahmedabad- Trib.)

Anita Ajay Shad vs. ITO

ITA No. 3154 (Ahd.) of 2015

A.Y.: 2011-12 Date
of Order: 18^th September, 2017

FACTS

During the previous year
relevant to assessment year 2011-12, a long term capital gain of Rs. 35,23,326
arose to the assessee, an individual, on transfer of an immovable property
jointly owned by her. The assessee claimed that a sum of Rs. 35 lakh was exempt
u/s. 54 on the ground that the assessee has deployed the consideration for
purchase of a new residential house. The assessee made the following
investments towards purchase of a new residential property –

# Rs.
15 lakh before 31.7.2011 (being due date for
filing ROI u/s. 139(1)

# Rs.
5 lakh before actual date of filing ROI (being 25.8.2011); and

# Rs.
15 lakh between Sept. 2011 to Dec. 2011 (which
is within the time limit available under section
139(4) of the Act).

While assessing the total
income of the assessee, the Assessing Officer (AO) denied the claim for
deduction u/s. 54 on the ground that the assessee has not invested capital gain
before filing return of income and the tax payer has not acquired the new
property before filing return of income.

Aggrieved, the assessee
preferred an appeal to CIT(A) who observed that the assessee has invested the
gains after furnishing the return of income. He, held that the assessee is
entitled to claim partial exemption u/s. 54 of the Act.

Aggrieved, the assessee
preferred an appeal to the Tribunal where, on behalf of the assessee, it was
contended that the investment made is within the due date stipulated u/s.
139(4) of the Act and that the property was acquired and put to use within a period
of two years from the date of transfer of original asset and therefore,
qualifies for exemption u/s. 54 of the Act.

HELD

Section 54(2) enjoins that
the capital gain is required to be appropriated by the assessee towards
purchase of a new asset before furnishing of return of income u/s. 139 of the
Act. Alternatively, in the event of non-utilisation of capital gains towards
purchase of new asset, the assessee is required to deposit the capital gains in
specified bank account before the due date of filing of return of income u/s.
139(1) of the Act. Any payment towards purchase subsequent to the furnishing of
return of income (25.8.2011 in the instant case) but before the last date
available to file the return of income u/s. 139(4) of the Act is irrelevant.
Such subsequent payments after filing of return are required to be routed out
of deposits made in capital gain account scheme. Thus, the plea of the assessee
that utilisation of capital gain can be made before the
extended date for filing of
return of income u/s. 139(4) of the Act
even after filing of return do not coincide with the plain language employed in
section 54(2) of the Act. Nonetheless, the capital gain employed towards
purchase of new asset before the actual date of furnishing return of income
either u/s. 139(1) or u/s. 139(4) of the
Act will be deemed to be sufficient compliance of section 54(2) of the Act.

The Tribunal observed that
the legislature in its wisdom has used the expression section 139 for purchase,
etc. of new asset while on the other hand, time limit u/s. 139(1) has
been specified for deposit in the capital gain account scheme. When viewed
liberally, the distinction between the two different forms of expression of
time limit can yield different results. A beneficial view may be taken to say
that section 139 being omnibus would also cover extended time limit provided
u/s. 139(4) of the Act. Thus, when an assessee furnishes return subsequent to
due date of filing return u/s.139(1), but within the extended time limit u/s.
139(4), the benefit of investment made upto the date of furnishing return of
income u/s. 139(4) cannot be denied on such beneficial construction. However,
any investment made after the
furnishing of return of income but before extended date available u/s.
139(4) would not receive beneficial construction in view of unambiguous and
express provision of section 54(2) of the Act. The suggestion on behalf of the
assessee on eligibility of payments subsequent to furnishing of return of
income is not aligned with and militates against the plain provision of law as
stated in section 54(2) of the Act.

Since there was ambiguity
on record as to whether the other joint owner of the property purchased by the
assessee has also availed exemption in respect of investment made from joint
account and if yes, to what extent, the Tribunal set aside and remanded back to
the file of AO for the limited purpose of verification of the extent of claim
made by the other joint owner.

The appeal filed by the
assessee was allowed.

shailesh.kwebmaker

4 Section 68 – Addition u/s. 68 cannot be sustained in respect of share application money received from shareholder who is a daughter of a director and is therefore, not a stranger. Also, shareholder was a resident of USA, earnings statement of her husband were on record, the payments were made through banking channels and receipts in bank account of the shareholder were also through banking channels.

4 TS-432-ITAT-2017 (Ahd.)

Namision Powertech Pvt. Ltd. vs. ACIT

ITA No. : 218/AHD/2015

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

FACTS

During the financial year
2009-10, the assessee company received a sum of Rs. 19,00,000 towards share
application money from Smt. Pammi Sandesara, daughter of one of the directors
of the assessee company. The Assessing Officer (AO) held that the source of
funds in the hands of Smt. Pammi Sandesara and her creditworthiness are not
proved. He rejected the explanation
furnished by the assessee viz. that she was a resident of USA, money was
received in US dollars through her ICICI Bank account in India.

Aggrieved, the assessee
preferred an appeal to CIT(A) who upheld the action of the AO.

Aggrieved,
the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that
Smt. Pammi Sandesara was a resident of USA as was evident from her passport. It
also noted that the earnings statement of her husband issued by NetApp Inc USA
was filed. The payments were made through banking channels and receipts in her
bank account were also through banking channels.

The relationship between
the assessee-company and the shareholder is well established in the sense that
the shareholder is the daughter of one of the directors of the company. It is,
therefore, not a transaction between two strangers and her bank accounts show prima
facie evidence of the means of the shareholder. The amounts have been
received through the banking channels. The Tribunal held that bearing in mind
all these factors, the receipts from Smt. Pammi Sandesara cannot be treated as
unexplained cash credit. The Tribunal deleted the addition made by the AO.

The Tribunal allowed the
appeal filed by the assessee.

shailesh.kwebmaker

8 Sections 69B and 147 – Reassessment – Undisclosed investment – Where as per rule 11UA, value of shares was less than Rs. 5, but assessee purchased same at Rs. 10 per share and disclosed all facts in return, reassessment notice for valuing these shares at Rs. 35 as per valuation by Government valuer was not justified

[2018] 90 taxmann.com 284 (Bom)
Shahrukh Khan vs. DCIT
A.Y.: 2010-11, Date of Order: 08th Feb., 2018

In the A. Y. 2010-11, the assessee had purchased 1,10,00,000 shares at the rate of Rs. 10 per share. The Assessing Officer received information that Government valuer has determined fair market value of the said shares at Rs. 33.35/- per share. Therefore, on the basis of the said information, the Assessing Officer issued notice u/s. 148 of the Income-tax Act, 1961 on the reason to believe that 1,10,00,00 shares were purchased at an undervaluation of Rs. 25.69 crores. Objections filed by the assessee were rejected.

The assessee filed writ petition challenging the reassessment proceedings. The Bombay High Court admitted the writ petition and held as under:

“i) The assessment order itself mentions that the value of shares is less than Rs. 5 per share on application of Rule 11UA of the Income-tax Rules. There was a complete disclosure of all facts during regular assessment proceedings. Prima facie, the order disposing of the objections, while dealing with the objection of no reason to believe that income has escaped assessment on application of section 56(2)(vii), has completely ignored the Explanation thereto. The Explanation to section 56(2)(vii) states that the fair market value is to be determined in accordance with the Income-tax Rules. On application of Rule 11UA of the Income Tax Rules, the value per share came to less than Rs. 5 per share.

ii) In the circumstances, the impugned notice indicates a change of opinion, as this very issue namely – valuation of share was a subject matter of consideration during the regular assessment proceedings. Besides, on the application of method of valuation as mandated by the Explanation to section 56(2)(vii), prima facie, the Assessing Officer could not have had reason to believe that income chargeable to tax has escaped assessment.

iii) In the above view, prima facie, the impugned notice is without jurisdiction. Accordingly, there shall be interim relief in terms of prayer clause (d).”

shailesh.kwebmaker

34. Section 37- Income – Charge of tax – Commission – Business expenditure – A. Ys. 1997-98 and 1998-99 – Assessee receiving 95% of payments against invoices after deduction of commission of 5%. – Finding of fact by Tribunal – Liability to tax only actual receipts

CIT vs. Olam Exports (India) Ltd.; 398 ITR 397 (Ker):

For the A. Ys.
1997-98 and 1998-99, the assessee claimed dediction u/s. 37 of the Act, of the
amounts payed towards commission to a concern, LE, for consignment sales. The
Assessing Officer disallowed the claim on the ground that the existence of such
an agent itself was in doubt. The Tribunal found that the evidence indicated
that the assessee had received only 95% of the invoice price and held that the
assessee could not have been taxed for the income which the assessee had not
received.

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

“i) The assessee could only
be taxed for the income that it had derived. There were transactions between
the assessee and LE and the invoices which were raised by the assessee in the
name of the agent contained the gross sale prices and the net amount payable
after recovery of 5% towards commission and other expenses due. Based on such
transactions, the amounts were realised by the assessee through banks and the F
form under the Central Sales Tax Act, 1956 were also obtained from the agent.

ii) Those admitted facts,
therefore, showed that the assessee had received only 95% of the gross price
and the Department had no material before it to show that the assessee had
received anything in excess thereof, either directly or otherwise. If that was
so, despite the contentions raised by the Department regarding the doubtful
existence of the agent, the assessee having received only 95% of the gross
value, it could have been taxed only for what it had actually received.

iii) Therefore, the Tribunal
was justified in coming to the factual conclusion that the assessee could not
have been taxed for anything more than what it had received. No question of law
arose.”

shailesh.kwebmaker

7 Sections 80-IA(4), 147 and 148 – Reassessment – Where AO rejected claim of assessee of deduction u/s. 80-IA(4) and, Commissioner (Appeals) allowed said claim of deduction in its entirety, thereafter AO could not reopen this very claim of deduction for disallowance u/s. 148

[2018] 91 taxmann.com 186 (Guj)
Gujarat Enviro Protection & Infrastructure Ltd. vs. DCIT
A.Y.: 2010-11, Date of Order: 19th February, 2018

For the A. Y. 2010-11, the assessee filed return of income after claiming deduction u/s. 80-IA(4). The return of the assessee was taken in scrutiny by the Assessing Officer. During such scrutiny assessment, the Assessing Officer examined the assessee’s claim of deduction u/s. 80-IA and disallowed the claim of deduction. On appeal, the Commissioner (Appeals) allowed the assessee’s claim.

Thereafter, the Assessing Officer issued reassessment notice u/s. 148 on grounds that on perusal of records, it was seen that the amount on which the assessee had claimed exemption u/s. 80-IA included the interest income assessable under the head ‘Income from other sources’. On verification of bifurcation of interest income, it was clear that this interest income was not derived from the infrastructure development activity of the undertaking. Hence, it was not to be considered for the purpose of deduction under section 80-IA. Thus, deduction so allowed on the interest income was not allowable. The objection filed by the assessee were rejected.

The assessee filed writ petition challenging the reopening. The Gujarat High Court allowed the writ petition and held as under:

“i) The assessee’s reply to the Assessing Officer would show that out of the total interest income, the assessee had attributed a sum of certain amount as business income. It is this claim of the assessee of the interest income of certain amount, as being part of its business income which is a focal point of the reasons recorded by the Assessing Officer for reopening the assessment. He contends that the interest income cannot be treated as arising out of the assessee’s business, and therefore, deduction u/s. 80-IA(4) would not be allowable. However, this is for later. For the present, one may record that the Assessing Officer passed an order of assessment in which he rejected the assessee’s claim of deduction under section 80-IA. He therefore had no occasion to separately comment on the assessee’s claim of interest income being eligible for such deduction. Be that as it may, the assessee carried entire issue in appeal before the Commissioner. The Commissioner (Appeals) by his order, allowed the assessee’s claim of deduction u/s. 80-IA in toto. Record is not clear whether the revenue has carried the order of Commissioner (Appeals) before the Tribunal or not. However, this by itself may not be a determinative factor.

ii) At that stage, after the Commissioner allowed the assessee’s appeal, the Assessing Officer issued the instant reassessment notice. Since the notice was issued beyond the period of four years from the end of relevant assessment year, the requirement of the assessee to make true and full disclosure, and the failure to make such disclosures leading to income chargeable to take escaping the assessment becomes crucial. In this context, the record would show that the crucial requirement arising out of the proviso to section 147 is not satisfied. The Assessing Officer has, in fact, in the reasons recorded itself proceeded on the basis of ‘on verification of record’. Thus, clearly the Assessing Officer proceeded on the basis of disclosures forming part of the original assessment. Even otherwise, as noted, during the original assessment, the Assessing Officer had called upon the assessee to clarify on the interest income which include the assessee’s claim of certain amount as business income and, therefore, eligible for deduction u/s. 80-IA(4). There was no failure on the part of the assessee to disclose fully and truly all relevant facts.

iii) There is yet another and equally strong reason to quash the impugned notice. Before elaborating on this, it is recorded that the assessee’s contention of possible change of opinion cannot be accepted. The Assessing Officer had rejected entire claim of deduction u/s. 80-IA(4). He, therefore, had no occasion to thereafter comment on a part of such claim relatable to the assessee’s interest income. Had the Assessing Officer accepted in principle the assessee’s claim of deduction under section 80-IA(4) and thereafter, after scrutiny not made any disallowance for interest income forming part of such larger claim, the principle of change of opinion would apply. In the present case, once the Assessing Officer rejected the claim of deduction u/s. 80-IA(4) in its entirety, there was thereafter no occasion and any need for him to dissect such claim for rejection on some additional ground.

iv) The second reason which it is referred to is of merger. The Assessing Officer having rejected the claim of deduction u/s. 80-IA(4), the issue may be recalled was carried in appeal by the assessee and the Commissioner (Appeals) allowed the claim in its entirety. It would thereafter be not open for the Assessing Officer to reopen this very claim for possible disallowance of part thereof. When the Commissioner (Appeals) was examining the assessee’s grievance against the order of Assessing Officer disallowing the claim, it was open for the revenue to point out to the Commissioner (Appeals) that even if in principle the claim is allowed, a part thereof would not stand the scrutiny of law. It was open for the Commissioner to examine such an issue, even suo motu. If one allow the claim in its entirety, the Assessing Officer thereafter cannot re-visit such a claim and seek to disallow part thereof. This would be contrary to the principle of merger statutorily provided and judicially recognised. Even after the Commissioner (Appeals) allow such a claim and the revenue was of the opinion that he has not processed it and committed an error, it was always open for the revenue to carry the matter in appeal. At any rate, reopening of the assessment would simply not be permissible. Reassessment carried an entirely different connotation. Once an assessment is reopened, the same gives wider jurisdiction to the Assessing Officer to examine the claims which had been formed part of the reasons recorded, but which were not originally concluded.

v) In the result, impugned notice is quashed. Petition is allowed and disposed of accordingly.”

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6 Section 43(6) – Depreciation – WDV – While computing written down value u/s. 43(6) for claiming depreciation, depreciation allowed under State enactment cannot be reduced

[2018] 90 taxmann.com 420 (Ker)
Rehabilitation Plantations Ltd. vs. CIT
A.Y.: 2002-03, Date of Order: 29th Jan., 2018

The assessee was engaged in the business of manufacture and sale of centrigued latex and rubber. For the A. Y. 2002-03, it claimed depreciation of the entire cost of the plant and machinery to the extent of 35 per cent treating it as the actual cost allowable on which the allowable deduction for depreciation is computed. The Assessing Officer found that the depreciation on assets used in the plantations, including for manufacturing activity, was found to have been claimed by the assessee-company for more than two decades. It was found that earlier the assessments had not been taken under the Income-tax Act, 1961, since the entire income was assessable under the Kerala Agricultural Income-tax Act, 1991 (AIT Act). It was found that as per section 32(1) of the IT Act, depreciation on building, machinery, etc. is to be allowed on the written down value of the assets, owned by the assessee and used for the purposes of the business. The written down value of the assets as per section 43(6) is the actual cost when the assets were acquired before the previous year. Otherwise the written down value shall be the actual cost of the assets less all depreciation actually allowed under the IT Act. The assessee had been claiming depreciation in computing the income from plantations, and if the actual cost of the assets is adopted it would lead to the assessee getting a double benefit on the same component of cost, to the extent of 35 per cent. Hence, the written down value for the previous year was only permissible to be claimed as depreciation, was the specific ground on which such claim was rejected. The Assessing Officer allowed depreciation on written down value after reducing the depreciation claimed under AIT Act from the actual cost.

The Tribunal held that there could be no claim for the assessee over and above the written down value as per the books of account and upheld the decision of the Assessing Officer.

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

“i) It is seen from the report filed by the Assessing Officer under the AIT Act that the assessee has claimed depreciation in the earlier years when filing returns under the AIT Act. The report of the Assessing Officer under the IT Act also indicates that the assets pertaining to the agricultural income has not been projected for depreciation under the IT Act for the previous years. The Assessing Officer points out that depreciation was claimed in the years 1998-99 to 2001-02 with respect to the building and plant & machinery of rubber sheeting factory, the income derived from which, being a manufacturing activity, however is not covered under the AIT Act. In such circumstances, one has to look at whether in allowing the depreciation on the basis of the written down value as available in section 43(6)(b), the entire cost of the building and plant and machinery for the purpose of generation of agricultural income has to be allowed or not.

ii) There need not be any controversy raised on the interpretation of the provision of section 43(6) at sub-clause (b). What can be reduced from the actual cost to the assessee is all depreciation actually allowed under the IT Act, 1961 or the IT Act, 1922 or any Act repealed by that Act or any executive orders issued when the Indian Income-tax Act, 1886 was in force. The AIT Act having not been specifically noticed and the depreciation allowed with respect to the income assessed to tax under any other enactments having not been excluded, there is no reason for this Court to come to a different finding as to the written down value which could be claimed as depreciation on the first year in which the assessee is assessed under the IT Act. The assessee was earlier assessed under the IT Act, but for its manufacturing activity and not its agricultural operations, the income from which was assessed under the AIT Act. The assets employed for agricultural operations were never accounted for computing the depreciation under the IT Act, since that income, prior to rule 7A, was not exigible to tax under the IT Act.

iii) The question arise since the entire income generated from the agricultural income was assessable to tax under the AIT Act, a State enactment. Only in the relevant assessment year i.e. 2002-03, the provision for a separate assessment under the AIT Act and IT Act came into force by virtue of the Income-tax Rules. Income from the manufacture of rubber which was earlier treated as agricultural income was made assessable under the IT Act to the extent of 35 per cent of the income derived from the business. Hence, the assessee would be entitled to claim only 35 per cent of the depreciation for the relevant assessment year. However, in computing such depreciation, should one adopt the entire cost of the plant and machinery or that shown as the written down value after reducing the depreciation allowed under the AIT Act, is the vexing question.

iv) As noticed, the deeming provision is very clear and there is nothing to exclude from the computation of the cost of the assets; the depreciation allowed under the AIT Act. The revenue would contend that this Court has ample powers to iron out the creases and avoid a double benefit being conferred on the assessee. There is no doubt of such powers, but, whether it could be exercised in the present case is the question. In ironing out creases one should not be accused of burning the cloth, by adding words into the statute to digress from the essential unambiguous intention.

v) The rule providing division of income to be assessed respectively under the AIT Act and the IT Act was brought in the year 2002. The Government was quite aware of the provision available in the IT Act, 1961 by which the depreciation in cases, where it was not being claimed under the enactments as specified in section 43(6)(b), can only be excluded and otherwise the written down value has to be deemed to be the cost of the assets. On apportioning the income from agriculture to be assessed under the respective enactments of the State and the Union; amendments ought to have been brought in accordingly to ensure that no double benefit accrues on an assessee.

vi) Such amendments were brought in with prospective effect as is seen from Explanation 7 to section 43(6) of the IT Act which got inserted by the Finance Act, 2009 with effect from 1-4-2010. The Explanation takes in the specific defect of double benefit being conferred on the assessee. The legislature thought it fit to give it effect from 1-4-2010. The assessment year herein is 2002-03 relating to the income of the previous year being 2001-02. The amendment does not apply to that year. The amendment brought in without any retrospective effect, further makes it clear that the legislature cured the defect, but however, did not do so for the years previous to the amendment and not for the relevant assessment year. This is not a situation in which casus omissus could be supplied.

vii) On the above reasoning, the disallowance of the depreciation and the computation made of the written down value cannot be accepted. The Assessing Officer is directed to employ the deeming provision for computing the written down value de hors the depreciation granted under the AIT Act and take 35 per cent of the cost of the total assets as written down value, allowing the depreciation for the relevant assessment year to that extent. The Assessing Officer shall deem the written down value to be the cost of the assets and compute the depreciation allowable at 35 per cent of such deemed written down value and apply it to the portion of the income derived from the agricultural business, that is assessable under the IT Act. The appeal is allowed with the above observations.”

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5 Section 32(2) – Unabsorbed depreciation – Law applicable – Effect of amendment to section 32(2) by Finance Act, 2001 – Removal of restriction of eight years for carry forward and set off – Unabsorbed depreciation or part thereof not claimed till relevant year – Carry forward and set off permitted

(2018) 400 ITR 569 (Delhi)
Principal CIT vs. British Motor Car Co. (1934) Ltd.
A.Y.: 2010-11, Date of Order: 09th January, 2018

The relevant period is the
A. Y. 2010-11. The assessee had the accumulated carried forward depreciation
u/s. 32(2) of the Income-tax Act, 1961 starting from the A. Y. 1998-99. In the
A. Y. 2010-11, the assessee claimed set off of the carried forward
depreciation. The Assessing Officer disallowed the claim in respect of amounts
carried forward from the years prior to A. Y. 2002-03 on the ground that the
amendment to section 32(2) of the Act, which removed of eight years limit, was
prospective and effective only from 01/04/2002.

The Commissioner (Appeals)
reversed the order and his decision was upheld by the Tribunal.

In
appeal by the Revenue, on the question whether section 32(2) as amended by the
Finance Act, 2001, w.e.f. 01/04/2002 could be given effect beyond the period of
eight years prior to its commencement, the Delhi High Court upheld the decision
of the Tribunal and held as under:

“i) The rationale for the amendment of section
32(2) the restriction against set off and carry forward limited to eight years,
beyond which the benefit could not be claimed under the provisions of the 1961
Act, was for the reasons deemed appropriate by Parliament.

ii) The limit was imposed in the year 1996
through the Finance (No. 2) Act, 1996. Had the intention of Parliament been
really to restrict the benefit, of unlimited carry forward prospectively, there
were more decisive ways of doing so, such as, an express provision or an
exception or proviso. The absence of any such legislative device meant that the
provision had to be construed in its own terms and not so as to restrict the
benefit or advantage it sought to conform. No question of law arose.”

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4 Section 54EC – Exemption of Capital gain – Time of six months from date of transfer for investment – Transfer effected only on transfer of physical possession of property and not on date of execution of development agreement – Investment made by assessee falling within time specified u/s. 54EC

(2018) 401 ITR 96 (Bom)
CIT vs. Dr. Arvind S. Phake
A.Y. 2008-09, Date of Order: 20th Nov., 2017

The assessee entered into a
registered development agreement dated 23/09/2017 in respect of certain
property. The total consideration agreed was Rs. 5,32,00,000/. Physical
possession was given on 01/03/2008. For the A. Y. 2008-09, a return was filed
by the assessee declaring his income on account of long term capital gain on
sale of the immovable property. The assessee claimed exemption u/s. 54EC of the
Income-tax Act, 1961 in respect of investment of Rs. 50,00,000/- in bonds of
the NHAI made on 28/03/2008 and Rs. 50,00,000/- in bonds of RECL on 22/08/2008.
The Assessing Officer held that the investment of the bonds of NHAI was within
the period specified u/s. 54EC of the Act and the investment of Rs. 50,00,000/-
in the bonds of RECL was beyond the period provided in section 54EC in as much
as the investment made on 22/08/2008 was not within six months from the date of
transfer of assets.

The Tribunal found that on
the date of execution of the development agreement, i.e., on 13/09/2007, full
consideration was admittedly not paid, and therefore the transfer was not
effected on 13/09/2017. Therefore, taking the date of transfer as 01/03/2008 on
which date physical possession of the property was delivered, the investment made
on 22/08/2008 was well within the time specified under section 54EC of the Act.
The Tribunal, accordingly allowed the assessee’s claim.

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

“i) The Tribunal considered
various clauses in the development agreement. Sub clause (d) of clause (3) of
the agreement provided that after full payment of consideration, the
construction would be undertaken by the developer. Admittedly, on the date of
execution of the development agreement, the entire consideration was not
received by the assessee.

ii) Physical possession of the property, the
subject matter of development agreement was parted with by the assessee on
01/03/2008. It was on that day that complete control over the property was
passed on to the developer.

iii) After having perused the various clauses in
the agreement and the factual aspects, the Tribunal rightly took 01/03/2008 as
the date of transfer and the investment made on 22/08/2008 was well within the
time specified u/s. 54EC of the Act. Therefore, no substantial question of law
arose.”

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3 Section 14A – Business expenditure – Disallowance – Assessing Officer cannot attribute administrative expenses for earning tax free income in excess of total administrative expenditure

[2018] 91 taxmann.com 29 (Guj)
Principal CIT vs. Adani Agro (P.) Ltd.
Date of Order: 05th February, 2018

The assessee incurred administrative expenses amounting to Rs. 30 lakhs. The Assessing Officer was of the view that the assessee failed to fully disclose the expenditure for earning the exempt income and based on the format provided under rule 8D, made the disallowance to the tune of Rs. 60 lakhs.

The Tribunal noted that the entire administrative expenses of the assessee was Rs. 30 lakhs, out of which, the assessee had offered Rs. 10 lakhs i.e., 1/3rd of the total administrative expenditure for earning income covered u/s. 14A. The Tribunal was of the opinion that even after completing the format, the disallowance cannot exceed the total administrative expenditure incurred by the assessee.

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

“i) Under no circumstances, can the Assessing Officer attribute administrative expenses for earning tax free income in excess of the total administrative expenditure incurred by the assessee.

ii) If it is a case where Assessing Officer disputes, question and disallow the very declaration of the assessee regarding total administrative expenditure, the issue can be somewhat different. Nevertheless, when the Assessing Officer has in the present case did not disturb the assessee’s declaration that total administrative expenses incurred by the assessee for all its activities was Rs. 30 lakhs, there was no question of disallowing administrative expenses to the tune of Rs. 60 lakhs u/s. 14A with the aid of rule 8D.”

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2 Sections 40(a)(ia), 194H and 194J – Business expenditure – Disallowance – Payments subject to TDS – Compensation paid to joint venture partner under MOU – Finding that agreement not sham – Payment cannot be treated as expenditure required to deduct tax at source – Disallowance for failure to deduct tax not attracted

1.
(2018) 400 ITR 521 (Cal)

Principal
CIT vs. Entrepreneurs (Calcutta) Pvt. Ltd.

A.Y.:
2006-07, Date of Order: 13^th Sept.,
2017

For the A. Y. 2006-07, the
assessee claimed as expenditure a sum of Rs. 5,17,48,439 paid to company A, as
compensation in connection with a land transaction. The assessee’s explanation
was that the amount was paid in performance of its obligation under a
memorandum of understanding with A under which A and the assessee were to share
the profit on sale of land in the ratio of 75% to A and 25% to the assessee,
that the services to be rendered by A included identifying the buyer and also
carrying out various other tasks in respect of the sale of the landed property
involved. The Assessing Officer was of the view that A was a sham company. He
treated the entire sum of compensation paid to A as the assesee’s income
chargeable to tax, on the grounds that the transaction was a sham, and that the
assessee had not deducted tax at source on the amount, invoking the provisions
of section 40(a)(ia).

The Tribunal held that the
transactions were made by a valid written contract on various terms and
conditions between the parties, which were essential for a joint venture
project. Such facts were not denied nor were any defects found in the agreement
by the Assessing Officer. It further held that the transaction was in lieu of
the agreement and the Assessing Officer was not justified in treating the
payment of compensation as an expenditure and that no tax at source was
required to have been deducted on the profit so shared between the two joint
venture partners and deleted the addition.

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

“i) Whether a transaction was sham or not was a
question of fact. The Commissioner (Appeals) had found the Assessing Officer’s
conclusion that it was sham transaction between assessee and A to be in direct
conflict with the Assessing Officer’s own acceptance that the services rendered
by A were of specialised, professional and technical in nature. Upon analyzing
the memorandum of understanding and other materials on record, the Commissioner
(Appeals) had accepted the contention of the assessee that the compensation paid
was not an expenditure incurred so as to attract the provisions of sections
194H and 194J requiring tax deduction at source. As a consequence, the question
of disallowance of the payments applying the provisions of section 40(a)(ia)
could not have arisen.

ii) The findings of the Commissioner (Appeals),
concurred with by the Tribunal, were based on appreciation of material on
record. Further, the Tribunal had recorded that the Assessing Officer did not
point out any defect in the “settlement/contract”. There was no perversity in
the findings of the Commissioner (Appeals) and the Tribunal. No question of law
arose.”

shailesh.kwebmaker

1 Section 143(3) – Assessment – Construction business – Estimate of cost of construction – Reference to DVO – Books of account maintained by assessee not rejected – AO cannot refer matter to DVO

(2018) 401 ITR 285 (Mad)
CIT vs. A. L. Homes
A.Y.: 2009-10, Date of Order: 20th Sept., 2017

The assessee was in
construction business. In the course of the assessment for the relevant year,
the Assessing Officer made a reference to the District Valuation Officer (DVO)
for estimation of the cost of construction. The estimated cost of construction
by the DVO was higher than that found according to the books of account of the
assessee. The valuation report was objected to by the assessee, on the ground
that it had been maintaining regular books of account and that reference could
not have been made to the DVO without rejecting the books of account. However,
the Assessing Officer added the difference in the cost of construction, as
unaccounted investment to the income of the assessee.

The Commissioner (Appeals)
deleted the addition and held that the Assessing Officer could not have made a
reference to the DVO for estimation, when the books of account of the assessee
had not been rejected. He further held that the difference between the cost
shown in the books of account and the estimation by the DVO was only 6.85%,
whereas, statutorily a reference for valuation could be made only if, in the
opinion of the Assessing Officer, the difference would have exceeded 15%. The
Tribunal found that the assessee had sold the flats and that most of the
purchasers had occupied the flats and that the cost improvements made had to be
considered as income of the purchasers. It upheld the deletion made by the
Commissioner (Appeals).

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

“i) The appellate authorities had concurrently
found that the books of account of the assessee had not been rejected by the
Assessing Officer and therefore, the matter ought not to have been referred to
the DVO for estimation of the cost of construction.

ii) The reliance placed on the report of the DVO
for making the addition was misconceived. No question of law arose.”

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18 TDS – Certificate for deduction at lower rate/nil rate – Cancellation of certificate – Judicial order – Recording of reasons is condition precedent – No change in facts during period between grant of certificate and order cancelling certificate – No valid or cogent reasons recorded and furnished to assessee for change – Violation of principles of natural justice – Order of cancellation quashed

Tata Teleservices (Maharashtra) Ltd. vs. Dy.
CIT; 402 ITR 384 (Bom); Date of Order:16-25/01/2018:

A.
Y. 2018-19:

Section
197; R. 28AA of ITR 1962; Art. 226 of Constitution of India

The
assessee provided telecommunication services. For the A. Ys. 2014-15 to
2016-17, it filed return declaring loss aggregating to Rs. 1330 crore and
making a claim of refund of an aggregate sum of Rs. 121 crore. In the course of
its business, the assessee received various payments for the services rendered
which were subject to tax deduction at source (TDS) under Chapter XVII of the
Income-tax Act, 1961. According to the assessee it was not liable to pay
corporate tax in the immediate future in view of the likely loss for the A. Y. 2018-19
and the carried forward losses. Therefore, it filed an application/s. 197 of
the Act for a certificate for nil/lower TDS to enable it to receive its
payments from various parties which were subject to TDS, without actual
deduction at source. On 04/05/2017, the Dy. Commissioner (TDS) issued a
certificate u/s. 197 and directed the deduction of tax at nil rate by the
various persons listed in the certificate while making payments to the assessee
u/ss. 194, 194A, 194C, 194-I, 194H and 194J. Thereafter, the Dy. Commissioner
(TDS) communicated that he was reviewing the certificate u/s. 197 which had
been issued, in respect of cases in which outstanding tax demand was pending.
Consequently, the assessee furnished the details of tax outstanding. The Dy.
Commissioner (TDS) issued a show cause notice and granted a personal hearing to
the assessee. By an order dated 23/10/2017, the certificate dated 04/05/2017
issued u/s. 197 was cancelled on the ground that any future tax payable might
not be recoverable from the assessee and that there was an outstanding tax
demand of Rs. 6.90 crore payable by the assessee.

The Bombay
High Court allowed the writ petition filed by the assessee, quashed the order
of the Dy. Commissioner (TDS) dated 23/10/2017 cancelling the certificate and
held as under:

“i) The issuance of the certificate was the
result of an order holding that the assessee was entitled to a certificate u/s.
197. In the absence of the reasons being recorded, the certificate u/s. 197
would not be open to challenge by the Department, as it would be impossible to
state that it was erroneous and prejudicial to the Revenue. The recording of
reasons was necessary as only then it could be subject to revision by the
Commissioner u/s. 263. Therefore, there would have been reasons recorded in the
file before issuing a certificate dated 04/05/2017 and that ought to have been
furnished to the assessee before contending that the aspect of rule 28AA was
not considered at the time of granting the certificate. Further, if the Department
sought to cancel the certificate on the ground that a particular aspect had not
been considered, before taking a decision to cancel the certificate already
granted, it must have satisfied the requirement of natural justice by giving a
copy of the same to the assessee and heard the assessee on it before taking a
decision to cancel the certificate.

ii) The notices which sought to review the
certificate did not indicate that the review was being done as the certificate
dated 04/05/2017 was granted without considering the applicability of rule 28AA
in the context of the assessee’s facts. Therefore, there was no occasion for
the assessee to seek a copy of the reasons recorded while issuing the
certificate. Moreover, it was found on facts that there was no change in the
facts that existed on 04/05/2017 and those that existed when the order dated
23/10/2017 was passed. Thus, there was a flaw in the decision-making process
which vitiated the order dated 23/10/2017. The grant or refusal to grant the
certificate u/s. 197 had to be determined by parameters laid down therein and
rule 28AA and it could not be gone beyond the provisions to decide an
application.

iii) The order dated 23/10/2017 did not indicate,
what the profits were likely to be in the near future, which the Department
might not be able to recover as it would be more than the carried forward
losses. However, such a departure from the earlier view had to be made on valid
and cogent reasons. Therefore, on the facts, the basis of the order, that the
financial condition of the assessee was that any further tax payable might not
be recoverable, was not sustainable and rendered the order bad.

iv) Neither section 197 nor rule 28AA provided
that no certificate of nil or lower rate of withholding tax could be granted if
any demand, however miniscule, was outstanding. Rule 28AA(2) required the
authority to determine the existing estimated liability taking into
consideration various aspects including the estimated tax payable for the
subject assessment year and also the existing liability. The existing and
estimated liability also required taking into account the demands likely to be
upheld by the appellate authorities. The assessee’s appeal with respect to the
demand of Rs. 6.68 crore was being heard by the Commissioner (Appeals) and no
order had been passed thereon till date.

v) The order in question did not deal with the
assessee’s contention that the demand of Rs. 28 lakh was on account of mistake
in application of TRACE system nor did it deal with the assessee’s contention
that the entire demand of Rs. 6.90 crore could be adjusted against the
refundable deposit of Rs. 7.30 crore, consequent to the order dated 27/05/2016
of the Tribunal in its favour. The order dated 23/10/2017 seeking to cancel the
certificate dated 04/05/2017 was a non-speaking order as it did not consider
the assessee’s submissions. Therefore, the basis of the order cancelling the
certificate, that there was outstanding demand of Rs. 6.90 crore payable by the
assessee, was not sustainable.

vi) In the above view, the impugned order dated
23/10/2017 is quashed and set aside.”

shailesh.kwebmaker

1 Section 54 – Two separate contracts for purchase of flat viz. one for house property and the other for furniture, etc. considered, in substance, as the one only and deduction allowed in full.

Rajat B. Mehta vs. Income Tax Officer
(Ahmedabad)
ITA No. 19/Ahd/16
A.Y: 2011-12. Date of Order: 9th February, 2018
Members: Pramod Kumar (A.M.) and S. S.
Godara (J.M.)Counsel for Assessee / Revenue: Urvashi Shodhan / V. K. Singh

FACTS
The assessee is a non-resident who sold off a house for a consideration of Rs 2.46 crore and earned long term capital gain of Rs. 1.9 crore. He invested a portion of the sale proceeds, Rs. 78 lakhs, in another residential unit and claimed a deduction u/s. 54. The AO noted that the assessee had entered into two separate contracts viz., for purchase of house property and another for purchase of furniture and fixtures therein. The payment of Rs. 60 lakhs was for the purchase of house property and Rs. 18 lakhs was for the purchase of furniture and fixtures. The AO was of the opinion that the assessee had executed two separate deeds to save stamp duty on it, (and) now the assessee is trying to evade income tax. He was further of the view that most of the furniture items are removable, and, that it cannot be said that furniture was purchased to make the house habitable. Therefore, the AO declined deduction u/s. 54 F to the extent of Rs 18 lakhs paid under a separate agreement for furniture and fixtures in the residential property purchased by the assessee.

HELD
Analysing the provisions of section 54, the Tribunal noted that the expression used in the statute is “cost of the residential house so purchased” which according to it does not necessarily mean that the cost of the residential house must remain confined to the cost of civil construction alone. A residential house may have many other things, other than civil construction and including things like furniture and fixtures, as its integral part and may also be on sale as an integral deal. Further, it noted that there are, for example, situations in which the residential units for sale come, as a package deal, with things like air-conditioners, geysers, fans, electric fittings, furniture, modular kitchens and dishwashers. If these things are integral part of the house being purchased, the cost of house has to essentially include the cost of these things as well. In such circumstances, what is to be treated as cost of the residential house is the entire cost of house, and it cannot be open to the AO to treat only the cost of only civil construction as cost of house and segregate the cost of other things as not eligible for deduction u/s. 54.

However, from the arrangement in which the transaction was entered into, the Tribunal noted that in substance and in effect the house was sold for Rs 78 lakhs. Even if the assessee was to buy the house, without the furniture, it would have been for Rs 78 lakhs – as was clearly specified in the agreement to sell. The cause or trigger for the splitting of the consideration was not relevant and it had no bearing on de facto consideration for purchase of house property. The two agreements, according to it, cannot be considered in isolation with each other on standalone basis, and have to be considered essentially as a composite contract, particularly in the light of the undisputed contents of the agreement to sale. Given these facts, the Tribunal held that the cost of the new asset has to be treated as Rs 78 lakhs. Accordingly, the Tribunal directed the AO to delete the disallowance of deduction u/s. 54 to the extent of Rs 18 lakhs.

shailesh.kwebmaker

4 Section 54 – The exemption u/s. 54 cannot be denied even in a case where the assessee has utilised the entire capital gain by way of making payment to the developer of flat but could not get possession of the flat as the new flat was not completed by the developer. Section 54(2) does not say that in case assessee could not get possession of property, he was not entitled for exemption u/s. 54.

[2018] 91 taxmann.com 11 (Chennai-Trib.)
ACIT vs. M. Raghuraman
ITA No. : 1990/Mds/2017
A.Y.: 2013-14
Date of Order: 08th February, 2018

FACTS

The assessee, in his return
of income, claimed exemption u/s. 54 of the Act. The claim for exemption was made on the basis
of payments made to the developer for sale consideration. The flat, however,
was not completed even though payment was made to the promoter. The possession
was not yet given to the assessee.

The Assessing Officer (AO)
denied deduction on the ground that construction is not completed and
therefore, the assessee is not eligible to claim exemption.

Aggrieved, the assessee
preferred an appeal to the CIT(A) who allowed the claim of the assessee.

Aggrieved, the revenue
preferred an appeal to the Tribunal.

HELD

A bare reading of section
54 clearly says that in case the assessee purchased a residential house in
India or constructed a residential house in India within a period stipulated in
section 54(1), the assessee is eligible for exemption u/s. 54. Section 54(2)
clearly says that in case the capital gain, which is not appropriated by the
assessee towards purchase of new asset or which is not utilised in purchase of
residential house or construction of residential house, then it shall be
deposited in a specific account. It is not the case of the revenue that capital
gain was not appropriated or it was not utilised. The fact is that the entire
capital gain was paid to the developer of the flat. In other words, the
assessee has utilised the entire capital gain by way of making payment to the
developer of the flat.

Section
54(2) does not say that in case the assessee could not get the possession of
the property, he is not entitled for exemption u/s. 54. The requirement of
section 54 is that the capital gain shall be utilised or appropriated as
specified in section 54(2). The assessee has complied with the conditions
stipulated in section 54(2). Therefore, the Commissioner (Appeals) has rightly
allowed the appeal of the assessee. The Tribunal held that it did not find any
reason to interfere with the order of the lower authority and accordingly, it
confirmed the same.

The appeal filed by the Revenue
was dismissed.

shailesh.kwebmaker

3 Section 47(iv) – Transaction of transfer of shares by a company to its second step down 100% subsidiary cannot be regarded as ‘transfer’ in view of the provisions of section 47(iv) of the Act. A second step down subsidiary company is also regarded as subsidiary of the assessee company under Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Act.

[2018] 91 taxmann.com 62 (Kolkata-Trib.)
Emami Infrastructure Ltd. vs. ITO
ITA No. : 880/Kol/2014
A.Y.: 2010-11: Date of Order: 28th February, 2018

FACTS
The assessee filed its return of income declaring therein a total income of Rs. 88,79,544. In the return of income, the assessee also claimed that it has incurred a long term capital loss of Rs. 25,05,20,775 which it carried forward. The Assessing Officer (AO), assessed the total income of the assessee to be Rs. 29,99,30,657.

During the previous year under consideration, on 31.3.2010, the assessee sold 2,86,329 shares of Zandu Realty Ltd., at the rate of Rs. 2100 per share, to Emami Rainbow Niketan Pvt. Ltd., a 100% subsidiary of the assessee’s subsidiary viz. Emami Realty Ltd. The sale was in accordance with the decision taken by the Board of Directors on 23.3.2010 and also in accordance with the valuation report of SSKM Corporate Advisory Pvt. Ltd.

The Assessing Officer found that the assessee had sold shares of Zandu Realty Ltd. at a price ranging from Rs. 6200 per share on 23.12.2009 to Rs. 4390 per share on 11.2.2010. He asked the assessee to show cause why the sale price per share of Zandu Realty Ltd. should not be taken at Rs. 3989.80 being the average price traded at NSE as on 31.3.2010 against the sale price of Rs. 2100 per share taken by the assessee.

The AO held that he found the explanation of the assessee to be not acceptable. Considering the huge price variance between the quoted price in NSE and the off-market selling price shown by the assessee he held that when the shares are traded in stock exchange the best way to determine the selling price of a share is the price quoted in the stock exchange. Accordingly, he determined the long term capital gain to be Rs. 29,05,83,769, by considering the sale price to be Rs. 3989.80 per share as against Rs. 2100 per share taken by the assessee, as against the claim of loss of Rs. 25,05,20,775 shown by the assessee in the return of income.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO by relying on the ratio of the decision of Gujarat High Court in the case of Kalindi Investments Pvt. Ltd. vs. CIT (256 ITR 713)(Guj.)

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that the assessee sold equity shares of Zandu Realty Ltd. to Emami Rainbow Niketan Pvt. Ltd based on price of shares determined by Corporate Advisory Pvt. Ltd. It also noted that the buyer Emami Rainbow Niketan is a 100% subsidiary of Emami Realty Ltd. Emami Realty Ltd. is a 100% subsidiary of Emami Infrastructure Ltd, the assessee. The Tribunal observed that the two issues which arise for its adjudication are –

(i) whether there is a transfer of shares in view of the provisions of section 47(iv) of the Act; and

(ii) if the transaction in question is not covered by section 47(iv) of the Act, then whether the computation of capital gains as made by the AO and confirmed by the CIT(A) is correct or not and whether the AO can substitute the sale consideration of the shares sold with FMV as determined by him?

The Tribunal observed that if it comes to the conclusion that this is not a transfer then the assessee’s claim that it had incurred a long term capital loss and same has to be carried forward cannot be allowed. Similarly, capital gain computed by the AO based on fair market value computed by him and substituted for the sale consideration agreed to by the seller and buyer has to be cancelled.

The Tribunal noted that the transfer is to a second step down 100% subsidiary of the assessee. The issue is whether provisions of section 47(iv)(a)(b) are applicable to a second step down subsidiary. It noted the following two divergent views on this issue –

(i) the Bombay High Court in the case of Petrosil Oil Co. Ltd. vs. CIT (236 ITR 220)(Bom.) has, in the context of provisions of section 108 of the Act, held that a 100% owned sub-subsidiary of a 100% owned subsidiary would be a subsidiary within the meaning of section 4(1)(c) of the Companies Act and also within the meaning of section 108(a) of the Act;

(ii) the Gujarat High Court has in the case of Kalindi Investments Pvt. Ltd. (256 ITR 713)(Guj) held that there is no justification for invoking clause (c) of sub-section (1) of section 4 of the 1956 Act while interpreting the provisions of clauses (iv) and (v) of section 47.

Applying the decision of the Bombay High Court (supra), the transaction in question cannot be regarded as a transfer in view of provisions of section 47(iv) of the Act, as it is a transfer of a capital asset by a company to its subsidiary company and as a second step down 100% subsidiary company is also a subsidiary of the assessee company under the Companies Act, 1956 as the term ‘subsidiary company’ has not been defined under the Income-tax Act.

Upon going through the two judgments, the Tribunal held that it prefers to follow the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra) as in its view a second step down 100% subsidiary is also covered by the provision of section 47(iv) of the Act, as this is the letter and spirit of the enactment.

Following the decision of the Bombay High Court in the case of Petrosil Oil Co. Ltd. (supra), the Tribunal held that the transaction of sale of shares of Zandu Realty by assessee to Emami Rainbow Niketan Ltd. is not regarded as transfer in view of section 47(iv) of the Act. Hence, the question of computing either the capital loss or capital gain does not arise. The Tribunal held that the assessee is not entitled to carry forward the capital loss of Rs. 25 crore as claimed.

This ground of appeal of assessee was dismissed.

shailesh.kwebmaker

2 Sections 2(29A) r.w.s. 2(42B) and 251 – Gain arising on sale of shares of a private limited company, offered in the return of income as `short term capital gain’ can be claimed, for the first time, to be `long term capital gain’ before appellate authority even without filing a revised return of income.

. 2018] 91 taxmann.com 28 (Mumbai – Trib.)

Ashok Keshavlal Tejuja vs. ACIT

ITA No. : 3429 (MUM.) of 2016

A.Y.: 2011-12: Date of Order: 15^th
February, 2018

FACTS

During the previous year
relevant to assessment year 2011-12, the assessee had sold shares of a private
limited company. Gain arising on sale of these shares was shown in the return
of income, filed by the assessee, as short term capital gains. In the course of
assessment proceedings, the assessee, without having revised the return of
income, filed a letter and also a revised computation of income thereby making
a claim that the gain arising on sale of shares of private limited company need
to be considered as `long term capital gains’. This additional claim was denied
to the assessee.

Aggrieved by the assessment
made, the assessee preferred an appeal to the CIT(A) and in the course of
appellate proceedings the assessee raised the said claim before the CIT(A). The
CIT(A) did not entertain the claim made by the assessee on the ground that it
was made otherwise than by filing a revised return of income.

Aggrieved,
the assessee preferred an appeal to the Tribunal where the assessee brought to
the notice of the Tribunal the decision of the Apex Court in the case of Goetze
(India) Ltd. vs. CIT [2006] 284 ITR 323 (SC) and also the decision of the
Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders
[2012] 349 ITR 336 (Bom.).

HELD

The Tribunal noted that the
Supreme Court in the case of Goetze India Ltd. (supra) and also the
Bombay High Court in the case of Pruthvi Brokers & Shareholders (supra)
has clearly held that the additional claim can be filed before the appellate
authorities even if the same is not filed by way of revised return of income.
Since the assessee had filed the claim before the AO as well as before the
CIT(A) to bring to tax the capital gains as long term capital gains on sale of
share of private limited company instead of short term capital gain as declared
in the return of income, the Tribunal admitted the claim filed by the assessee.

The Tribunal remitted the
matter to the file of the AO for considering the aforesaid additional claim
raised by the assessee on merits after hearing the contention of the assessee
and evaluating the evidences filed / to be filed by the assessee on merits in
accordance with law.

This ground of appeal filed
by the assessee was allowed.

shailesh.kwebmaker

1 Section 253 – An erroneous disallowance made by the assessee in its return of income on account of non-deduction of tax at source which disallowance was not contested before CIT(A) can be challenged by the assessee, for the first time, before the Tribunal.

[2018] 90 taxmann.com 328 (Kolkata-Trib.)
Allahabad Bank vs. DCIT
ITA No. : 127/Kol/2011
A.Y.: 2007-08 and 2009-10
Date of Order: 07th February, 2018

If the stand of the
assessee is found to be correct and if it results in income being assessed
lower than returned income, that would be the true and correct income of the
assessee and it would be the duty of the revenue to assess the correct tax
liability of the assessee.

FACTS

The assessee, in his return
of income for AY 2007-08, disallowed a sum of Rs. 3,17,32,735 u/s. 40(a)(ia) of
the Act. Since this disallowance was
made voluntarily in the return of income, the assessee did not contest it in an
appeal filed before CIT(A) against the assessment order.

In Assessment Year 2008-09,
the deduction was claimed in the return of income and same was disallowed by
the Assessing Officer (AO). This disallowance was contested in an appeal before
CIT(A) who allowed the deduction to the extent of Rs. 96,38,366 after
examination of copies of challans and other documents.

Subsequent to the passing
of the order by CIT(A), the assessee bank observed that in respect of
disallowance amounting to Rs. 99,32,277 out of Rs. 3,17,32,735, the provisions
of TDS are not applicable at all and consequently the provisions of section
40(a)(ia) are not attracted.

For the first time in an
appeal before the Tribunal, the assessee took an additional ground that the AO
be directed to allow deduction of Rs. 99,32,277 after verification of all
necessary documents in support of the claim of the assessee.

Before the Tribunal, it was
contended that the assessee never had an occasion to address this issue before
the lower authorities and hence had no option but to file an additional ground
before the Tribunal. It was also submitted that since the issue has not been
examined by the lower authorities, in order to appreciate the contentions of
the assessee, it could be remanded to the file of the AO. The revenue had no
objection except that it would result in an assessment being framed at lesser
than returned income.

HELD

As regards the contention
of the revenue that the assessment would be framed at lesser than returned
income, the Tribunal noted the observations of the Calcutta High Court in the
case of Mayank Poddar (HUF) vs. WTO [2003] 262 ITR 633 (Cal.) and
observed that it is now well settled that there is no estoppel against the
statute. It observed that the assessee is only pleading for claim of deduction
which had been erroneously disallowed by it in the return of income and
considered as such by the AO in the assessment. Though there was no occasion
for the revenue to adjudicate this issue on merits, the revenue could not take
advantage of the mistake committed by the assessee. The scheme of taxation is
primarily governed by the principles laid down in the Constitution of India and
as per Article 265 of the Constitution of India, no tax shall be levied or
collected unless by an authority of law. When a particular item is not to be
taxed as per statute, then taxing the same would amount to violation of
constitutional principles and revenue would be unjustly enriched by the same.
Hence, in the process of verification by the AO, if the stand of the assessee
is found to be correct and if it results in income being assessed lower than
the returned income, that would be the true and correct income of the assessee
and it would be the duty of the revenue to assess the correct tax liability of
the assessee.

Having made the aforesaid
observations, the Tribunal, in the interest of justice and fair play, remanded
the issue to the file of the AO for adjudication of merits.

The additional ground of
appeal filed by the assessee was allowed.

shailesh.kwebmaker

4 Section 4 – Charge of income-tax – Interest on advance – if the income does not result at all – then the same cannot be taxed – even though an entry is made in the books of account about such a hypothetical income – which has not been materialised.

1.
CIT vs. Godrej Realty Pvt.
Ltd.

ITA
No.: 264 of 2015 (Bom High Court)

AY:
2008-09 Dated: 11^th December, 2017

[Godrej
Realty Pvt. Ltd v. ITO; ITA No.: 4487/Mum/2012;
Dated: 04^th June, 2014; Mum. ITAT]

The Assessee Company had
entered into a Memorandum of Understanding (MoU) with M/s. Desai & Gaikwad
to develop residential project on a plot of land, belonging to M/s. Desai &
Gaikwad at Pune. In terms of the MoU, the Assessee had given an advance to M/s.
Desai & Gaikwad and the assessee was entitled to receive from M/s. Desai
& Gaikwad interest at 10% p.a. on the aforesaid project advance. However,
the obligation to pay interest on M/s. Desai & Gaikwad to the assessee, was
from the date of execution of the development agreement. In its return for the
subject AY, the assessee did not offer to tax any interest on the aforesaid
advance with M/s. Desai & Gaikwad.

However, the A.O, brought
to tax the amount of interest on advance. This on the basis of M/s. Desai &
Gaikwad’s ledger account showed an aggregate of advance and interest, as
payable by it to the assessee. Thus, concluding that interest had accrued to
the assessee, as it follows the mercantile system of accounting. Therefore,
interest is includable in its total income.

The CIT(A) dismissed the
assessee appeal. Thus, upholding the view of the A.O that as M/s. Desai &
Gaikwad had shown interest liability to the assessee as expenditure in its
books of account, it follows that interest has accrued to the assessee.
Therefore, the interest was includable in the total income subject to tax.

The Revenue case is that,
assessee was following the mercantile system of accounting. Therefore, it was
obligatory on its part to account for its accrued interest, which had so
accrued in terms of MoU. This accrual of interest is further supported,
according to him by the fact that M/s. Desai & Gaikwad has shown in its
books the above amount as a liability to the assessee. In support of the
proposition that in a mercantile system of accounting, the income is said to
accrue, when it becomes due and the postponement of the date of payment or non
receipt of the payment, would not affect the accrual of interest, he places
reliance upon the decision of the Supreme Court in Morvi Industries Ltd.
vs. CIT (1971) 82 ITR 835.

The Tribunal records the
fact that in terms of MOU, M/s. Desai & Gaikwad was liable to pay interest
at 10% p.a. on the advance from the date of the execution of the development
agreement and the undisputed position is, it has not been executed. The debit
note sent by the assessee to M/s. Desai & Gaikwad towards the interest chargeable
on the advance was returned by M/s. Desai & Gaikwad, denying its liability
to pay any interest as demanded. Moreover, the board of directors of the
assessee had recording the no acceptance of the debit note towards the interest
payable, decided to waive the interest chargeable which is to be recovered from
M/s. Desai & Gaikwad.

Being aggrieved, the
Revenue carried the issue in appeal to the High court. The Hon. Court observed
that, in fact, there was no accrual of income in the present case. This for the
reason that there was no right to receive income of Rs.1.98 crores as interest
as admittedly development agreement has not been executed. The interest in
terms of the MoU would only commence on development agreement, being executed.
Admittedly, this is not done. Further, the return of the debit note by M/s.
Desai & Gaikwad was also an indication of the fact that M/s. Desai &
Gaikwad did not accept that interest is payable to the Assessee. Consequently,
there was no amount which had become due to the Assessee.

The entire grievance of the
Revenue before us is that the entries made by M/s. Desai & Gaikwad in its
ledger account, indicating that interest was payable, by itself, lead to the
conclusion that interest had accrued to the assessee is not correct.
Particularly, in the context of the MoU and return of debit note. Moreover, the
board of directors of assessee had passed a resolution, waiving the interest
receivable from M/s. Desai & Gaikwad. This, on account of non acceptance of
liability to interest by M/s. Desai & Gaikwad. Therefore, it was not an
unilateral giving up of accrued income but acceptance of the rejection of debit
note by M/s. Desai & Gaikwad. Moreover, the reliance upon Morvi Industries
Ltd., (supra) is inapplicable for the reasons on facts, the accrual of
income in this case would only arise after the execution of the development
agreement. Undisputedly, it has not taken place. Thus, as no income i.e.
interest has accrued or has been received, the occasion to levy tax on such
hypothetical income, cannot arise. Accordingly, Revenue appeal was dismissed.

shailesh.kwebmaker

3 Income in respect of sale of flats – accrued when possession of the flat was given – not when allotment letter was issued.

CIT vs. Millennium Estates Private Ltd.
ITA No.: 853 of 2015 (Bom. High Court)
A.Y.: 2007-08 Dated: 30th January, 2018
[Millennium Estates Private Ltd. v. DCIT; ITA No. 517/Mum/2011; Dated: 16th May, 2012; Mum. ITAT]

The assessee carries on
business as a contractor and developer. During the scrutiny proceedings the A.O
found that an amount was shown under the head current liabilities i.e. as
advances received from it buyers. The A.O did not accept the contention of the
Assessee that the aforesaid amounts from M/s. Siddhi Vinayak Securities Pvt.
Ltd. and M/s. Manomay Estates Pvt. Ltd. were received as advance at the time of
allotment on 14 & 15 March 2007 and that further consideration was received
on 1 April 2007, when the possession of the flats was given, thus chargeable to
tax in the next AY. The A.O made addition the aggregate amount received from
M/s. Siddhi Vinayak Securities Pvt. Ltd and M/s. Manomay Estates Pvt. Ltd. as
accrued income in the subject Assessment Year.

Being aggrieved, the
assessee carried the issue in appeal to the CIT (A). The CIT (A) dismissed the
Assessee appeal.

On further Appeal, the
Tribunal allowed the Assessee appeal.
Thus after being examined all the
clauses of the allotment letter as well as the clauses of the possession letter
concluded that the sale of the flats took place only in the subject Assessment
Year i.e. on 1 April 2007 i.e. when the possession of the flats was given and
the balance amount was paid. The accrual of income took place in the next year.
Till then, the amount received was only in the nature of advances. The Tribunal
also records the fact that it was not the case of the Revenue that the possession
letter dated 1 April 2007 was not genuine. Nor has the Revenue brought on
record any evidence to show that the possession was given to M/s. Siddhi
Vinayak Securities (P.) Ltd. and M/s. Manomay Estates (P.) Ltd. prior to 1
April 2007. In the above view the addition was made by the A.O and upheld by
the CIT (A) was deleted.

The Tribunal also records
the fact that in the next AY , the Assessee has offered the income on the sale
of the flats to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay
Estates Pvt. Ltd. to tax. The same has also been accepted by the Revenue as
taxable income for the next AY.

The grievance of the
Revenue is that the sale of the flats under consideration had in fact taken
place on 14 and 15 March 2007 when they were allotted under an allotment
letters to M/s. Siddhi Vinayak Securities Pvt. Ltd. and M/s. Manomay Estates
Pvt. Ltd.

Being aggrieved, further
Revenue filed an appeal to the High Court. The Hon. High Court observed that
the Tribunal has reproduced the relevant clauses of the allotment letter dated
15 March 2007 which is similar to the allotment letter dated 14 March 2007 and
the relevant clause. The Tribunal, held that the amount of Rs.2.14 Crores was
an advance during the subject AY. It thus held that part of the above amount
had accrued as income during the AY 2007-08. From the above clauses of the
allotment letter and clause 9 of the possession letter referred to by the
Tribunal it is very evident that the possession of the flats was given on
receipt of total consideration only on 1 April 2007. The Tribunal records as a
matter of fact that there is no dispute about the genuineness of the letter of
possession dated 1 April 2007. Moreover, no statement of the buyers or other
evidence, even circumstantial in nature, was brought on record to indicate that
the facts are different from what has been recorded in the possession letter
dated 1 April 2007. In the aforesaid facts, the view taken by the Tribunal on
the self evident terms of allotment and possession letter does not give rise to
any substantial question of law. Accordingly, Appeal of dept was dismissed.

shailesh.kwebmaker

33. U/s. 80HHC – Export Business – Deduction – A. Y. 1996-97 – Supporting manufacturer – Application by exporter for renewal of trading house certificate pending before concerned authorities – Does not disentitle supporting manufacturer to the deduction u/s. 80HHC – Exporter gave disclaimer certificate with details of export – Supporting manufacturer entitled to benefit of deduction u/s. 80HHC(1A)

CIT vs. Arya Exports and Industries; 398 ITR 327 (Del):

The assessee was a supporting manufacturer
of an export trading house, R. In its return for the A. Y. 1996 97, the assessee claimed deduction u/s. 80HHC(1) on the net profit
shown in the profit and loss account. It had dispatched the supplies prior to
31/03/1995 and on various dates between 01/04/1995 to 05/06/1995 and the goods
were exported by R which had issued a disclaimer certificate on 29/08/1996. It
submitted the certificate in form 10CCAB, which was issued by the export
trading house R, confirming that no deduction u/s. 80HHC(1) had been claimed by
R in respect of the export turnover shown by the assessee. The certificate
contained the particulars which related to the supporting manufacturers and the
export trading house, also included the invoice numbers, dates of invoice,
shipping bill numbers, nature of goods with quantities, etc. R had a
trading house certificate, valid up to 31/03/1995 and had filed an application
for renewal of its trading house certificate by a receipt dated 16/10/1995, and
had not received any communication to indicate that its application for renewal
was rejecetd. The Assessing Officer held that it was obligatory on the part of
R, the export trading house, to obtain a certificate from the concerned
Government authorities and that without the renewal certificate, the claim for
deduction u/s. 80HHC by the assessee, a supporting manufacturer, was not valid
and that therefore, the exports done after 01/04/1995 were not entitled to
deduction u/s. 80HHC. The Commissioner (Appeals) and the Tribunal allowed the
assessee’s claim for deduction.

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

“i) The assessee was entitled
to the deduction u/s. 80HHC(1A) for the A. Y. 1996-97. The legislative scheme
which emanated from sub-section (1A) of section 80HHC was to treat the
supporting manufacturer and its entitlement to deduction separately from that
of the exporter. The words “assessee” used throughout s/s. (1) referred only to
the exporter whereas the same word used throughout s/s. (1A) referred to the
supporting manufacturer. There was a discernible distinction, in the
legislative scheme of section 80HHC between, the deduction that could be
claimed by an exporter and the deduction that could be claimed by a supporting
manufacturer. While the supporting manufacturer has to fulfil the condition of
a certificate having been issued by the exporter/export trading house to avail
the benefit of a deduction from the turnover that had been made available to
the supporting manufacturer, expressly u/s. 80HHC(1A), the deduction did not
hinge upon the eligibility of the exporter for the deduction u/s. 80HHC(1).
Further, a perusal of form 10CCAB showed that there was a separate certificate
to be issued in favour of the supporting manufacturer where the exporter made a
declaration that it had not claimed a deduction u/s. 80HHC(1) and there was a
counter verification by the chartered accountant of such a certificate. It was,
therefore, clear that there was no double deduction claimed in respect of the
export, which was consistent with the legislative intent of extending the
benefit u/s. 80HHC either to the exporter or to the supporting manufacturer and
not to both.

ii) Even
after the period for which the renewal of the trading house certificate was
sought, R continued to be treated as an export house according to the facts
that had emerged before the Commissioner (Appeals) and the Tribunal. R filed an
application for renewal of its trading house certificate, which was pending
before the relevant authorities for four years and was pending even on the date
of the assessment order.

iii) The export import policy
for the relevant period expressly stated that during the interim period the
export trading house would be eligible to claim all the facilities and benefits
of the exporter and, therefore, the further benefit of the supporting
manufacturer as well. The benefit u/s. 80HHC was, therefore, available to R for
the exports made during the period in question. However, R having issued the
disclaimer, did not, in fact, claim the deduction. The mere non-grant of the
renewal of the trading house certificate by the Director General of Foreign
Trade could not deprive the assessee as a supporting manufacturer of the
deduction it was entitled to u/s. 80HHC(1A).”

shailesh.kwebmaker

32. Sections 2(15) and 12AA – Charitable Trust – Registration – A. Y. 2012-13 – Meaning of charitable purpose – Institution for training Government officials in water and land management – Direct connection with preservation of environment – Institution entitled to registration

CIT vs. Water and Land Management
Training and Research Institute; 398 ITR 283 (T&AP):

The assessee is an institution established
in the year 1983, under the control of the Irrigation Department of the
Government of Andhra Pradesh. The assessee applied for registration u/s. 12AA
of the Act. The Director of Income Tax (Exemptions) observed that though the
institute was mainly functioning as a training institute for the purpose of
training Government officials in the field of water and land management, the
institute was also providing guidance to farmers and rendering consultancy
services to various organisations for a fee. With this view, the Director of
Income-tax (Exemptions) rejected the application for registration. The Tribunal
allowed the appeal and directed registration u/s. 12AA.

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

“i) A careful reading of the
definition of the expression “charitable purpose” appearing in section 2(15) of
the Act, 1961 would show that it is an inclusive definition. This is clear from
the usage of the word “includes”. The definition “includes” within its ambit,
(a) relief of the poor, (b) education, (c) yoga, (d) medical relief, (e)
preservation of environment including waterheads, forests and wildlife, (f)
preservation of monuments or places or objects of artistic or historic interest
and (g) the advancement of any other object of general public utility.
Interestingly, the first proviso does not deal with anyone of the first six
items. The first proviso as it stood before April 1, 2016 or even as it stands
after April 1, 2016 deals only with one of the seven items covered by the
substantive part of the definition, namely, “advancement of any other object of
general public utility”. The second proviso takes away from the ambit of the
first proviso, even an activity relating to the advancement of any other object
of general public utility, if the aggregate value of the receipts from the
activities referred to in the first proviso is
Rs. 25 lakhs or less in the previous year.

ii) It is only after an
institution is granted registration u/s. 12AA of the Act; that the examination
of the gross receipts year after year for the purpose of finding out the
eligibility for exemption would arise. This has also been clarified by the CBDT
Circular No. 21 of 2016, dated May 27, 2016.

iii) Charitable purpose
includes preservation of environment including waterheads, forests and
wildlife. The activity carried out by the assessee had a direct casual
connection to the activity of preservation of environment. The Tribunal was
correct and the assessee was entitled to registration.”

shailesh.kwebmaker

Sections 45, 48 – The cost of construction incurred by the Builder cannot be the consideration for exchange of land in the scheme of Joint Development. It is the FMV, based on the value of the Sub-Registrar, on the date of JDA, which needs to be taken as full value of consideration

16. Y. S. Mythily vs. ITO
(Bangalore)

Members : Inturi Rama Rao (AM) and Lalit
Kumar (JM)

ITA No. 235/Bang./2016

A.Y.: 2006-07.
Date of Order: 9^th June, 2017.

Counsel for assessee / revenue: H. Guruswamy / Swapna Das

FACTS

The assessee owned vacant site in respect of which she
entered into a Joint Development Agreement (JDA) with M/s Sai Dwarka Builders
and Developers. As per the terms of JDA entered into by the assessee, the
assessee agreed to transfer to the developer 55% of the undivided portion of
the land measuring 3153 sq. ft. (sic mts) out of total 5733 sq. ft. (sic mts)
and the remaining undivided portion of 2580 sq. mts was retained by the
assessee. The proposed built up area to be constructed was about 19,836 sq. ft.
out of which the assessee was entitled to 45% of the built-up area measuring
8735 sq. ft. in exchange of 3153 sq. ft of undivided portion of land and
developer was entitled to 55% of the built-up area measuring 11000 sq. ft.

In the course of assessment proceedings, the Assessing
Officer (AO) proposed to adopt cost of construction incurred by the Builder as
consideration for exchange of 55% of the undivided portion of land measuring
3153 sq. ft. According to the AO, the cost of construction, as provided by the
Builder to the AO, was Rs. 1238 per sq. ft. The AO accordingly, determined the
consideration to be Rs. 1,08,13,930 in respect of 55% of undivided portion of
land transferred by the assessee in favor of the Builder. The assessee, relying
on the ratio of the decision of Karnataka High Court in the case of Sri. Ved
Prakash Rakhra (2015) 370 ITR 762 (Kar.) submitted that the cost of
construction incurred by the Builder cannot be the consideration for exchange
of land in the scheme of Joint Development. The AO did not accept the
contentions of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
dismissed the appeal on the ground that the decision of the Karnataka High
Court in the case of Sri. Ved Prakash Rakhra (supra) is distinguishable
in as much as in the case of the assessee the agreement does not mention the
price of land transferred by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal upon going through the relevant clauses of the
JDA observed that neither the AO nor the CIT(A) had adjudicated as to the date
of transfer i.e. as to when the property would be transferred in terms of JDA.
In the opinion of the Tribunal, prima facie, the property would not be
transferred to the assessee during the assessment year under consideration in
terms of JDA. However, since this was not urged before the Tribunal, it did not
adjudicate this issue on merit.

The Tribunal held that for the purposes of
determining the cost of construction, in identical facts and circumstances of
the case, the Hon’ble jurisdictional High Court has in the case of Ved Prakash
Rakhra (supra) held that the date of entering into the JDA would be “the
date” for the purposes of arriving at the cost of transfer i.e. cost of
structure as on the date of agreement would be the cost of transfer instead of
cost of actual construction in terms of JDA. Following the decision of the High
Court, the Tribunal allowed the appeal filed by the assessee.

shailesh.kwebmaker

Sections 43(5), 271(1)(c) – Penalty cannot be levied in a case where set off of loss against normal business income was not allowed because the AO assessed the loss to be speculative loss as against normal business loss claimed by the assessee in its return of income. Such a change amounts to change in sub-head of loss and not furnishing of inaccurate particulars of income invoking penal provisions.

18. [2017] 84
taxmann.com 63 (Kolkata – Trib.)

DCIT vs. Shree Ram Electrocast (P.) Ltd.

A.Y.: 2009-10
Date of Order: 2^nd June, 2017

FACTS

The assessee in its return of income for AY 2009-10 claimed
deduction of Rs. 51,00,000. This sum represented amount paid by the assessee as
damages to Global Alloys Pvt. Ltd. with whom assessee had entered into a
contract on 9.7.2008 for purchase of 200 MT of “Silicon Magnum” and 50MT of
“Ferro Silicon” at the rate of Rs. 78,000/MT and Rs. 86,000/MT respectively.
The contract was valid till 28.2.2009. The contract interalia provided
that in case of failure on the part of the assessee to lift the material on the
date fixed for performance of the agreement, the assessee would pay damages to
seller. Similar was the provision in case the supplier failed to supply the
material. The quantification of damages was with reference to market price on
the date of failure.

The Assessing Officer (AO) held that –

(i) the agreement read as a whole showed that the
loss in question was speculative in nature;

(ii) the element of speculation was embedded in
clauses 7 and 8 of the agreement;

(iii) non-delivery of material was contemplated in
the contract itself and the payment of Rs. 51 lakh was emanating directly from
the settlement of the contract rather than on account of any arbitration award
on account of any separate suit filed by counter party for breach of the
contract;

(iv) non-delivery of material was never a breach of
the contract but was a part of the contract under clauses of the contract and
either assessee or the seller could lose or gain depending upon whether price
of the material decreases or increases in future.

The AO rejected the contention of the assessee that the
amount paid was damages and damages paid for breach of contract was not to be
regarded as speculative loss was not accepted by the AO.

As a result of the AO treating the loss to be speculative in
nature, there was a consequent addition to the total income of the assessee.
Further, the AO initiated penalty proceedings u/s. 271(1)(c) for furnishing
inaccurate particulars and concealing particulars of income. He levied penalty
u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
held that a loss declared in the income was treated as a speculative loss and
consequently not allowed to be set off against the normal business income would
only be a change of the sub-head of the loss and it could not be said that
there was furnishing of inaccurate particulars. He decided the appeal in favour
of the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD

The Tribunal noted that in the quantum proceedings, the
Tribunal has vide order dated 22.3.2013 confirmed the action of the CIT(A) that
the loss under consideration is a speculation loss and cannot be set off
against income of a non-speculative nature. It observed that the question that
requires consideration and decision is whether the disallowance of the
assessee’s claim for set off of share trading loss against other income by
treating the same as speculation loss will attract penalty u/s. 271(1)(c). It
observed that the issue is covered in favour of the assessee by the following
judicial pronouncements –

(i) CIT vs. SPK Steels (P.) Ltd. [2004]
270 ITR 156 (MP);

(ii) CIT vs. Auric Investment & Securities
Ltd. [2009] 310 ITR 121 (Delhi)

(iii) CIT vs. Bhartesh Jain [2010] 323 ITR
358 (Delhi).

The Tribunal noted that the Delhi High Court in the case of
Auric Investment & Securities Ltd. (supra) has held that penalty
imposed by the AO u/s. 271(1)(c) was not sustainable as mere treatment of
business loss as speculation loss by the AO did not automatically warrant
inference of concealment of income and there was nothing on record to show that
in furnishing return of income, the assessee has concealed its income or had
furnished any inaccurate particulars of income.

The Tribunal upheld the action of the CIT(A) in deleting the
penalty levied by the AO.

The Tribunal dismissed the appeal filed by the
revenue.

shailesh.kwebmaker

Section 5: Where foreign employer directly credited the salary, for services rendered outside India, into the NRE bank account of the non-resident seafarer in India, same cannot be brought to tax in India u/s. 5.

17. [2017] 82
taxmann.com 209 (Kolkata – Trib.)

Shyamal Gopal Chattopadhyay
vs. DDIT

A.Y.: 2011-12
Date of Order: 2^nd June, 2017

FACTS

The assessee, a Marine Engineer, engaged with Wallem Ship
Management Ltd., in capacity as a Master was paid USD 74271.36 on different
dates, convertible into Indian Rupees of Rs. 33,47,312. The amount was received
in USD outside India and on request of the assessee, was remitted to the
Savings Bank NRE Account maintained by the assessee with HSBC in India. The
above income was not offered for taxation on the ground that it has been
received from outside India in foreign currency.

In the course of assessment proceedings, the Assessing
Officer (AO) issued asked the assessee to show cause why remuneration received
in India should not be brought to tax in terms of section 5(2)(a) of the Act.

The AO rejected the assessee’s contention that the payments
were received outside India and at the request of the assessee, were remitted
to his savings bank NRE account maintained in India. The AO charged to tax the
sum of Rs. 33,47,112 as income chargeable to tax in India. For this
proposition, he placed reliance on the Third Member decision of Mumbai Tribunal
in the case of Capt. A. L. Fernandes vs. ITO [2002] 81 ITD 203, wherein
it has been held that salary received by the assessee in India is taxable u/s.
5(2)(a) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that its case is squarely covered by the following decisions
–

(i) DIT
(Int Tax) vs. Prahlad Vijendra Rao [2011] 198 Taxman 551 (Kar.)

(ii) CIT
vs. Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom.)

It was also submitted that the issue is now squarely covered
in favour of the assessee by CBDT Circular No. 13/2017 dated 11.4.2017 wherein
it has been categorically clarified by CBDT that the subject mentioned receipt
is not taxable as income u/s. 5(2)(a) of the Act.

HELD

The Tribunal observed that the decision in the case of Tapas
Kumar Bandhopadhya vs. DDIT (Int. Tax) [2016] 159 ITD 309 (Kol.-Trib.),
relied upon by the ld. DR, was rendered by placing reliance on the Third Member
decision of Mumbai Tribunal in case of Capt. A. L. Fernandes (supra).
This decision clearly lays down that the 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 is received the right to tax
the said income on receipt basis. Such a provision is found in section 5(2)(a)
of the Act which was applied in the aforesaid decision. It is trite that
decision of a Third Member would be equivalent to a decision of a Special Bench
and thereby would become a binding precedent on the division bench. However, we
find that the impugned issue has been duly addressed by the CBDT Circular No.
13/2017 dated 11.4.2017 as rightly relied upon by the ld AR.

A perusal of the Circular referred to above, shows that
salary accrued to a non-resident seafarer for services rendered outside India
on a foreign going ship (with Indian flag or foreign flag) shall not be
included in the total income merely because the said salary has been credited
in the NRE account maintained with an Indian bank by the seafarer. Remittances
of salary into NRE Account maintained with an Indian Bank by a seafarer could
be of two types: (i) Employer directly crediting salary to the NRE Account
maintained with an Indian Bank by the seafarer;
(ii) Employer directly crediting salary to the account maintained
outside India by the seafarer and the seafarer transferring such money to NRE
account maintained by him in India. The latter remittance would be outside the
purview of provisions of section 5(2)(a) of the Act, as what is remitted is not
“salary income” but a mere transfer of assessee’s fund from one bank
account to another which does not give rise to “Income”. It is not
clear as to whether the expression “merely because” used in the
Circular refers to the former type of remittance or the latter. To this extent,
the Circular is vague.

In the instant case, the employer has directly
credited the salary, for services rendered outside India, into the NRE bank
account of the seafarer in India. In our considered opinion, the aforesaid
Circular is vague inasmuch as it does not specify as to whether the Circular
covers either of the situations or both the situations contemplated above.
Hence, we deem it fit to give the benefit of doubt to the assessee by holding
that the Circular covers both the situations referred to above. The result of
such interpretation of the Circular would be that the provisions of sec.5(2)(a)
of the Act are rendered redundant. Be that as it may, it is well settled that
the Circulars issued by CBDT are binding on the revenue authorities. This
position has been confirmed by the Hon’ble Apex Court in the case of Commissioner
of Customs vs. Indian Oil Corpn. Ltd. [2004] 267 ITR 272, wherein their Lordships
examined the earlier decisions of the Apex Court with regard to binding nature
of the Circulars and laid down that when a Circular issued by the Board remains
in operation then the revenue is bound by it and cannot be allowed to plead
that it is not valid or that it is contrary to the terms of the statute.
Accordingly, the grounds raised by the assessee are allowed.

shailesh.kwebmaker

Sections 23, 198, 199 – Credit has to be granted even in respect of TDS on the part of annual value which has been claimed as unrealised rent.

16. [2017] 82 taxmann.com 456 (Mumbai- Trib.)

Shree Ranji Realties (P.) Ltd. vs. ITO

A.Y.: 2010-11
Date of Order: 9^thJune, 2017

FACTS

The assessment of total income of the assessee company having
investment in shares, mutual funds and immovable properties, etc. was
completed u/s. 143(3) of the Act.
Subsequent to completion of assessment, the Assessing Officer (AO)
noticed that the assessee had offered income under the head `Income from House
Property’ after deducting amount of unrealised rent under Rule 4 of the
Income-tax Rules, 1962 (“Rules”) and had claimed credit of TDS on both,
realized as well as unrealised rent. The
AO, in an order passed u/s. 154 of the Act restricted the credit of TDS to the
extent of actual amount of rent received.

Aggrieved, the assessee preferred an appeal to the CIT(A) who
confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal
where relying on the decision of the Apex Court in the case of T. S.
Balaram, ITO vs. Volkart Bros. [1971] 82 ITR 50 (SC), it was contended that
the issue is highly debatable and cannot be rectified u/s. 154 of the Act.

HELD

The Tribunal observed that –

(i) the facts are not in dispute that the
assessee has disclosed rental income but claimed deduction of unrealised rent
u/s. 23(1) read with rule 4 of the Rules;

(ii) the Unrealised rent is duly offered to tax by
the assessee at the first instance, and then the same is claimed as deduction from
Rental Income u/s. 23(1) of the Act r.w. Rule 4 of the rules;

(iii) the assessee duly fulfils all the conditions
as laid down in section 198 r.ws. 199 read with Rule 37A of the Act.

(iv) TDS had been deducted and paid to the Central
Government by the deductee and Payment / Credit of Rent Income has been
included in the accounts of the assessee;

(v) the deductor had duly filed requisite TDS
returns as per Rules and also issued TDS certificate to the assessee and the
same was furnished to the AO;

(vi) amount of TDS claimed, corresponding to claim
of unrealised rent, is duly offered to tax as income of the assessee, in view
of section 198 of the Act and also assessed by the AO.

It held that the Unrealised rent is deduction which is
claimed u/s. 23(1) of the Act, read with Rule 4 of the Rules, from the total
rental income offered during the year. The unrealised rent is not an exempt
income. As the total rental income (including unrealised rent) is duly offered
to tax under the head ‘Income from House Property’, corresponding TDS credit
needs to be allowed. The Tribunal observed that there are similar instances,
where although the deduction is allowed with respect to total income offered
during the year, still the claim of TDS with respect to such deduction is duly
allowable under the Act i.e. TDS credit is allowed on deduction of Income u/s.
8OIA, 8OIB, 80IC of the Act, etc. and also TDS credit is allowed on bad
debts claimed u/s. 36(1)(vii) of the Act.

Further, the issue is covered by the decision of co-ordinate
bench of this Tribunal in the case of Chander Shekhar Aggarwal (2006) 157 ITD
626 (Delhi).

The Tribunal held that the assessee’s action is in accordance
with provisions of section 199 of the Act and the assessee is eligible for seeking credit of the TDS amount.

The Tribunal set aside the order of the authorities below and
decided the issue in favour of the assessee. It also held that this issue is
highly debatable and cannot be acted upon by the revenue.

The Tribunal allowed the appeal filed by the
assessee.

shailesh.kwebmaker

10. Capital Gain – purchase and sale of shares and mutual funds – Whether chargeable to tax under the head ‘capital gains’ or as business income

CIT, vs. Mohan Vallabhdas Bhatiya. [ Income tax Appeal no
1201 of 2014 dt : 24/01/2017 (Bombay High Court)].

[ACIT , vs. Mohan Vallabhdas Bhatiya., [dated 31/01/2014;
A Y: 2005-06. Mum.ITAT]

The assessee carries on business as a trader in shares. He
also has investments, consequently he holds two portfolios one an investment
portfolio showing the capital assets and the other is trading portfolio. The
assessee was consistently showing gains on account of his investment portfolio
and offering them to tax under the head ‘capital gains’. In fact, right from
the AY : 2003-04 till AY: 200-10, the Revenue has consistently accepted the claim
of the assessee with regard to the gain made on its investment portfolio is
taxable under the head Capital gain except for the subject AY, the Revenue is
seeking to take a different view. The grievance of the Revenue is that in the
subject Assessment Year, there were borrowed funds. Thus, the gains claimed to
have been made on investments are in fact trading gains.

So far as borrowed funds are concerned, the Tribunal records
the fact that a small amount of loan was taken from the relatives and it did
not bear any interest. Moreover, the use of borrowed funds is not necessarily
attributable to the investments made, as there is no such finding given by the
authorities below.

The Hon. High Court dismissed the Revenue’s appeal upholding
the stand of the Assessee that the income earned on account of purchase and
sale of shares and mutual funds were chargeable to tax under the head ‘capital
gains’ and not as business income.

The High Court observed that even before the Tribunal, the
Revenue did not point out any variation in the facts and circumstances of the
case for the subject Assessment Year from those of the earlier and subsequent
years on account of income earned on investment. Moreover, the loan which has
been taken from relatives were for a small amount and further the use of these
borrowed funds were not established to be for purchase of shares for investment
by the authorities.

Therefore, in view of the fact that the Revenue
has been consistently taking a view that the income earned on investments is
taxable under the head capital gains no difference in facts and /or in law has
been pointed out to take a different view for the subject AY. Moreover, both
the CIT(A) as well as the Tribunal have concurrently come to a finding of fact
that the income earned on the investment portfolio is chargeable under the head
capital gains and not under the head ‘profits from trading of shares’ which is
not shown to be perverse. In the above view, the revenue’s Appeal was
dismissed.

shailesh.kwebmaker

9. TDS – Payments made for hiring of cranes – the crane owner responsible for day-to-day maintenance and operating costs – liable for TDS u/s. 194C of the Act – not u/s. 194I of the Act.

CIT (TDS) vs. M/s. UB Engineering Ltd. [ Income tax Appeal
no 1312 of 2014 With 1313 of 2014, dt : 23/01/2017 (Bombay High Court)].

[ITO , (TDS – 3), vs. M/s. UB Engineering Ltd. [ ITA NO.
2025 & 2026/PN/2012; Bench : A ; dated 30/09/2013 ; A Y:2007-08 &
2008-09. Pune. ITAT ]

The assessee is engaged in the business of erection and
commissioning of Industrial Plants and also in A.Ys. 2008-09 & 2009-10
undertakes maintenance of operational plants. The assessee undertakes such work
on contractual basis. Amongst the machinery deployed, it includes ‘cranes’
which are mobilised for movement of heavy machinery. Apart from the deployment
of machinery, assessee also allocated specific activities to labour
contractors. In the case of such activities, assessee incurred expenditure of
Rs.1,21,14,506/- for mobilisation of cranes. The assessee company deducted tax
at source on such payments treating the same to be contractual payments and
applying the provisions of section 194C of the Act. Accordingly, the assessee
deducted tax at source u/s. 194C @ 1% whereas as per the AO the tax was liable
to be deducted in terms of the provisions of section 194I of the Act @ 10% plus
surcharge, treating the payments as rental payments. For the said reason, the
AO treated the assessee as an assessee in default in terms of section 201(1) of
the Act for short deduction of tax to the extent of Rs.12,39,043/- and also
held the assessee liable for the payment of interest on such short deduction in
terms of section 201(1A) amounting to Rs.4,46,055/-.

The CIT(A) considered the facts of the case and concluded
that assessee had correctly applied the provisions of section 194C of the Act
while deducting the tax at source on the impugned payments. The CIT(A) has
noticed that assessee hired services of cranes for which entire maintenance,
repairs, drivers’ salaries etc. was borne by the supplier. The CIT(A) relied
upon the decision of the Pune Tribunal in the case of Wings Travels, ITA No.
1136/PN/2009 and also the judgement of the Hon’ble Gujarat High Court in the
case of Swayam Shipping Services (P) Ltd., 339 ITR 647 (Gujarat) and concluded
that the AO was not justified in invoking the provisions of section 194I of the
Act in respect of the ‘crane hire charges’.

The Tribunal observed that factually, it is not in dispute
that the crane owner not only provides the services of a crane but is also
responsible to provide the operator and incur maintenance & repairs costs, etc.
The Hon’ble Gujarat High Court in the case of Swayam Shipping Services (P) Ltd.
(supra) held that the payments for hiring cranes and Trailers were
liable for deduction of tax at source in terms of section 194C of the Act and
not in terms of section 194I of the Act. The Tribunal also relied on decision,
of the Pune Bench decision in the case of Wings Travels (ITA
No.1136/PN/2009, dated 30^th August, 2011 and Bharat Forge Ltd.
vs. Addl. CIT vide ITA No.1357/PN/2010, wherein a similar view to the
effect that in cases where the crane owner provides the operator as also is
responsible for day-to-day maintenance and operating costs, the payments made
for hiring of cranes would be liable for deduction of tax at source u/s. 194C
of the Act and not u/s. 194I of the Act, as contended by the Revenue. Accordingly,
the order of the CIT(A) was affirmed.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the impugned order dismissed the
Revenue’s appeal before it by inter
alia placing reliance upon the decision of the coordinate
bench in the case of Wings
Travels (Supra). In the affidavit dated 13^th January, 2017, Mr.
Rajesh Gawali, Deputy Commissioner of
Income Tax (TDS) stated that the
decision of the coordinate bench
of the Tribunal in Wings Travels (supra) has been accepted by the Income
Tax Department in view of an earlier
view taken in the case of Accenture
Services (P) Ltd. (ITAT No.5920,
5921 and 5922/Mum/2009).

In the above view, Revenue Appeal was dismissed.

shailesh.kwebmaker

8. Advance received for exports – shown in the accounts as a liability for a period of more than 10 years – no addition of the amount shown as a liability u/s. 41(1)

CIT vs. M/s. Aasia Business Ventures Pvt.Ltd. [ Income tax
Appeal no 1010 of 2014, dt : 24/01/2017 (Bombay High Court)].

[M/s. Aasia Business Ventures Pvt. Ltd. vs. ITO. [ITA
No.430/MUM/2011 ; Bench : A ; date:08/11/2013 ; A Y: 2007- 2008. MUM. ITAT ]

The assessee is engaged in giving advisory services and
traded in shares. Earlier, the assessee was a trader in SKO Superior Kerosene
Oil. It imported SKO and was selling the same in domestic market. During the
course of assessment, the AO noticed that an amount of Rs.3.04 crore was
reflected under the head “current liabilities” (being advance against exports)
in its balance sheet for the year ending 31^st March, 2007. On
inquiry, the AO found that the advance had been received as far back as on 24^thJanuary, 1997 from one Amas Mauritius Ltd. in order to export goods.
However, the exports could not be made till date and the balance is still due
and payable to Amas Mauritius Ltd. in
the books of assessee. The AO in the above view held that the transaction of
advance from Amas Mauritius Ltd. was not a genuine transaction and it was not
to be repaid. Therefore, an addition of Rs.3.04 crore was made on application
of section 41(1) of the Act as cessation of liability.

The CIT(A) upheld the order of AO. Being aggrieved by the
order of the CIT(A), the assessee filed an appeal to the Tribunal. The assessee
pointed out that it had approached the Reserve Bank of India for permission to
return the amount of Rs.3.04 crore shown as an advance against export to Amas
Mauritius Ltd. However, the approval of RBI had not yet been received. The
Tribunal allowed the assessee’s appeal by following the decisions of this Court
in Commissioner of Income Tax vs. Chase Bright Steel Ltd. 177 ITR 128 to
hold that where an amount is shown as an advance in the balance sheet by the
assessee, it amounts to acknowledgment of liability and it does not cease to
exist. So far as the genuineness of the transaction as well as creditworthiness
of the creditor is concerned, the impugned order holds that the same was appearing
in the books of account for all the earlier assessment years and the same was
accepted by the Revenue as genuine. Further, the ITAT placed reliance upon a
decision of its Co-ordinate bench in Jayram Holdings Pvt. Ltd. (ITA
No.6914/Mum/2010) rendered on 4th July, 2012 wherein in almost identical fact
situation, advance received for exports was also shown in the accounts as a
liability for a period of more than 10 years, the Tribunal took a view that
there can be no addition of the amount shown as a liability either u/s. 41(1)
and/or u/s. 28(iv) of the Act. This is so as long as the liability exists.

Before the High Court, the grievance of the Revenue was that
the above transaction is not genuine. This particularly in view of the fact
that Amas Mauritius Ltd. is a 40% shareholder in the assessee company. Thus
related.

Therefore, the impugned order of the Tribunal requires
consideration by this Court to determine its correctness.

The High Court observed that the issue as arising herein was
also a subject matter of consideration before the Tribunal in the case of M/s.
Jayram Holdings Pvt. Ltd. (supra) and it is relied upon in the impugned
order to conclude that section 41(1) of the Act cannot be applied in the
present facts. The Court noticed that in the above case also, the assessee
therein had received from its sister concern an advance for export and shown in
its books over a period of 10 years as a liability.

However, the Tribunal held that section 41(1) of the Act
cannot be applied so long as the liability is acknowledged. The Court held that
the liability does not cease, so long as the party acknowledges its liability.
The order of the Tribunal in Jayram Holdings Pvt. Ltd. (supra) has been
accepted by the revenue. No distinguishing features in the present case have
been indicated during the course of the hearing.

Moreover, it was stated that on obtaining the
permission from Reserve Bank of India on 21^st April, 2014, the
amounts have been repatriated to Amas
Mauritius Ltd. on 16^thMay, 2014. Thereafter, this amount is not now
shown as a liability. In the above view, the appeal was dismissed.

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41. Revision- Section 264 – A. Y. 2013-14- Power of Commissioner – Intimation u/s. 143(1) whether can be considered in revision – Assessee filing revised return and seeking interference by Commissioner – Commissioner to consider revision application

Agarwal Yuva Mandal (Kerala) vs. UOI; 395 ITR 502 (Ker):

For the A. Y. 2013-14, the assessee society filed return of
income claiming certain deductions. The assessee received an intimation u/s.
143(1) disallowing certain expenses on the ground that it was not registered
u/s. 12A of the Act, 1961. The assessee was assessed to a liability of Rs.
2,85,190-. The assessee later revised its return, but no action was taken by
the Department based on the revised return. The assessee thereafter received a
reminder for payment of the outstanding amount of Rs. 2,85,190. The assessee
sent a reply requesting consideration of its revised return. Since there was no
response, the assessee filed a revision petition u/s. 264 of the Act. The
Principal Commissioner declined to exercise the revisional authority holding
that the intimation u/s. 143(1) was not an order of assessment for the purpose
of section 264, whereas it was deemed to be a notice of demand u/s. 156 of the
Act. The assessee filed a writ petition against the order of the Principal
Commissioner.

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

“i) Section 143 had undergone certain changes
w.e.f. 01/06/1999. The statute uses the word intimation and not order. It was
in the light of the change in the statutory provision that one had to consider
the scope and effect of the revisional powers u/s. 264.

ii) Though not as a challenge to section 143(1)
notice, when the assessee filed a revised return and sought for interference by
the Commissioner, necessarily a claim had to be considered in accordance with
law. The Commissioner would be justified in considering the claim to deduction
by the assessee in accordance with law u/s. 264 of the Act. The Commissioner is
directed to consider the matter.”

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40. TDS – Rent – Section 194-I – A. Y. 2010-11 – Meaning of “rent”- Passenger service fees collected by airline operators – Use of land and building incidental – Tax not deductible at source on such fees

CIT(TDS) vs. Jet Airways (India) Ltd.; 395 ITR 230 (Bom):

The assessee was engaged in the business of transportation by
aircraft and for that purpose used and occupied airports run by airport
operators. In the course of its business the assessee collected on behalf of
the airport operators, a passenger service fees and handed it over to the
airport operators.

However, as no tax was deducted at source while handing over
the passenger service fees to the airport operator, a notice u/s.
201(1)(1a) of the Act, 1961 was issued
calling for the assessee’s explanation. The basis of the notice was that the
passenger service fees paid over to the airport operator was “rent” falling
within the scope of section 194-I of the Act. The assessee contended that the
passenger service fees collected by it from its passengers and handed over to
the airport operator is not in the nature of rent. That it consisted of two
components, i.e., security component and facilitation component.

However, the Assistant Commissioner (TDS) did not accept the
assessee’s submission and held the assessee liable to deduct and pay the amount
of tax at source and the interest thereon u/s. 201(1) and (1A). The Tribunal
held that the payment could not be considered to be rent and allowed the
assessee’s claim.

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

“i) The
assessee collected passenger service fees only from its embarking passengers
for and on behalf of the airport operator. The payment of passenger service
fees was for use of secured building and furniture. Therefore, the use of land
or building in this case was only incidental. As the substance of the passenger
service fees was not for use of land or building, but for providing security
service and facilities to the embarking passengers, the payment could not be
considered to be rent within the meaning of section 194-I.

ii) Tax
was not deductible at source on the payment. Proposed question of law does not
give rise to any substantial question of law and thus not entertained.”

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31. Section 2(47) – Capital gain – Computation – Transfer – A. Y. 1995-96 – Transfer of land to developer – 44% of land transferred in exchange for 56% of built-up area – Consideration for transfer of land was cost of construction of 56% of built up area – Cost of acquisition of land was its market value on 01/04/1981 – Land and development charges deductible from sale consideration

CIT vs. Vasavi Pratap Chand; 398 ITR 316 (Del):

A piece of land
was owned by co-owners. They entered into an agreement with A on 02/05/1984. In
terms of the agreement, the building on the land was to be demolished and an
apartment complex was to be constructed thereon. It was agreed that the
co-owners would get built up area of 89,136 sq. ft. which constituted 56% of
the total built up area. 44% of the built-up area would belong to A. The entire
cost of construction was to be met by A. The co-owners entered into agreements
with various flat buyers and ultimately sold constructed flats during the
assessment years 1993-94 to 1995-96. In the A. Y. 1995-96, the three co-owners
sold 18,636 sq. ft. of built up area for a total consideration of Rs.
4,72,98,075. Each co-owner disclosed a loss of Rs. 31,30,663 under the head
“capital gains” in his individual return. The Assessing Officer held that the
cost of acquisition of property (one-third share) would be only Rs. 2,03,334.
In other words, the Assessing Officer adopted the computation of cost of
acquisition in the manner indicated in section 49(1)(i) of the Wealth-tax Act,
1957. The Tribunal held that the figure indicated in the wealth-tax return
filed by the assessee could not be taken to be the basis for determining
capital gains. It held that the agreement of sale clearly showed that 56% of
the built-up area including the land would be retained by the assessee and 44%
by the builder. There was simultaneous transfer of possession of 44% of land by
the assessee to the builders and possession of 56% of the built-up area by the
builder to the assesses in the financial year 1991-92 in terms of section 2(47)
of the Income-tax Act, 1961 read with section 53A of the Transfer of Property
Act. The Tribunal further held that the cost of acquisition of land had to be
its market value as on 01/04/1981. It did not reduce the land and development
charges from the sale consideration.

On appeal, the Delhi High Court held as under:

“i) There was transfer of
title to the land by the assessee in favour of A. What was transferred under
the collaboration agreement was only 44% of the land owned by them in exchange
for 56% of the built-up area and not the entire land. Further, the assesee not
only transferred the flats to the buyers but the proportionate right in the
appurtenant land as well. There was transfer of possession of 44% of the land
by the assesee to the builder and possession of 56% of the built-up area by the
builder to the assessee in terms of section 2(47) of the 1961 Act read with
section 53A of the Transfer of Property Act.

ii) The consideration for the
transfer of 44% land was the cost of construction of the 56% built-up area. The
land and development charges had to be reduced from the sale consideration.

iii) The value declared in
the tax return filed by the assessee under the Wealth-tax Act could not be
taken to be the cost of acquisition in the hands of the assessee. The cost of
acquisition of land had to be the market value of land as on 01/04/1981.”

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30. Section 153 – Assessment – Limitation – Computation of period – Exclusion of time during which assessment proceedings stayed by Court – Expl. 1 – A. Y. 2006-07 – Effect of section 153 – Period between vacation of stay and receipt of order by Income Tax Department not excluded – Vacation of stay on 09/11/2016 – Order of reassessment passed on 30/01/2017 – Barred by limitation

Saheb Ram Omprakash Marketing P. Ltd. vs.
CIT; 398 ITR 292 (Del):

In the case of the assessee, a notice u/s.
148 of the Act, was issued on 27/03/2012 for reopening the assessment for the
A. Y. 2006-07. The assessee filed a writ petition and challenged the validity
of the notice and the reassessment proceedings. The High Court granted stay of
the reassessment proceedings by an order dated 18/03/2013. The stay was vacated
by an order dated 09/11/2016. According to the assessee, on the date of the
stay order being vacated i.e., on 09/11/2016, there were only 13 days left for
passing the reassessment order where period is extended to 60 days by
Explanation 1 to section 153. Therefore, the assessee claimed that a valid reassessment
order could have been passed only up to 08/01/2017, i.e. within 60 days from
09/11/2016; the date on which the stay was vacated by the Court. The Department
rejected the assessee’s claim. It was the claim of the Department that the said
order of the Court dated 09/11/20016 was received by the Department on
02/12/2016 and therefore, the Department would have 60 days from 02/12/2016 to
pass the order of reassessment. Accordingly, the Assessing Officer passed the
reassessment order on 30/01/2017.

The assessee filed a writ petition and
challenged the validity of the reassessment order on the ground of limitation.
The Delhi High Court allowed the writ petition and held as under:

“i) In terms of explanation 1
to section 153 of the Act, in computing the period of limitation “the period
during which the assessment proceedings are stayed by an order or injunction by
the court” shall be excluded. In terms of the first proviso to Explanation 1,
where, after the vacation of stay, the period available to the Assessing
officer to complete the reassessment proceedings is less than 60 days, then
such remaining period shall be extended to 60 days and the period of limitation
shall be deemed to be extended accordingly.

ii) Clause (ii) of
Explanation 1 only excludes from the computation of limitation, “the period
during which the assessment proceeding is stayed by an order or an injunction
of any court”. It does not exclude the period between the date of the order of
vacation of stay by court and the date of receipt of such order by the
Department.

iii) Circular No. 621 dated
19/12/1991, issued by the CBDT, while explaining the reason for introduction of
the proviso to Explanation 1, acknowledged that the time remaining after
vacation of stay in terms of section 153(2) of the Act may not be sufficient to
complete the reassessment proceedings which is why the language used in the
first proviso is that the period “shall be extended to 60 days” for passing the
assessment order in terms of section 153(2) of the Act, if the period remaining
within limitation after the excluded period has elapsed, is less than 60 days.

iv) The Revenue could not take
advantage of the fact that it received the copy of the order dated 09/11/2016
of the Court only on 02/12/2016 to contend that the assessment order having
been passed on 30/01/2017 within 60 days of the date of receipt of the order of
the High Court, was not issued (passed) beyond the period stipulated u/s.
153(2) of the Act read with the proviso to Explanation 1 thereof.

v) Even otherwise, the
assertion that the Revenue was aware of the order only on 02/12/2016 was not
correct. The Revenue had been unable to dispute the fact that, on 30/11/2016, a
notice was issued by the Assessing Officer u/s. 142(1) of the Act and this was
pursuant to the order passed by this Court on 09/11/2016. Clearly, therefore,
on the date such notice was issued, the Assessing Officer was aware of the
order dated 09/11/2016 of the Court. Also, the order dated 09/11/2016 was
passed in the presence of counsel of the Revenue and, therefore, the Revenue
clearly was aware of the order on that date itself.

vi) The order dated 30/01/2017
was time-barred.”

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29. Section 254 –Appellate Tribunal – Power and duties as final fact finding authority –A. Y. 2009-10 and 2010-11 – Must reappraise and reappreciate all factual materials – Failure by Tribunal to render complete decision in terms of powers conferred on it – Matter remanded to Tribunal

Thyrocare Technologies Ltd. vs. ITO(TDS);
398 ITR 443 (Bom):

The assessee
is a sample testing laboratory. The Assessing Officer was of the view that the
sample collectors were not independent persons but were agents of the assessee
which was the principal and that it was an arrangement with the sample
collectors to avoid the obligation to deduct tax at source. The assessee
submitted before the Commissioner (Appeals) that the samples were not collected
directly by it from the patients, but by the sample collectors who visited the
patients and thereafter, brought the samples to it for testing. It was also
submitted that there was no privity of contract between it and the patients and
that the sample collectors did not collect the samples exclusively for it, but
were free to send the samples collected by them for testing to any other
laboratories and therefore it was a principal to principal relationship. The
order of the Assessing Officer was set aside by the Commissioner (Appeals). The
Tribunal held that the payments made by the assessee to the sample collectors
were in the nature of commission or brokerage which was evident from the
affidavit-cum-undertaking executed by the sample collectors and their
application forms for appointment as sample collectors and also from the
statements recorded during the survey u/s. 133A of the Income-tax Act, 1961
(Hereinafter for the sake of
brevity referred to as the “Act”).
It also held that the assessee did not satisfactorily explain the queries
raised. It further held that the Commissioner (Appeals) erred in not correctly
appreciating the nature of the payments made to the sample collectors, that
there was a principal and agent relationship between the assessee and the
sample collectors and deleting the interest levied u/s. 201(1A).

In appeal before the High Court, the
assessee raised the issue whether the findings of the Tribunal that the
assessee had not “satisfactorily explained the queries”, “not produced any
documents to substantiate the contention” and “not discharged the burden”, were
perverse, contrary to the facts on record and that it never indicated during
the hearing that it was not satisfied with the evidence. The Bombay High Court
remanded the matter back to the Tribunal and held as under:

“i) The order of the Tribunal
was vitiated not only by non-application of mind but also by misdirection in
law. The Tribunal as the last fact finding authority, failed to make any
reference to the observations, findings and conclusions in the order of the
Assessing Officer and that of the first appellate authority.

ii) It termed certain facts
as undisputed, whereas, they were very much disputed such as the non-admission
by the assessee that the service providers were its agents or that they were
allowed to collect the necessary charges from its clients for collecting the
sample and delivering the reports. There was no reference to any communication
or any document which indicated that the Tribunal’s queries had not been
satisfactorily answered by the assessee.

iii) The
Tribunal should, independent of the statements recorded during the survey u/s.
133A, have referred to such of the materials on record which disclose that the
assessee had entered into such arrangements so as to have avoided the
obligation to deduct tax at source. If the arrangements were sham, bogus or
dubious, then such a finding should have been rendered.

iv) The Tribunal was obliged,
in terms of the statutory powers conferred on it, to examine the matter,
reappraise and reappreciate all the factual materials satisfactorily. It had
not rendered a complete decision and its order was to be set aside.

v) We direct the Tribunal to
hear the appeals afresh on the merits and in accordance with law after giving
complete opportunity to both sides to place their versions and arguments. The
Tribunal shall frame proper points for its determination and consideration and
render specific findings on each of them.”

shailesh.kwebmaker

28 Sections 253 and 254 –Appeal to Appellate Tribunal – Condonation of delay – A. Ys. 1994-95 and 1996-97 – Delay of 2984 days in filing appeal – Request for condonation of delay not to be refused unless delay is shown to be deliberate and intentional – Orders of Tribunal rejecting condonation of delay based on irrelevant factors – erroneous – delay condoned – Appeals filed by assessee to be restored for adjudication by Tribunal

Vijay Vishin Meghani vs. Dy. CIT; 398 ITR
250 (Bom):

For the A. Ys. 1994-95 and 1996-97, the
assessee filed appeals before the Appellate Tribunal against the orders of the
Commissioner (Appeals) with a delay of 2,984 days. The assessee made applications
for condonation of delay. The assessee submitted an affidavit stating that he
followed the advice given by his chartered accountant not to file further
appeals before the Tribunal for the A. Ys. 1994-95 and 1996-97, as the issue
involved was identical to the appeal
filed before the Tribunal for the A. Y. 1993-94, which was then pending before
the Tribunal, to avoid multiplicity of litigation and that after the
adjudication of appeal for the A. Y. 1993-94 by the Tribunal, he could move a
rectification application before the Assessing Officer to bring the assessment
order in conformity with the decision of the Tribunal. In support of the
averments made in the affidavit, the assessee also filed an affidavit by one of
the partners of the firm of chartered accountants.

The Tribunal dismissed the appeal in limine
and observed that a chartered accountant could not have given an absurd advice.
The affidavit filed by the firm of chartered accountants was rejected. The
affidavit filed by the assessee was also rejected on the ground that it gained
strength only from the affidavit filed by the firm of chartered accountants.
The Tribunal held that the assessee had failed to show the reasons for the
entire period of delay, i.e., no reason was given for the delay that occurred
between periods and therefore, the delay in filing the two appeals could not be
condoned. In a miscellaneous application u/s. 254(2).

The Bombay High Court allowed the appeals
filed by the assessee against the said orders of the Tribunal dismissing the
appeals as barred by limitation and held as under:

“i) None should be deprived
of an adjudication on the merits unless the Court or the Tribunal or appellate
authority found that the litigant had deliberately and intentionally delayed filing
of the appeal, that he was careless, negligent and his conduct lacked
bonafides. Those were the relevant factors.

ii) The Tribunal’s order did
not meet the requirement set out in law. It had misdirected itself and had
taken into account factors, tests and considerations which had no nexus to the
issues at hand. The Tribunal, therefore, had erred in law and on the facts in
refusing to condone the delay. The explanation placed on affidavit was not
contested nor could it have been concluded that the assessee was at fault, that
he had intentionally and deliberately delayed the matter and had no bona
fide or reasonable explanation for the delay in filing the proceedings. The
position was quite otherwise.

iii) In the light of the
above discussion, we allow both the appeals. We condone the delay of 2,984 days
in filing the appeals but on the condition of payment of costs, quantified
totally at Rs. 50,000. Meaning thereby,
Rs. 25,000 plus 25,000 in both appeals. The cost to be paid in one set
to the respondents within a period of eight weeks from today. On proof of
payment of costs, the Tribunal shall restore the appeals of the assessee to its
file for adjudication and disposal on the merits.”

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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 II

(Continued
from the last issue)

2.6 As stated in para 1.4
of Part I of this write-up, under the New Provisions, loan given to two
categories of persons are covered u/s. 2(22) (e) viz. i) certain shareholders
(first limb of the provisions) and ii) the ‘concern’ in which such shareholder
has substantial interest (second limb of the provisions). As mentioned in para
1.5 of Part I of this write-up, in cases where the requisite conditions of the
second limb of the New Provisions are satisfied, the issue is under debate
that, in such cases where the loan is given to a ‘concern’, whether the amount
of loan is taxable as deemed dividend in the hands of the shareholder or the
‘concern’ which has received the amount of the loan. As also mentioned in that
para, the judicial precedents [including the Special Bench in Bhaumik Colour’s
case reported in (2009) 18 DTR 451] largely, directly or indirectly, showed
that, in such cases, deemed dividend should be taxed in the hands of the
shareholder and on the other hand, in CBDT circular [No. 495 dtd. 22/9/1987], a
view is taken that the same should be taxed in the hands of the ‘concern’. As
further mentioned in para 2.5 read
with para 2.4 of Part I of this write-up, the Delhi High Court decided this
issue in favour of the assessee company on the short ground that the deemed
dividend can not be assessed in the hands of the assessee company which was not
a shareholder of the lending company [i.e. BPOM] as dividend can be assessed
only in the hands of the shareholder of the lending company and can not be
assessed in the hands of a non-shareholder. For this, the Delhi High Court
merely relied on its judgement in the case of Ankitech P. Ltd. [ITA No
462/2009] and passed a short order to this effect (Ref: para 2.4 of Part I of this
write-up). Therefore, it is necessary to analyse, that judgement of the Delhi
High Court also, more so as that has been ultimately approved by the Apex
Court.

CIT vs.
Ankitech[P]Ltd[(2012)40ITR14(Del)-ITA No. 462/2009] & connected Appeals

3.1 In the above, the High Court dealt with and simultaneously
disposed of number of appeals relating to different assessees by a common order
by taking the facts of the case of Ankitech P. Ltd. [ITAT No.462/2009] as the
base.

3.2 In the above case, the brief facts were that the assessee company
had received advances of Rs. 6,32,72,265 by way of a book entry from M/s
Jackson Generator (P) Ltd. [JGPL]. There was sufficient accumulated profit with
JGPL to cover this amount. So far as the shareholding pattern of the two
companies is concerned, the undisputed facts revealed that the same
shareholders (Guptas) were holding (it seems beneficially) more than 10% of
equity shares carrying voting power in JGPL and the same shareholders were also
holding (it seems beneficially) equity shares carrying voting power in the
assessee company much more than 20% and accordingly, were having substantial
interest therein. As such, the facts would reveal that the conditions of the
second limb of the New Provisions were satisfied. It is also worth noting that
the assessee company itself was neither a registered shareholder nor the
beneficial shareholder in JGPL(i.e. lending company). On these facts, the
Assessing Officer (AO), while completing the assessment for the Asst. Year. 2003-04,
assessed the above referred amount of advances as deemed dividend in the hands
of the assessing company. While doing so, the AO rejected the specific
contention raised by the assessee company that since the assessee company is
not a shareholder in JGPL, the provisions of section 2(22) (e) will not be
attracted as one of the essential conditions for taxing deemed dividend u/s.
2(22) (e) was that such income is to be assessed in the hands of the
shareholder. The view of AO was confirmed by the Commissioner of Income-tax
(Appeals). However, the Tribunal deleted the addition by taking a view that
though the amount received by the assessing company by way of book entry is
deemed dividend u/s. 2(22)(e), the same cannot be assessed in the hands of the
assessee company as it was not a shareholder in JGPL and a dividend cannot be
paid to a non-shareholder.

The Tribunal also took the view that it would
have to be taxed, if at all, in the hands of the shareholders who have
substantial interest in the assessee company and also holding not less than 10%
shares carrying voting power in the lending company. For this, it appears that
the Tribunal had relied on the Special Bench decision in Bhaumik Colour’s case
(supra).

3.3 When the issue came-up
before the High Court at the instance of the Revenue with four questions
raised, the Court, in this context, felt that real question is one and stated
as under [pg 16]:

“Though as many as
four questions are framed, it is with singular viz., whether the assessee who
was not the shareholders of M/S. Jackson Generators (P) Ltd. (JGPL) could be
treated as covered by the definition of “dividend“ as contained in section
2(22)(e) of the Income-tax Act (hereinafter referred to as “the Act”).”

3.3.1 To decide the issue,
the Court referred to the relevant provisions of section 2(22) (e) along with the share holding
pattern of both the companies and stated that the payment of advance given by
JGPL to the assessee company (‘concern’) would be treated as deemed dividend u/s.
2(22)(e). With these undisputed facts, the Court, in the context of the issue
on hand, stated as under [pg 19]:

“…….. The dispute
which has arisen, in the scenario is to whether this is to be treated as
dividend income in the form of dividend advance of the shareholders or advance
of the said concern,(i.e. the assessees herein). Whereas the Department has
taken it as income at the hands of the assessee, as per the assessee it cannot
be treated as dividend income to their account. The Tribunal has accepted this
plea of the assessee holding that such dividend income is to be taxed at the
hands of the shareholders.”

3.3.2 The Court then referred to the historical background of the
provisions from 1922 Act to the New Provisions narrated by the Special Bench in
Bhaumik Colour’s case (supra) and observed as under [pg 21]:

“It is clear from the
above that under the 1922 Act, two categories of payments were considered as
dividend viz., (a) any payment by way of advance or loan to a shareholder was
considered as dividend paid to shareholder; or (b) any payment by any such
company on behalf of or for the individual benefit of a shareholder was
considered as dividend. In the 1961 Act, the very same two categories of
payments were considered as dividend but an additional condition that payment
should be to a shareholder being a person who is the beneficial owner of shares
and who has a substantial interest in the company, viz., shareholding which
carries not less than twenty per cent. of voting power, was introduced, By the
1987 amendment with effect from April 1, 1988, the condition that payment
should be to a shareholder who is the beneficial owner of shares (not being
shares entitled to a fixed rate of dividend whether with or without a right to
participate in profits) holding not less than ten per cent. of the voting power
was substituted. Thus, the percentage of voting power was reduced from twenty
per cent. to ten per cent. By the very same amendment, a new category of
payment was also considered as dividend, viz., payment to any concern in which
such shareholder is a member or a partner and in which he has a substantial interest.
Substantial interest has been defined to mean holding shares carrying 20 per
cent. of voting power.”

3.3.3 After referring to the
above referred historical background, the Court noted that the controversy in
the present case refers to the second limb of the New Provisions. The Court
then stated that a Special Bench in Bhaumik Colour’s case has analysed the New
provisions and spelt out the conditions [Ref. para 1.4.1. of Part I of this
write-up] which are required to be satisfied for attracting this category of
the New Provisions. These include the view that the expression ‘such
shareholder’ found in the second limb of the New Provisions refers to
registered shareholder [for this, basically reliance was placed on Apex Court’s
judgement in the case of C. P. Sarathy Mudaliar (supra)] and the
beneficial holder of the shareholding carrying 10% voting power. In this
context, the Court also referred to the relevant part of the order of the
Special Bench and noted that the Special Bench held that the intention behind
this provision is to tax dividend in the hands of the shareholders. The Court
then also referred to the judgements of the Bombay High Court in the case of
Universal Medicare (P) Ltd [(2010)324 ITR 263] and Rajasthan High Court in the
case of Hotel Hilltop [(2009) 313 ITR 116] in which also similar view was
taken.

3.4 The Court then noted that
despite the above referred judgements of the High Courts of Bombay and
Rajasthan, the learned counsel appearing on behalf of the Revenue (Ms. Bansal)
made a frantic afford to persuade the Court to take a contrary view. Her
endeavour was to demonstrate on first principle that by this deeming provision
fictionally the ‘concern’ which receives the amount would be treated as
shareholder for the purpose of this provision and the same should be treated as
dividend in the hands of the recipient (i.e. ‘concern’). In this regard, her
contention was that under the New provisions, deeming fiction is specifically
created to tax the amount of such loan given to a ‘concern’ as deemed dividend
and when this legal fiction is created, it was to be taken to its logical
conclusion and as such, the ‘concern’ which had received the amount should be
taxed. For this, she placed reliance on certain judgements including of the Apex
Court dealing with the effects of creation of a legal fiction. According to
her, this is the effect of the second limb of the New Provisions read with Explanation 3. She also relied on the
CBDT Circular No. 495 dtd 22/9/1987 in which such a view is taken (Ref. para
2.6 above)

3.4.1 The Court then dealt
with the contentions of the learned counsel for the Revenue and pointed out
that we have already referred to the relevant provisions of section 2(22)(e)
and requisite conditions for invoking the same as well as the historical
background of section 2(22)(e). Considering the intention behind enacting these
provisions, the Court stated as under [pg 35]:

“…… The intention behind the provisions of section 2(22)(e)
of the Act is to tax dividend in the hands of shareholders. The deeming
provisions as it applies to the case of loans or advances by a company to a
concern in which its shareholder has substantial interest, is based on the
presumption that the loans or advances would ultimately be made available to
the shareholders of the company giving the loan or advance. “

3.4.2 The Court then proceeded
further to deal with the contention with regard to creation of deeming fiction
and its effects and stated as under [pg 35]:

“Further, it is an
admitted case that under the normal circumstances, such a loan or advance given
to the shareholders or to a concern, would not qualify as dividend. It has been
made so by a legal fiction created u/s. 2(22)(e) of the Act. We have to keep in
mind that this legal provision relates to “dividend”. Thus, by a deeming
provision, it is the definition of dividend which is enlarged. Legal fiction
does not extend to “shareholder”. When we keep in mind this aspect, the
conclusion would be obvious, viz., loan or advance given under the conditions
specified u/s. 2(22) (e) of the Act would also be treated as dividend. The
fiction has to stop here and is not to be extended further for broadening the
concept of shareholders by way of legal fiction. It is common case that any
company is supposed to distribute the profits in the form of dividend to its
shareholders/members and such dividend cannot be given to non members. The
second category specified u/s. 2(22) (e) of the Act, viz., a concern (like the
assessee herein), which is given the loan or advance is admittedly not a
shareholder/member of the payer company. Therefore, under no circumstances, it
could be treated as shareholder/member receiving divided. If the intention of
the Legislature was to tax such loan or advance as deemed dividend at the hands
of “deeming shareholder”, then the Legislature would have inserted a deeming
provision in respect of shareholder as well, that has not happened. Most of the
arguments of the learned counsel for the Revenue would stand answered, once we
look into the matter from this perspective.”

3.4.3 Finally, rejecting the argument with regard to creation of
deeming fiction and its logical effect as contented by the learned counsel for
the Revenue, the Court stated as under [pg 36]:

“No doubt, the legal
fiction/deemed provision created by the Legislature has to be taken to “logical
conclusion” as held in Andaleeb Sehgal [2010] 173 DLT 296 (Delhi) [FB].
The revenue wants the deeming provision to be extended which is illogical and
the attempt is to create a real legal fiction, which is not created by the
Legislature. We say at the cost of repetition that the definition of
shareholder is not enlarged by any fiction.”

3.4.4 With regard to the view
expressed in the CBDT Circular, the Court stated that it is inclined to agree
with the observations of the Special Bench in Bhaumik Colour’s case (supra)
that the same is not binding on the courts. In this regard, the Court further
observed as under [pg 36]:

“…..Once it is found that such loan or advance cannot be
treated as deemed dividend at the hands of such a concern which is not a
shareholder, and that, according to us, is the correct legal position, such a
circular would be of no avail. ”

3.5 Having taken a view
that such deemed dividend cannot be assessed in the hands of the assessee
company which is not the shareholder of JGPL, the Court further concluded as
under [pg 36]:

“Before we part with,
some comments are to be necessarily made by us. As pointed out above, it is not
in dispute that the conditions stipulated in section 2(22)(e) of the Act
treating the loan and advance as deemed dividend are established in these cases
Therefore, it would always be open to the Revenue to take corrective measure by
treating this dividend income at the hands of the shareholders and tax them
accordingly. As otherwise, it would amount to escapement of income at the hands
of those shareholders.”

3.6 In the above
judgement, the Court took the view that once the requisite conditions of the
second limb of the New Provisions are satisfied, the amount of loan can be
assessed as deemed dividend in the hands of the shareholder only and not in the
hands of a ‘concern’ (non-shareholder). On this basis, the Court also
simultaneously disposed of all other connected appeals. However, in addition to
this, the Court also passed further orders in respect of four other appeals,
which are based on specific facts of these cases with which we are not
concerned in this write-up. These additional four orders are in the cases of
Timeless Fashions Pvt Ltd. [ITA No. 1588 of 2010], Nandlala Securities Pvt.
Ltd. [ITA No. 211 of 2010], Roxy Investment [ITA No. 2014 of 2010] and Indian
Technocraft Ltd. [ITA No. 352 of 2011].

CIT vs. Madhur Housing
and Development Company (Appeal No. 3961 of 2013-
SC)

4.1 As mentioned in para 2.6 above, in the above case, the Delhi High
Court decided the issue of taxation of deemed dividend in the hands of the
assessee company [i.e. ‘concern’] on the short ground that the deemed dividend
cannot be assessed in its hands, as it was not a shareholder of the lending
company (i.e. BPOM) and for that purpose, the Court merely followed its earlier
decision in the case of Ankitech (P) Ltd. [ITA No 462/2009] (supra).

4.2 The above judgement of
the Delhi High Court along with number of appeals relating to different
assessees invoking similar issue came-up before the Apex Court and the Apex
Court disposed of all of them, by a common order, by referring to the judgement
and the order of the Delhi High Court in the above case (i.e. Madhur Housing’s
case) by passing the following order:

“The impugned
judgement and order dated 11.05.2011 has relied upon a judgement of the same
date by a Division Bench of the High Court of Delhi in ITA No. 462 of 2009.
Having perused the judgement and having heard arguments, we are of the view
that the judgement is a detailed judgment going into section 2(22)(e) of the
Income-tax Act which arises at the correct construction of the said Section. We
do not wish to add anything to the judgment except to say that we agree
therewith.

These appeals are
disposed of accordingly. “

4.3
From the above, it would appear that the Apex Court took note of the
fact that the judgment of the Delhi High Court in the case of Ankitech (P) Ltd.
(supra) is a detailed judgement considering this aspect of the
provisions of section 2(22)(e) of the Act and approved the same. It is worth
noting that the Apex Court has approved the judgement of the Delhi High Court
only in the case of Ankitech (P) Ltd. [ITA No 462/2009] which is analysed in
para 3 above. For this purpose, it seems that the Apex Court has not considered
separate orders simultaneously passed by the Delhi High Court in four other
connected appeals [Ref. para 3.6 above].

Conclusion

5.1 The above judgement of
the Division Bench of the Apex Court directly dealt with and decided the issue
referred to in para 2.6 above [read with para 1.5 of Part I of this write-up]
that in a case where the conditions for invoking the second limb of the New
Provisions of section 2(22) (e) are
satisfied, the amount of loan given to a ‘concern’, which is treated as deemed
dividend, should be assessed only in the hands of the common shareholder with
requisite shareholding in the lending company and who is also having
substantial interest in the ‘concern’ and not in the hands of the ‘concern’
receiving the loan. As such, the issue referred to in para 2.6 above read with
para 1.5 of part I of this write-up now could be treated as settled. Based on
this, the judicial precedents supporting this view, referred to in para 1.5 of
Part I of this write-up, could also be treated as impliedly approved. In this
respect, based on this, the view expressed in the CBDT Circular [No. 495 dtd.
22/9/1987] referred to in para 2.6 above could be treated as incorrect position
in law.

5.1.1 In the above case, the
Apex Court has also specifically considered the effect of a legal fiction
created in section 2(22)(e) and its logical effect. In this context, the Court
has emphatically taken a view that the legal fiction created in section 2(22)(e) only expands the meaning of
the expression ‘dividend’ and it does not, in anyway, enlarge the meaning of
the expression ‘shareholder’ as contemplated in the said provisions. In fact,
this and the general principles that dividend can be paid by the company only
to its shareholders/members and it cannot be given to non-shareholders/members
are the main basis of conclusion arrived by the Apex Court in the above case.

5.2 Interestingly, as
mentioned in para 1.6 of part I of this write-up, the Division Bench of the
Apex Court in the case of Gopal and Sons HUF [ (2017) 391 ITR 1] also had an
occasion to indirectly deal with similar issue of the type referred to in para
2.6 above [read with para 1.5 of part I of this write-up] in the context of a
case of a loan given by closely held company to an HUF, which was the
beneficial owner of the shares with requisite shareholding in the lending
company. In that case, there was some debate as to whether the HUF itself was a
registered shareholder or its Karta was the registered shareholder of the
lending company. On these facts, the following question was raised before the
Apex Court:

“Whether in view of the settled principle that
HUF cannot be a registered shareholder in a company and hence, could not have
been both registered and beneficial shareholder, loan/ advances received by HUF
could be deemed as dividend within the meaning of section 2(22)(e) of the
Income-tax Act, 1961 especially in view of the term “concern” as defined in the
Section itself?”

5.2.1 Under the above
circumstances, in that case, the Apex Court, on peculiar facts of the case,
took the view that the amount of loan in question should be treated as deemed
dividend under the second limb of the New Provisions and it should be taxable
as such in the hands of the HUF, as the Karta of the HUF is having undisputedly
substantial interest in the HUF. The Court also further concluded that even if
it is presumed that HUF itself is not a registered shareholder of the lending
company, as per the provisions of section 2(22)(e), once the payment is
received by the HUF (which was admittedly beneficial owner of the shares) and
the registered shareholder of the lending company [it’s Karta] is a member of
the said HUF with substantial interest, the payment made to the HUF constitutes
deemed dividend u/s. 2(22) (e) and taxable as such in the hands of HUF.
According to the Court, that is the effect of Explanation 3 to the said
section. According to the Court, the judgment of C.P. Sarathy Mudaliar (supra)
will have no application as that was delivered u/s. 2(6A)(e) of the 1922 Act,
wherein there was no provision like
Explanation 3. Effectively, the Court concluded that, in view of the
Explanation 3 to section 2(22)(e), the amount of loan constitutes deemed
dividend under the second limb of the New Provisions of section 2(22)(e) in the
hands of the HUF, even if one presumes that HUF itself is not a registered
shareholder of the lending company.

5.2.2 From the above, it
would appear that in Gopal and Sons HUF’s case (supra), the Apex Court
impliedly decided the issue referred to in para 2.6 above read with para 1.5 of
Part I of this write-up, by taking a view that the deemed dividend under the
second limb of the New Provisions is taxable in the hands of the ‘concern’
(i.e. HUF). This gives support to the opinion expressed in CBDT circular
referred to in that para. This judgement has been analysed by us in this column
in April and May, 2017 issues of this journal.

5.3 Interestingly, in the above judgement of the Apex Court in the case
of Madhur Housing and Development Company, the Apex Court’s judgement in Gopal and Sons HUF’s case (supra)
has not been referred to or considered. Apex Court in the above case referred
to the judgement of the Delhi High Court in the case of Ankitech (P) Ltd. (Ref.
para 4.2 above) and approved the same and the judgement of the Apex Court in
the case of Gopal and Sons HUF(supra), which is the recent one, was not
available before the Delhi High Court in that case.

5.3.1 It is also worth noting
that in the case of Gopal and Sons HUF (supra), the facts were peculiar
and it was also noted that though the share certificates were issued in the
name of the Karta of the HUF but in the annual returns of the company filed
with the ROC, HUF was also shown as registered shareholder. Whether this
factual position could be regarded as relevant in the context of the issue on
hand (i.e. to determine the taxable person of deemed dividend) to distinguish
the effect of Gopal and Sons HUF’s case (supra) may be a matter of
consideration. However, this would be an uphill task in view of the conclusion
of the Apex court in the case of Gopal and Sons HUF (supra) referred to
in para 3.9 read with para 3.8 of part II of the write-up on that judgement
appeared in May, 2017 issue of this journal.

5.4 In
view of the above, an interesting issue is likely to come-up for consideration
as to which judgement of the Apex Court, between the two of the above, would be
relevant, for the purpose of determining the taxable person under the second limb
of the New Provisions in cases where the loan is given to a ‘concern’ and the
other conditions for treating such a loan as deemed dividend under these
provisions are satisfied. _

shailesh.kwebmaker

Allowability Of Interest On Delayed Payment Of Tax Deducted At Source

Issue for Consideration

Chapter XVII of the
Income-tax Act, 1961 contains several provisions for collection and recovery of
tax, by way of Tax Deduction at Source (‘TDS’) and Tax Collection at Source
(‘TCS’), by the payer and the receiver respectively. The payer and receiver are
also tasked with remitting the TDS and TCS to the government, filing periodic
statements and issuing certificates in respect of the same. Interest is levied
u/s. 201(1A), on the payer/receiver, for the period of delay in case of
non-deduction or collection of tax, or for failure to pay the same as required
by the Act.

Section 37(1) of the Act
provides for allowance of a deduction in respect of any expenditure, which is
not dealt with in sections 30 to 36 and is not in the nature of capital
expenditure or personal expenses of the assessee, but is laid out or expended
wholly and exclusively for the purposes of the business or profession.

Further, Explanation 1 to
section 37(1) declares that, for the removal of doubts, any expenditure
incurred by an assessee for any purpose which is an offence or which is
prohibited by law shall not be deemed to have been incurred for the purpose of
business or profession and no deduction or allowance shall be made in respect
of such expenditure.

Four attributes emerge from
the provisions of section 37 as being essential for claiming deduction in respect
of any expenditure in computing the income under the head “Profits and gains of
business or profession” –

1) It
must not be capital in nature;

2) It
must not be personal in nature;

3) It
must be laid out or expended wholly and exclusively for the purposes of
business or profession; and

4) It
must not be incurred for a purpose which is an offence or which is prohibited
by law.

In
claiming the deduction u/s. 37(1) for interest u/s. 201(1A), an issue arises as
to whether such interest can be considered to be incurred wholly and exclusively for the
purpose of business or profession.

Conflicting decisions of
the different benches of the Tribunal, delivered in recent times, have
reignited the controversy. The Ahmedabad bench has, in two separate decisions,
taken a view that no deduction can be allowed in respect of such interest and
the Kolkata bench, on the other hand, has upheld the allowability of deduction
of interest in a recent decision.

Shree Saras Spices & Food P.
Limited’s case

The issue came up before
the Ahmedabad bench of the Tribunal in the case of Shree Saras Spices &
Food P. Limited vs. DCIT ITA Nos. 2527/Ahd/2010 and 1220/Ahd/2012 for
assessment years 2007-08 and 2009-10.

In the said case, the
assessee had claimed deduction in respect of interest on TDS. The A.O.
disallowed the same. The assessee challenged the addition before the CIT(A),
who dismissed the appeal and confirmed the action of the A.O., relying on the
Supreme Court decisions in the case of East India Pharmaceutical Works Ltd.
vs. CIT (1997) 224 ITR 627 (SC) and Bharat Commerce & Industries
Ltd. vs. CIT (198) 230 ITR 733 (SC). The CIT(A) observed that interest was
paid on TDS only upon late payment to the Government treasury, which implied that
the assessee had utilised Government funds and paid interest as a compensation
for enjoyment of the amount due to the Government.

On second appeal by the
assessee, the Tribunal also noted that the assessee had used the Government
money for its own purposes and interest on late payment of TDS was not
allowable as was held in East India Pharmaceutical Works Ltd. vs. CIT
(supra) and accordingly, dismissed the appeal.

The issue of allowability
of interest on late payment of TDS was also examined by the Ahmedabad bench in
an earlier decision in the case of ITO vs. Royal Packaging ITA No.
1363/Ahd/2010 for assessment year 2005-06.

In that case, interest on
TDS was disallowed by the A.O. on the ground that since TDS was not allowable,
interest on same was also not allowable. On appeal before the CIT(A), it was
argued by the assessee that since interest received on tax refund was taxable,
in the same manner, interest on late payment of TDS was an allowable expense.
The CIT(A) accepted the contention of the assessee and deleted the addition
made by the A.O.

On further appeal, the
Tribunal relying on the Supreme Court decision in the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), held that interest on late
payment of TDS is also not allowable and restored the disallowance made by the
A.O.

Narayani Ispat Pvt. Ltd.’s case

Recently, the issue had
once again arisen before the Kolkata bench in the case of DCIT vs. Narayani
Ispat Pvt. Ltd. ITA No. 2127/Kol/2014 for assessment year 2010-11.

In that case, interest on
late payment of service tax and TDS was claimed by the assessee as a part of
its interest and finance expenses. However, the A.O., relying on the Supreme
Court decision in the case of Bharat Commerce & Industries Ltd. vs. CIT
(supra), disallowed the claim of interest.

The assessee preferred an
appeal against the addition before the CIT(A), wherein it was pointed out that
in the case of Bharat Commerce & Industries Ltd. vs. CIT (supra),
the disallowance was made in respect of interest u/s. 215 of the Act due to
delay in the payment of income tax on the income disclosed under Voluntary
Disclosure of Income and Wealth Act, 1976, which was different from the
interest u/s. 201(1A) on late deposit of service tax and TDS. The assessee
relied on the decision of the Karnataka High Court in the case of CIT vs.
Mysore Electrical Industries Ltd. 196 ITR 884 (Kar), where interest for
failure to pay PF contribution was held deductible, and also on the Supreme
Court decision in the case of Lachmandas Mathura Das vs. CIT 254 ITR 799 (SC),
where interest on sales tax arrears was held deductible. Accepting the
arguments of the assessee, the CIT(A) held that the impugned interest expense
was incurred wholly and exclusively for the purpose of business and was thus,
allowable.

The Tribunal, in further
appeal by the Revenue discussed the judgement in the case of Bharat Commerce
& Industries Ltd. vs. CIT (supra) in detail and distinguished its facts
since it dealt with interest on delayed payment of income tax, whereas in the
appeal before the tribunal, interest was paid for delayed payment of service
tax and TDS. The Tribunal observed that interest for delay in making payment of
service tax and TDS was compensatory in nature and not in the nature of
penalty. It also delved upon the decision of the Supreme Court in the case of Lachmandas
Mathura Das vs. CIT (supra), and held that its principles can be applied to
interest on delayed payment of TDS, noting that interest on late payment of TDS
related to expenses claimed by the assessee which were subjected to the TDS
provisions and that TDS did not represent tax of the assessee, but rather the
tax of the payee. The deduction allowed by the CIT(A) in respect of interest on
TDS was thus upheld by the Tribunal.

Observations

The issue under
consideration is relevant for a large number of assessees.

Section 40(a)(ii) of the
Act expressly provides for disallowance of any sum paid on account of any rate
or tax levied on the profits or gains of any business or profession under the
head ‘Profits and Gains of Business Profession’. The case for disallowance of
income tax levied on the profits and gains of the business or profession is
thus specifically settled by the express provisions of the Act. Similarly
settled by the decisions of the Supreme Court, is the proposition of the law
that any interest paid for delay in payment of income tax on profits and gains
of business or profession is also not deductible in computing the profits and
gains of business. It is also settled that any interest paid on borrowings made
for payment of such income tax is also not deductible in computing such profits
and gains of business.

In the case of Bharat
Commerce & Industries Ltd. vs. CIT (supra), the assessee, a
manufacturing company, had claimed deduction in respect of interest on delay in
payment of advance tax u/s. 37(1) of the Act on the ground that delayed payment
of taxes resulted in increase in the assessee’s financial resources, which
became available for its business. The assessee also contended that the
interest paid to the Government represented in effect, the interest on capital
that would have been borrowed by it otherwise and thus, it was an expense
incurred wholly and exclusively for the purpose of its business.

The Apex Court observed as under –

“When interest is paid
for committing a default in respect of a statutory liability to pay advance
tax, the amount paid and the expenditure incurred in that connection is in no
way connected with preserving or promoting the business of the assessee. This is
not expenditure which is incurred and which has to be taken into account before
the profits of the business are calculated. The liability in the case of
payment of income- tax and interest for delayed payment of income-tax of
advance tax arises on the computation of the profits and gains of business. The
tax which is payable is on the assessee’s income after the income is
determined. This cannot, therefore, be considered as an expenditure for the
purpose of earning any income or profits.”

The Supreme Court, in the
said case, in conclusion, held that the interest levied u/s. 139 and section
215 of the Income-tax Act was not deductible as a business expenditure u/s.
37(1) of the Act. The court in that case held that the income tax was a tax on
profit of the business and was therefore not allowable as a deduction.
Similarly, interest also was not deductible as the same was inextricably
connected with the assessee’s tax liability; if the income tax was not a
permissible deduction u/s. 37, any interest payable for default in payment of
such income tax could not be allowed as a deduction. In arriving at the
conclusion, the court followed its own decision in the cases of East India
Pharmaceutical Works Ltd, 224 ITR 627 and Smt. Padmavati Jaikrishna, 166
ITR 176, where decisions dealt with the issue of deductibility of interest
paid on moneys borrowed for payment of income tax.

The principles that emerge
from the observations of the Apex Court in the above decision as well as in the
various decisions cited therein, are that interest on delayed payment of income
tax would take its colour from the principal amount of income tax and thus, it
could not be considered to be incurred wholly and exclusively for the purpose
of business and consequently, such interest cannot be claimed as a deduction.
Where, however, the principal amount is an expenditure for the purpose of
earning any income or profits and is incidental to the business, whether
interest on delayed payment thereof would be allowed as a deduction u/s. 37(1)
is a question that was not addressed by the court.

The Bombay High Court had
the occasion to examine the issue of deductibility u/s. 37(1) of the interest
u/s 201(1A) of the Act. The court, in a brief order, upheld the disallowance of
the deduction u/s. 37 by simply following the decisions in the cases of Aruna
Mills Ltd, 31 ITR 153 (Bom.), Ghatkopar Estate and Finance Corporation Pvt.
Ltd, 177 ITR 222 (Bom.), Bharat Commerce Industries Ltd, 153 ITR 275 (Del.) and
Federal Bank Ltd, 180 ITR 37 (Kerela) after noting that the high courts in
the above referred decisions had taken a similar view.

Subsequently, the Madras
High Court in the case of Chennai Properties and Investments (P) Ltd., 239
ITR 435 (Mad) examined the deductibility u/s. 37(1) of the interest u/s.
201(1A) of the Act. The court noted that the interest paid took it’s colour
from the nature of the principal amount remaining unpaid.The principal amount
being income tax, interest thereon was in the nature of a direct tax, and could
not be regarded as a compensatory payment, and was therefore not allowable as
business expenditure. In deciding against the assessee, the court followed the
decision of the Supreme Court in the case of Bharat Commerce and Industries
Ltd, 230 ITR 733 (SC).

In spite of the issue of
the deductibility and allowance of interest paid for delay in payment of the
tax deducted at source levied u/s 201(1A) being decided against the assessee by
the high courts, in our considered opinion, it remains open and debatable.
While the Bombay and the Madras High Courts have examined the issue and have
held against the allowability of such interest, the said decisions, in our very
respectful opinion, cannot be taken to have been delivered on due examination
of the law, in as much as the courts, in those cases, have simply relied on the
precedents to arrive at a conclusion without appreciating that the decisions,
referred to as precedents, were concerned with the payment of interest under
sections 139, 215 and 270, levied for delay in payment of income tax on gains
of business. None of them were concerned with the payment of interest on
delayed payment of the tax deducted at source. Neither was this distinction
highlighted before the courts nor did the courts on their own examine the vital
difference between the tax on income and the tax deducted at source. It is
possible that the decisions in question may be reviewed or reconsidered or
dissented or distinguished. The law shall remain debatable till such time as
the same is examined by the highest court of the land.

It is significant to note
that usually a tax is deducted at source on payments made by a businessman in
his character as a trader and, in most of the cases, such payments are
expressly or otherwise deductible under the Act, in computing the Profits and
Gains of Business or Profession. In the absence of any specific provisions such
as section 40(a), for expressly disallowing the payments, the tax deducted and
withheld is a part of the expenditure of the payer and in no manner can be construed
as a tax on his profits or gains of business or profession. Therefore,
provisions of section 40(a)(ii) have no application to such payments or
interest thereon. In fact, the entire expenditure representing the payment,
including tax deducted and withheld, is deductible in law without reservation.

The
term “tax” is defined u/s. 2(43) to mean income tax chargeable under the
provisions of Income-tax Act and includes the fringe benefit tax. On a bare
reading of this provision, it is clear that the term “tax” in no manner
includes the tax deducted at source which is tax on somebody else’s income and
not on the income of the assessee payer; in any case, the tax deducted at
source is not an income tax ‘chargeable’ under the provisions of the Act.

The view of the Kolkata
Tribunal in the case of Narayani Ispat Pvt. Ltd. (supra), thus,
appears reasonable that TDS, by itself, does not represent income tax of the
assessee, but is a deduction from the payment made to a party in respect of
expenses claimed by the assessee, at a certain percentage prescribed in the
Act. So long as the expenses from which tax is deducted, relate to the business
of the assessee, the TDS thereon would also be considered to be relating to the
business of the assessee and therefore, interest on delayed payment of such TDS
would be considered to be incurred wholly and exclusively for the purpose of
business.

It may be true that the
interest for delay in payment of the tax deducted at source would not be
considered to be interest on capital borrowed for the purposes of business and
therefore, may not be eligible for deduction u/s. 36(1)(iii) of the Act. The same however, would be eligible for deduction
u/s.37(1) of the Act, being an expenditure wholly and exclusively incurred for
the purposes of business.

The better view therefore, is that
interest on delayed payment of the tax deducted at source, payable u/s. 201(1A)
or any other similar provision, is deductible in law in computing the Profits
and Gains of Business or Profession of the payer. _

shailesh.kwebmaker

Delhi High Court On ICDS – Battle Begins!

The first ever decision on ICDS has been pronounced by Delhi High Court in a writ petition filed by The Chamber of Tax Consultants assailing its constitutional validity. The Court has read down the provisions of section 145(2) enabling the Central Government to notify only such standards which do not seek to override binding judicial precedents interpreting statutory provisions contained in the Act. Some of the ICDS have been struck down fully and few selected provisions of other ICDS which were inconsistent with judicial precedents have been knocked off.

Here is a summary of the important observations of the Court on the conflicting provisions of ICDS and the final decision of the Court thereon.

ICDS	Observations	Final Decision
ICDS I – Accounting Policies	Non-acceptance of the concept of prudence in ICDS is per se contrary to the provisions of the Act. This concept is embedded in Section 37(1) of the Act which allows deduction in respect of expenses “laid out” or “expended” for the purpose of business. It is acknowledged by the Courts also.	ICDS is unsustainable in law.
ICDS II – Valuation of Inventories	The requirement to value inventories at market value in case of the dissolution of a firm, where its business is taken over by other partners is contrary to the decision of the Supreme Court in the case of Shakti Trading Co. vs. CIT 250 ITR 871. Where the assessee regularly follows a certain method for valuation of goods then that will prevail irrespective of the ICDS because of a non-obstante clause in Section 145A.	ICDS is held to be ultra vires the Act and struck down.
ICDS III – Construction contracts	ICDS requires recognition of the retention money as a part of the contract revenue on the basis of percentage of completion method. However, the retention money does not accrue to the assessee until and unless the defect liability period is over. The treatment to be given to the retention money depends upon the facts of each case and the conditions attached to such amounts.	To that extent, Para 10(a) of ICDS is held to be ultra vires.
Para 12 of ICDS III read with Para 5 of ICDS IX, provides that no incidental income can be reduced from the borrowing cost while recognising it as a part of contract costs. This is contrary to the decision of the Supreme Court in CIT vs. Bokaro Steel Limited 236 ITR 315 wherein it was held that if an Assessee receives any amounts which are inextricably linked with the process of setting up of its plant and machinery, such receipts would go to reduce the cost of its assets.	This particular provision of ICDS is struck down.
ICDS IV – Revenue Recognition	ICDS 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. It is contrary to the decision of the Supreme Court in the case of CIT vs. Excel Industries Limited 358 ITR 295 wherein it was held that, until and unless the right to receive export incentives accrues in favour of the assessee, no income can be said to have accrued.	This particular provision in Para 5 of ICDS is ultra vires the Act and struck down.
	The proportionate completion method as well as the contract completion method have been recognised as valid method of accounting under mercantile system of accounting by the Courts. However, Para 6 of ICDS permits only one of the methods, i.e., proportionate completion method for recognising revenue from service transactions and therefore, it is contrary to the Court decisions.	This particular provision in Para 6 of ICDS is ultra vires the Act and struck down.
ICDS VI – Effects of Changes in Foreign Exchange Rates	In Sutlej Cotton Mills Limited vs. CIT 116 ITR 1 (SC), it was held that exchange gain/loss in relation to a loan utilised for acquiring a capital item would be capital in nature. ICDS provides contrary treatment. ICDS does not allow recognition of marked to market loss/gain in case of foreign currency derivatives held for trading or speculation purposes. This is also not in consonance with the ratio laid down by the Supreme Court.	ICDS is held to be ultra vires the Act and struck down as such.
	Circular No. 10 of 2017 clarifies that Foreign Currency Translation Reserve Account balance as on 1st April 2016 has to be recognised as income/loss of the previous year relevant to the AY 2017-18. It is only in the nature of notional or hypothetical income which cannot be even otherwise subject to tax
ICDS VII – Government Grants	ICDS provides that recognition of government grants cannot be postponed beyond the date of actual receipt. It is contrary to and in conflict with the accrual system of accounting.	To that extent it is held to be ultra vires the Act and struck down.
ICDS VIII – Securities (Part A)	The method of valuation prescribed under ICDS is different from the corresponding AS. Therefore, the assessees will be 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.	To that extent it is held to be ultra vires the Act and struck down.

ICDS

Observations

Final Decision

ICDS I – Accounting Policies

Non-acceptance of the concept of prudence in
ICDS is per se contrary to the provisions of the Act. This concept is
embedded in Section 37(1) of the Act which allows deduction in respect of
expenses “laid out” or “expended” for the purpose of business. It is
acknowledged by the Courts also.

ICDS is unsustainable in law.

ICDS II – Valuation of Inventories

The requirement to value inventories at market
value in case of the dissolution of a firm, where its business is taken over
by other partners is contrary to the decision of the Supreme Court in the
case of Shakti Trading Co. vs. CIT 250 ITR 871.

Where the assessee regularly follows a certain
method for valuation of goods then that will prevail irrespective of the ICDS
because of a non-obstante clause in Section 145A.

ICDS is held to be ultra vires the Act
and struck down.

ICDS III – Construction contracts

ICDS requires recognition of the retention
money as a part of the contract revenue on the basis of percentage of
completion method. However, the retention money does not accrue to the
assessee until and unless the defect liability period is over. The treatment
to be given to the retention money depends upon the facts of each case and
the conditions attached to such amounts.

To that extent, Para 10(a) of ICDS is held to
be ultra vires.

Para 12 of ICDS III read with Para 5 of ICDS
IX, provides that no incidental income can be reduced from the borrowing cost
while recognising it as a part of contract costs. This is contrary to the
decision of the Supreme Court in CIT vs. Bokaro Steel Limited 236 ITR 315
wherein it was held that if an Assessee receives any amounts which are
inextricably linked with the process of setting up of its plant and
machinery, such receipts would go to reduce the cost of its assets.

This particular provision of ICDS is struck
down.

ICDS IV – Revenue Recognition

ICDS 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. It is contrary to the
decision of the Supreme Court in the case of CIT vs. Excel Industries
Limited 358 ITR 295 wherein it was held that, until and unless the right
to receive export incentives accrues in favour of the assessee, no income can
be said to have accrued.

This particular provision in Para 5 of ICDS is
ultra vires the Act and struck down.

The proportionate completion method as well as
the contract completion method have been recognised as valid method of
accounting under mercantile system of accounting by the Courts. However, Para
6 of ICDS permits only one of the methods, i.e., proportionate completion
method for recognising revenue from service transactions and therefore, it is
contrary to the Court decisions.

This particular provision in Para 6 of ICDS is
ultra vires the Act and struck down.

ICDS VI – Effects of Changes in Foreign
Exchange Rates

In Sutlej Cotton Mills Limited vs. CIT 116
ITR 1 (SC), it was held that exchange gain/loss in relation to a loan
utilised for acquiring a capital item would be capital in nature. ICDS
provides contrary treatment.

ICDS does not allow recognition of marked to
market loss/gain in case of foreign currency derivatives held for trading or
speculation purposes. This is also not in consonance with the ratio laid down
by the Supreme Court.

ICDS is held to be ultra vires the Act
and struck down as such.

Circular No. 10 of 2017 clarifies that Foreign
Currency Translation Reserve Account balance as on 1st April 2016 has to be
recognised as income/loss of the previous year relevant to the AY 2017-18. It
is only in the nature of notional or hypothetical income which cannot be even
otherwise subject to tax

ICDS VII – Government Grants

ICDS provides that recognition of government
grants cannot be postponed beyond the date of actual receipt. It is contrary
to and in conflict with the accrual system of accounting.

To that extent it is held to be ultra vires
the Act and struck down.

ICDS VIII – Securities (Part A)

The method of valuation prescribed under ICDS
is different from the corresponding AS. Therefore, the assessees will be
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.

To that extent it is held to be ultra vires
the Act and struck down.

It is relevant to note that the Delhi High Court has held that the ICDS is not meant to overrule the provisions of the Act, the Rules there under and the judicial precedents applicable thereto as they stand. There may be instances, other than those taken up before the Delhi High Court, where the provisions of ICDS are contrary to and/or overrule the judicial precedents applicable, in view of the ratio of the Delhi High Court, such provisions of ICDS will also have to give way to the provisions of the Act, the Rules there under and the judicial precedents applicable. To illustrate, ICDS IX on Borrowing Costs requires capitalization of interest to Qualifying Assets. Work-in-progress in the case of a builder / developer will qualify as a qualifying asset as defined in ICDS IX. A question arises as to whether the requirement of capitalizing borrowing costs to inventory as per ICDS is in conflict with section 36(1)(iii) of the Act. The Bombay High Court has in the case of CIT vs. Lokhandwala Construction Industries (2003) 260 ITR 579 (Bom) held that interest on funds borrowed for construction of work-in-progress in case of a builder is a period cost. Similar is the view expressed in the Technical Guide of ICAI on ICDS in para 4.5 of Chapter X titled ‘ICDS IX: Borrowing Costs’. The ratio of the decision of Delhi High Court will be applicable to such cases as well.

The decision of the Delhi High Court is the only decision of the competent court in the country. A question arises as to whether the decision of the Delhi High Court under consideration is binding throughout the country or it is binding only to cases falling within the jurisdiction of the Delhi High Court. In this connection it is relevant to note that Bombay High Court in the case of Group M. Media India Pvt. Ltd. vs. Union of India [(2017) 77 taxmann.com 106] was dealing with a case where the Bombay High Court was concerned with an instruction which had been struck down by the Delhi High Court. The Court, observed as under – “Therefore, in view of the decision of this Court in Smt. Godavaridevi Saraf (supra), the officers implementing the Act are bound by the decision of the Delhi High Court and Instruction No.1 of 2015 dated 13th January, 2015 has ceased to exist. Therefore, no reference to the above Instruction can be made by the Assessing Officer while disposing of the petitioner’s application in processing its return u/s. 143(1) of the Act and consequent refund, if any, u/s. 143(1D) of the Act. Needless to state that the Assessing Officer would independently apply his mind and take a decision in terms of Section 143 (1D) of the Act whether or not to grant a refund in the facts and circumstances of the petitioner’s case for A.Y. 2015-16.”

In view of the above observations of the Bombay High Court, it appears that the ratio of the decision of the Delhi High Court could be considered to be binding on all the officers implementing the Act.

BCAS had made number of suggestions through representations (November 20161 to scrap ICDS and December 20152 on specific aspects of all 10 ICDS) which did not find favour in the formulation / implementation of ICDS. When the need of the hour is to bring tax certainty, bringing more cohesiveness amongst laws and bring reduction in multiplicity of compliances, ICDS in their present form are taking things in a contrary direction. It is unfortunate that the tax payers have to seek judicial intervention to arrest anomalies that are already pointed out through well reasoned representations.

This intervention and Court’s strictures seem to be a beginning of the battle over ICDS. Time will only tell as to what would be fate of these and many more controversial provisions of ICDS.

1 https://www.bcasonline.org/resourcein.aspx?rid=389

2 https://www.bcasonline.org/files/res_material/resfiles/1612152944merged_document.pdf

shailesh.kwebmaker

16 Section 54 – Acquisition of a flat in a building under construction is a case of `construction’ and not `purchase’. Construction of new house may commence before transfer of old house but should be completed within a period of 3 years from the date of transfer of old house.

[2017] 88 taxmann.com 275 (Mumbai-Trib.)

Mustansir I Tehsildar vs. ITO

ITA No. : 6108/Mum/2017

A.Y. : 2013-14 Date of Order: 18^th December, 2017

FACTS

During the previous year relevant to the
assessment year under consideration, on 5-12-2012, the assessee sold his 1/3^rd
share in Flat No.2902 of an apartment named Planet Godrej located at Byculla,
Mumbai, for a consideration of Rs.126.83 lakh. Long term capital of Rs. 78.36
lakh accrued to the assessee on transfer of his flat in
Planet Godrej.

The assessee had earlier, vide agreement
dated 5.2.2010, booked a flat at Elegant Tower, which was under construction.
The details of payments made to the builder are as detailed below:-

Particulars of payment

Rupees

Before the date of transfer of old house

From 12.04.2007 to 03-11-2009

86,38,225

On 21.4.2012

7,28,525

Sub-total (a)

93,66,750

Payments subsequent to the date of transfer of old house

14.06.2014

3,12,225

22.10.2014

7,28,525

Sub-total (b)

10,40,750

Total (a + b)

1,04,07,500

Thus, the aggregate payments made by the
assessee towards the new flat were Rs.104.07 lakh. Since the aggregate of
payments made was more than the amount of Capital gain, the assessee claimed
that entire amount of capital gain of Rs.78.36 lakh was deductible u/s. 54 of
the Act. The assessee treated the acquisition of new flat as a case of “Construction”. As per the provisions of section 54, the new
flat is required to be constructed within 3 years from the date of transfer of
old flat. Since the old flat was transferred on 05-12-2012, the assessee submitted
that the time limit was available up to December, 2015 and the new flat was
acquired before that date.

The Assessing Officer (AO) treated the case
of acquisition of new house by the assessee as a case of purchase and not of
construction. He, accordingly, held that the purchase should have been between
06-11-2011 to 04-12-2014. Accordingly, he held that –

(a) the payments aggregating to
Rs.86.38 lakh made between 12-04-2007 to 03-11-2009 falls outside the period
mentioned above and hence not eligible for deduction u/s. 54 of the Act;

(b) the capital gains not
utilised for purchase of new asset before the due date for filing return of
income should have been deposited in Capital gains Account Scheme as per the
provisions of section 54 of the Act. The payments of Rs.3,12,225/- and Rs.7,28,525/-made
on 14.6.2014 and 22.10.2014 respectively have violated the provisions of
section 54 of the Act, since the assessee did not deposit them in Capital gains
Account scheme. Accordingly, the AO held that the above said two payments are
not eligible for deduction u/s. 54 of the Act;

(c) The payment of
Rs.7,28,525/- made on 21-04-2012 was within the range of period mentioned by
him. Accordingly, he allowed deduction u/s. 54 of the Act only to the extent of
Rs.7,28,525.

Aggrieved, the assessee preferred an appeal
before CIT(A) who following the decision of the Bombay High Court in the case
of CIT vs. Smt. Beena K. Jain (217 ITR 363)(Bom.) held that the
acquisition of the new house by the assessee was a case of purchase and not
construction. He, confirmed the action
of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal noted that the Hon’ble Bombay
High Court in the case of Mrs. Hilla J. B. Wadia (216 ITR 376)(Bom.) has held
that booking of flat in an apartment under construction must also be viewed as
a method of constructing residential tenements.

Accordingly, the co-ordinate bench has taken
the view in the case of Sagar Nitin Parikh (ITA No.6399/Mum/2011 dated
03-06-2015) that booking of flat in an apartment under construction is a
case of “construction”. In view of the above said decision of the
Hon’ble Bombay High Court and the Tribunal, the acquisition of new flat in an
apartment under construction should be considered as a case of “construction”
and not “purchase”. The Tribunal set aside the view taken by the tax
authorities and held that the assessee has constructed a flat and the
provisions of section 54 should be applied accordingly.

It also noted that section 54 of the Act
provides the condition that the construction of new residential house should be
completed within 3 years from the date of transfer of old residential house.

It noted that the Hon’ble Karnataka High
Court has held in the case of CIT vs. J. R. Subramanya Bhat [1987](165 ITR
571) that commencement of construction is not relevant for the purpose of
section 54 and it is only the completion of construction. The above said ratio
has been followed in the case of Asst. CIT vs. Subhash Sevaram Bhavnani
[2012](23 taxmann.com 94)(Ahd. Trib.). Both these cases support the
contentions of the assessee.

The Tribunal held that, for the purpose of
section 54 of the Act, it has to be seen whether the assessee has completed the
construction within three years from the date of transfer of old asset. It noted
that there is no dispute that the assessee took possession of the new flat
within three years from the date of sale of old residential flat.

The Tribunal held that the assessee has
complied with the time limit prescribed u/s. 54 of the Act. Since the amount
invested in the new flat prior to the due date for furnishing return of income
was more than the amount of capital gain, the requirements of depositing any
money under capital gains account scheme does not arise in the instant case.
Further, the Hon’ble High Court has held in the case of K.C.Gopalan [(1999)
107 Taxman 591 (Kerala)] that there is no requirement that the sale
proceeds realised on sale of old residential house alone should be utilised.

The Tribunal held that the assessee is
entitled for deduction of full amount of capital gains u/s. 54 of the Act, as
he has complied with the conditions prescribed in that section. It set aside the order passed by Ld CIT(A)
and directed the AO to allow the deduction u/s. 54 of the Act as claimed by the
assessee.

shailesh.kwebmaker

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