BCAJ | Bombay Chartered Accountant Journal

37. Appellate Tribunal – Rectification of mistake – Section 254(2) – Mistake can be on part of litigants or his advisors

Binaguri Tea Co. Pvt. Ltd. vs. Dy. CIT; 389 ITR 648 (Cal):

While assessing the fringe benefit tax, the Assessing Officer
gave the assessee the benefit applicable under rule 8 of the Income-tax Rules
1962. However, invoking section 154, of the Income-tax Act, 1961 (hereinafter
for the sake of brevity referred to as the “Act”) the Assessing
Officer withdrew the benefit. The Commissioner(Appeals) confirmed the
rectification order. The assessee filed an appeal before the Appellate Tribunal
contending that the Commissioner (Appeals) had erred in holding that Rule 8 had
no applicability while calculating the eligible expenses of a company engaged
in the business of cultivation, manufacture and sale of tea for the purpose of
fringe benefit tax. Based on the Tribunal decisions against the assessee, the
assessee was advised by the advisors not to press the appeal. Accordingly, the
assessee did not press the appeal and the Appellate Tribunal dismissed the
appeal. It was subsequently noticed that the said Tribunal decisions were
reversed by the Calcutta High Court and the issue was decided in favour of the
assessee even before the dismissal order of the Tribunal. Therefore, within two
months of the order of the Tribunal, the assessee applied for restoration of
the appeal u/s. 254(2) of the Act which was rejected by the Tribunal for the
following reasons.

“The learned counsel for
the assessee reiterated the stand of the assessee as contained in the
miscellaneous application. We are of the view that jurisdiction u/s. 254(2) of
the Act can be exercised only to rectify an error apparent on the face of the
record. The contention in the miscellaneous application, even if true, cannot
give rise to any mistake in the order of the Tribunal apparent on the face of
the record. The miscellaneous application, in our view, cannot therefore be entertained
and the same is hereby rejected.”

On appeal by the assessee, the Calcutta High Court allowed
the appeal and held as under:

“i) Section 254(2) of the Act did not provide
that it had to be a mistake solely on the part of the Appellate Tribunal to
recall an order and that the statutory power could also be exercised in the
case of mistake apparent on the part of the litigants or his advisors.

ii) Neither the Appellate Tribunal nor the
assessee was aware of the judgment of the jurisdictional High Court. Therefore,
the prayer for leave to withdraw the appeal and the order allowing the prayer
were both based on a mistake. The order of the Tribunal is set aside.

iii) The Tribunal shall hear the appeal on
merits.”

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Interest Income of a Credit Society and Deductibility U/S. 80p

Issue for Consideration

Section 80P of the Income-tax Act grants a deduction to an
assessee, being a co-operative society, in respect of such sums that,
inter-alia, includes the whole of the amount of profits and gains of business
attributable to any one or more of such activities which are listed in clauses
(i) to (vii) of clause (a) of sub-section (2). One of the sub-clauses grants a
deduction for a co-operative society engaged in carrying on the business of
banking or providing credit facilities to its members.

The Courts, in the past, have time and again examined the
true meaning of the term ‘attributable’, and have found the same to be of wider
import in contrast to the term ‘derived from’. Based on such interpretation,
the courts have been inclined to include income from activities incidental to
the main business or activity of the assessee, and have held that such incidental
income too was eligible for deduction, inasmuch as such income was profits and
gains attributable to the business.

In the recent past, the Supreme Court, in the case of Totgars
Co-operative Sale Society Ltd., 322 ITR 283 held that income from interest
on deposits with the bank, earned by a credit society, was to be taxed u/s.56
of the Income-tax Act.

The above mentioned decision in Totgars Co-operative Sale
Society’s case has become a subject matter of controversy leading to
conflicting decisions of the High Courts, whereunder, the Gujarat High Court
followed the said decision, but the Karnataka High Court chose to distinguish
the same on facts, and the Andhra Pradesh High Court held the said decision to
be applicable only to Totgars Co-operative Sale Society Limited. In fact, the
ratio of the said decision and its applicability has also become debatable.

Tumkur Merchants Souharda Credit Cooperative Ltd.’s case

The issue arose in the case of Tumkur Merchants Souharda
Credit Cooperative Ltd. vs. Income-tax officer, 55 taxmann.com 447 (Karnataka).
The assessee, a Cooperative Society registered under the provisions of section
7 of the Karnataka Co-operative Societies Act, 1959, was engaged in the
activity of carrying on the business of providing credit facilities to its
members. It filed the return of income for the assessment year 2009-10,
declaring a total income of Rs. NIL, after claiming a deduction of
Rs.42,02,079/- under the provisions of section 80P of the Act in respect of its
business income, which, inter alia, included interest from short term
deposits and savings bank accounts aggregating to Rs. 1,77,305.

The assessing authority denied the deduction claimed u/s. 80P
and passed an order of assessment, determining a total income of
Rs.42,02,079/-, as against the declared income of Rs.NIL. Aggrieved by the said
order, the assessee preferred an appeal to the Commissioner of Income Tax
(Appeals) who held that assessee’s interest income earned from short-term
deposits with Allahabad Bank of Rs. 1,55,300/- and savings bank account with
Axis Bank of Rs.22,005/-, totalling to Rs. 1,77,305/- was liable to income tax,
in view of the judgment of the Apex Court in the case of Totgars Cooperative
Sale Society Ltd. vs. ITO, 322 ITR 283(SC).

Aggrieved by that part of the order, the assessee preferred
an appeal to the Tribunal, which dismissed the appeal, following the judgment
of the Apex Court in the aforesaid case. Aggrieved by the said order, the
assessee filed the appeal challenging the order passed by the Tribunal
raising the following substantial question of law: ‘”Whether the Tribunal
failed in law to appreciate that the interest earned on short-term deposits
were only investments in the course of activity of providing credit facilities
to members and that the same cannot be considered as investment made for the
purpose of earning interest income and consequently passed a perverse
order?”

The assessee, assailing the impugned order, contended before
the Karnataka High Court, that the interest accrued in a sum of Rs. 1,77,305/-
was from the deposits made by the assessee in a nationalised bank out of the
amounts which was used by the assessee for providing credit facilities to its
members, and therefore the said interest amount was attributable to the credit
facilities provided by the assessee, and formed part of profits and gains of
business. It therefore submitted that the appellate authorities were not
justified in denying the said benefit in terms of sub-section (2) of section
80P of the Act. In support of the contention that the interest income was
eligible for deduction u/s. 80P, it relied on several judgments, and pointed
out that the Apex Court in the aforesaid judgment had not laid down any law. In
reply, the Revenue strongly relied on the said judgment of the Supreme Court in
Totgars Co-operative Sale Society Ltd. (supra), and submitted that the
case before the court was covered by the judgment of the Apex Court and no case
for interference was called for.

The Karnataka High Court, on hearing the facts and the rival
contentions, noted the undisputed facts emerging that the assessee was a
co-operative society providing credit facilities to its members, was not
carrying on any other business and that the interest income earned by the
assessee by providing credit facilities to its members was deposited in the
banks for a short duration, which had earned interest in the sum of Rs.
1,77,305/- .

Analysing the provisions of section 80P, the court found that
the word ‘attributable’ used in the said section was of great importance. It
took note of the fact that the Apex Court had considered the meaning of the
word ‘attributable’ as opposed to ‘derived from’ in the case of Cambay
Electric Supply Industrial Co. Ltd. vs. CIT ,113 ITR 84. The court found
from the above decision that the word “attributable to” was certainly
wider in import than the expression “derived from”, and whenever the
legislature wanted to give a restricted meaning, they had used the expression
“derived from”. The expression, “attributable to”, being of
wider import, was used by the legislature whenever they intended to gather
receipts from sources other than the actual conduct of the business.

The court observed that a cooperative society, which was
carrying on the business of providing credit facilities to its members, earned
profits and gains of business by providing credit facilities to its members;
the interest income so derived and the capital, if not immediately required to
be lent to the members, could not be kept idle, and the interest income earned
on depositing such balance in hand was to be treated as attributable to the
profits and gains of the business of providing credit facilities to its members
only; the society was not carrying on any separate business for earning such
interest income; the income so derived was the amount of profits and gains of
business attributable to the activity of carrying on the business of banking or
providing credit facilities to its members by a co-operative society and was
liable to be deducted from the gross total income u/s. 80P of the Act.

The court further observed that the Apex Court in the case of
Totgars Co-operative Sale Society Ltd.(supra), on which reliance was
placed, was dealing with a case where the assessee – cooperative society, apart
from providing credit facilities to the members, was also in the business of
marketing of agricultural produce grown by its members and the sale
consideration received from marketing agricultural produce of its members was retained
in many cases, and the said retained amount which was payable to its members
from whom produce was bought, was invested in a short-term deposit/security;
such an amount which was retained by the assessee – society was a liability and
it was shown in the balance sheet on the liability side; therefore, to that
extent, such interest income could not be said to be attributable either to the
activity mentioned in section 80P(2)(a)(i) of the Act or u/s. 80P(2)(a)(iii) of
the Act; in the facts of the said case, the Apex Court held that the assessing
officer was right in taxing the interest income u/s. 56 of the Act after making
it clear that they were confining the said judgment to the facts of that case.
It was clear to the Karnataka high court that the Supreme Court in Totgars
Co-operative Sale Society Ltd.(supra) was not laying down any law.

In the instant case, the court noted that the amount which
was invested in banks to earn interest was not an amount due to any members; it
was not the liability; it was not shown as liability in the accounts and that
the amount which was in the nature of profits and gains, was not immediately
required by the assessee for lending money to the members, as there were no
takers. Therefore, they had deposited the money in a bank so as to earn
interest. The court accordingly held that the said interest income was
attributable to carrying on the business of banking and was liable to be
deducted in terms of section 80P(1) of the Act. The court cited with approval
the decision of the Andhra Pradesh High Court in the case of CIT vs. Andhra
Pradesh State co-operative Bank Ltd.,200 Taxman 220.

State Bank Of India (SBI)’s case

The issue again arose in the case of State Bank of India
vs. CIT , 74 taxmann.com 64 before the Gujarat high court. The assessee, a
co-operative society, namely State Bank of India Employees Co-op Credit and
Supply Society Ltd. was registered under the Gujarat Co-operative Societies
Act, 1961 with the object of accepting deposits from salaried persons of the
State Bank of India, Gujarat region, with a view to encourage thrift and
providing credit facility to them. It had launched various deposit schemes such
as Term Deposit, Recurring Deposit, Aid to Your Family Scheme, Members Retiring
Benefit Fund etc., and at the same time, was advancing loans to the
members, such as consumer goods loan, car-vehicle loan, food grain loan and
general purposes loan, etc. It had filed its return of income for
assessment year 2009-10 and 2010-11, declaring total income at Rs. Nil, after
claiming deduction u/s. 80P of the Income-tax Act, 1961 of Rs.29,69,444/- and
Rs.43,64,828/-.respectively.

The matter was taken up in
scrutiny by the Assessing Officer who called for various details, including
justification regarding claim of deduction u/s. 80P of the Act vide notice
u/s. 142(1). The society submitted its replies, narrating the nature of
activities carried out by it, and details of claim of deduction u/s. 80P with
copy of bye-laws, and the Assessing Officer framed assessment u/s. 143(3) of
the Act accepting the claim.

Subsequently, the Commissioner of Income Tax invoked powers
u/s. 263 of the Act, proposing to revise the above order on the ground that
interest income of Rs.16,14,579/- for assessment year 2009-10 and of
Rs.32,83,410/- from the State Bank of India for assessment year 2010-11 was not
exempt u/s. 80P(2)(d) of the Act. In response, the assessee contended that the
interest income was business income, and was exempt u/s. 80P(2)(a)(i) of the
Act. The Commissioner of Income Tax did not find the explanation satisfactory,
on the ground that interest income was not business income, so as to be exempt
u/s. 80P(2)(a)(i) of the Act. Hence, the assessment order was held to be
erroneous and prejudicial to the revenue.

Being aggrieved, the appellant carried the matter in appeal
before the Income Tax Appellate Tribunal, which held that interest income
earned from members on grant of credit did not have nexus with the interest
earned on deposits made with SBI, and could not be said to be the one arising
from business of providing credit facility to its members, by drawing support
from the decision of the Supreme Court in Totgars Co-operative Sales Society
Ltd. vs. ITO 322 ITR 283(SC) .

The assessee being aggrieved, raised substantial questions of
law in appeal for consideration of the Gujarat High Court, which included ;

‘(1) Whether on the facts and in the
circumstances of the case, ………… ?

(2) Whether on the facts and in the
circumstances of the case, the Income Tax Appellate Tribunal was justified in
holding that interest income of Rs……………. on deposits placed with State Bank of
India was not exempt under section 80P(2)(a)(i) of the Income Tax Act, 1961?

On behalf of the society, it was submitted that the assessee
was a co-operative society formed by the employees of the State Bank of India,
Gujarat Circle, under the Gujarat Co-operative Societies Act, 1961 in the
category of Employees’ Co-operative Credit Society for the purpose of
encouragement of savings and providing credit facilities to the members of the
Society; it was not engaged in any other activity except giving credit
facilities to its members, who were employees of State Bank of India, and that
the income generated by the assessee was mainly on account of differential rate
of amount of deposits received from the members and the amount of loans given
to the members; the income generated was only from the contributions received
from the members and it did not deal in any way with any person other than the
members; the employer deducted the contribution from the salary of the
employees and the collective contribution received was remitted to the assessee
society, generally on the first of every month, while the loans were given to
the employees on a fixed day of the month (around 15^th of the month)
and not every day, and during the intervening period, the idle money collected
by the assessee was deposited with the State Bank of India for the purpose of
earning interest; as and when the amount was required, the deposits with the
State Bank of India are liquidated and utilised for the purposes of the
assessee.

In the above stated facts, it was pleaded that the deposit of
amount with State Bank of India was during the course of business and was part
of the activities of the assessee society and could not be seen in isolation.
It was submitted that the decision of the Supreme Court in the case of Totgars
Co-operative Sales Society Limited (supra) would not be applicable to the
facts of the present case, inasmuch as to apply the said decision, the
necessary facts had to be on record, and that there was no strait-jacket
formula that the above decision would be applicable. Reliance was placed upon
the decision of the Karnataka High Court in Tumkur Merchants Souharda Credit
Cooperative Ltd. vs. ITO, 55 taxmann.com 447, wherein the court had held
that the word “attributable to” was certainly wider in import than
the expression “derived from” and whenever the legislature used the
expression ‘attributable ‘ they intended to gather receipts from sources other
than the actual conduct of business. Reliance was also placed upon the decision
of the Karnataka High Court in the case of Guttigedarara Credit Co-operative
Society Ltd. vs. ITO, 377 ITR 464 wherein the above view has been
reiterated. Reliance was also placed upon the decision of the Patna High Court
in the case of Bihar State Housing Co operative Federation Ltd. vs. CIT, 315
ITR 286 wherein the court was dealing with the question as to whether on
the facts and in the circumstances of that case, the Tribunal was correct in
holding that the sum of Rs.15,98,590/- received by way of interest on bank
deposit was not ancillary and incidental to carrying on the business of
providing credit facilities to its members and as such, exempt u/s.
80P(2)(a)(i) of the Income-tax Act, 1961. It was submitted that the above
decisions would be squarely applicable to the facts of the present case, as the
factual background in which the said decisions were rendered were similar to
the present case.

It was contended that insofar as the interest earned from
deposits was concerned, section 80P(2)(a)(i) did not make any difference nor
was it possible to read any limitation having regard to the language of the
said provision and every income “attributable to any one or more of such
activities” should be deducted from the gross total income. It was
highlighted that one had to bear in mind the object with which the provision
was introduced, viz. to encourage and promote growth of co-operative sector in
the economic life of the country and in pursuance of the declared policy of the
Government. Reference was made to bye-law 7 of the Bye-laws of the appellant
society to point out that the interest income was a part of the corpus of the
society, and when the corpus was invested, the decision of the Supreme Court in
the case of Totgars Co-operative Sales Society Ltd. (supra) would not be
applicable. It was submitted that the interest income was incidental to the
main activity of the appellant of providing credit facility and that in the
above decision of the Supreme Court, the word ‘incidental’ had not come up for
consideration. In conclusion, it was submitted that the appeals deserved to be
allowed by answering the questions in favour of the assessee and against the
revenue.

Opposing the appeals, it was contended by the Revenue that it
was only the interest received from members towards credit facilities extended
to them that would fall within the ambit of the expression profits and gains of
business attributable to the activities of the appellant; interest from bank on
surplus did not have any direct or proximate connection with the activities of
the society , and hence, it would not be entitled to the benefit of section
80P(2) of the Act in respect of such income.

It was submitted that in case of a credit co-operative
society, it was the income derived from such activity that was exempt.
Adverting to the facts of the present case, it was submitted that the decision
of the Supreme Court in the case of Totgars Co-operative Sales Society Ltd. (supra)
was squarely applicable. It was submitted that section 80P of the Act was based
upon the concept of mutuality, and accordingly exempted any income derived by
the society from its members. As the interest earned from the funds deposited
with the banks lacked the degree of proximity between the appellant and its
members, it could not be categorised as an activity in the pursuit of its
objectives, so as to fall within the ambit of section 80P(2)(a)(i) of the Act.

Reference was made to the decision of the Karnataka High
Court in the case of Totgars Co-operative Sale Society Ltd. (supra), to
point out the nature of the dispute involved in that case. It was submitted
that, in that case, the court was concerned with two activities of the assessee
society: (i) to provide credit facility to its members, and (ii) to market the
agricultural produce of its members. It was submitted that the findings
recorded by the Supreme Court were also in connection with the two activities
and, therefore, to say that the Supreme Court was only concerned with the
surplus of marketing produce was not correct. It was submitted that the
observation regarding the judgment being confined to the facts of that case was
because the assessee was not in the banking business, and all the earlier
decisions in this regard were relating to banking business. It was submitted
that the decision of the Karnataka High Court in the case of Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) was based upon an
incorrect reading of the above decision of the Supreme Court.

The Gujarat High Court, on hearing the parties to the appeal,
noted that the short question that arose for consideration in these appeals was
as to whether the appellant was entitled to claim deduction u/s. 80P(2)(a)(i)
of the Act in respect of the interest earned on the deposits placed with the
State Bank of India. For the purpose of appreciating the controversy in issue,
it extensively referred to the records of the case and appreciated the
contesting views of the parties before the lower authorities. The court also
examined the ratio of the decision of the Supreme Court in Totgars
Co-operative Sale Society Ltd. (supra), and supplied emphasis where
felt necessary.

Expressing its opinion, the court stated that in case of a
society engaged in providing credit facilities to its members, income from
investments made in banks did not fall in any of the categories mentioned u/s.
80P(2)(a) of the Act; in the case of Totgars Co-operative Sale Society
(supra), the court was dealing with two kinds of activities: interest
income earned from the amount retained from the amount payable to the members
from whom produce was bought and which was invested in short-term
deposits/securities, and the interest derived from the surplus funds that the
assessee therein invested in short-term deposits with the Government
securities. The Gujarat High Court opined that the above decision was not
restricted only to the investments made out of the retained amount which was
payable to its members, but was also in respect of funds not immediately
required for business purposes. For the above reasons, the Gujarat High Court
did not agree with the view taken by the Karnataka High Court in Tumkur
Merchants Souharda Credit Cooperative Ltd. (supra) to the effect
that the decision of the Supreme Court in Totgars Co-operative Sale Society
(supra) was restricted to the sale consideration received from marketing
agricultural produce of its members, which was retained in many cases and
invested in short term deposit/security, and that the said decision was
confined to the facts of the said case and did not lay down any law.

Relying on the principles enunciated by the Supreme Court in Totgars
Co-operative Sale Society (supra), the Gujarat High court held that
in case of a society engaged in providing credit facilities to its members,
income from investments made in banks did not fall within any of the categories
mentioned in section 80P(2)(a) of the Act. In the end, the court did not find
any infirmity in the order passed by the Tribunal warranting interference, and
accordingly held that the Income Tax Appellate Tribunal was justified in
holding that interest income of Rs.16,14,579/- and Rs.32,83,410/-respectively
on deposits placed with State Bank of India was not exempt u/s. 80P(2)(a)(i) of
the Income-tax Act, 1961.

Observations

An assessee, a co-operative society engaged in providing
credit facilities to its members, is entitled to deduction for the whole of the
amount of profits and gains of business attributable to such activity. As per
section 80P(2), in the case of a co-operative society engaged in carrying on
the business of providing credit facilities to its members, what is deductible
is the whole of the amount of profits and gains of business attributable to any
one or more such activities.

A co-operative society which is carrying on the business of
providing credit facilities to its members, earns profits and gains from
business by providing such facilities to its members. The interest income so
earned from members, if not immediately required to be lent to the members,
cannot be kept idle. On deposit of such income in a bank so as to earn
interest, such interest income enhances the capital available for the credit to
its members, besides reducing the cost of interest to members. Such interest so
received from bank has the business nexus, in as much as the source thereof is
the business income, and should be treated as attributable to the profits or
gains of the business of providing credit facilities to its members only, more
so where such deposit with the bank is for short period and further so where
the bye-laws or the enactment require the society to employ funds. The income
so derived is the profits or gains of business that is attributable to the
activity of carrying on the business of providing credit facilities to its
members by a co-operative society and should be eligible for being deducted
from the gross total income u/s. 80P of the Act.

Money is stock-in-trade or circulating capital for a credit
society and its normal business is to deal in money and credit. It cannot be
said that the business of such a society consists only in receiving
contribution from its members. Depositing money with banks or such other societies,
as are mentioned in the objects, in a manner that it may be readily available
to meet the demand of its members, if and when it arises, is a legitimate mode
of carrying on of its business.

The interest received by a credit society on bank deposits,
in any case, is ancillary and incidental to carrying on the business of
providing credit facilities to its members, and as such, is deductible under
the provisions of section 80P(2)(a)(i) of the Act. The nature of credit
business, conducted out of the funds of the employees, clearly creates a
situation where surplus funds are available, which are deposited in a bank,
interest is earned thereon. The placement of such funds, being incidental and
ancillary to carrying on business of providing credit facilities to its
members, and by reason of section
80P(2)(a)(i) of the Act, the same should be eligible for deduction.

The business of a credit society essentially consists of
dealing with money and credit. Members put their money in the society at a
small rate of interest. In order to meet their demands, as and when they arise,
the society has always to keep sufficient cash or easily realisable securities.
That is a normal step in the carrying on of the business; in other words, that
is an act done in what is truly the carrying on or carrying out of a business.

It is a normal mode of carrying on credit business to invest
moneys in a manner that they are readily available and that is just as much a
part of the mode of conducting a business as receiving contributions or lending
moneys; that is how the circulating capital is employed and that is the normal
course of business of a credit society. The moneys laid out in the form of
deposits with the bank would not cease to be a part of the circulating capital
of the credit society nor would the deposits cease to form part of its
business. The returns flowing from the deposits would form part of its profits
from its business. In a commercial sense, the managers of the society owe it to
the society to make investments which earn them interest, instead of letting
moneys lie idle. It cannot be said that the funds which were not lent to
borrowers but were laid out in the form of deposits in another bank, to add to
the profit instead of lying idle, necessarily ceased to be a part of the
stock-in-trade of the society, or that the interest arising therefrom did not
form part of its business profits.

As regards the decision of the Supreme Court in the case of Totgars
Co-operative Sales Society Ltd. (supra), the court, in the facts of that
case, had observed that it was dealing with a case where the assessee –
co-operative society, apart from providing credit facilities to the members,
was also in the business of marketing of agricultural produce grown by its
members; the sale consideration received from marketing agricultural produce of
its members was retained in many cases; the said retained amount which was
payable to its members from whom produce was bought, was invested in a
short-term deposit/security; such an amount which was retained by the assessee
– society was a liability and it was shown in the Balance Sheet on the
liability side. In the above facts, the Supreme Court held that therefore, to
that extent, such interest income could not be said to be attributable either
to the activity mentioned in section 80P(2)(a)(i) of the Act or u/s.
80P(2)(a)(iii) of the Act. In the facts of the said case, the Supreme Court
held that the Assessing Officer was right in taxing the interest income u/s. 56
of the Act. The court further made it clear that it was confining the said
judgment to the facts of the said case and, therefore, was not laying down any
law.

The Supreme Court in that Totgars’ case has held that
interest on such investments, could not fall within the meaning of the expression
“profits and gains of business” and that such interest income could
not be said to be attributable to the activities of the society, namely,
carrying on the business of providing credit facilities to its members or
marketing of agricultural produce of its members. The court held that when the
assessee society provides credit facilities to its members, it earns interest
income and the interest which accrued on funds not immediately required by the
assessee for its business purposes and which had been invested in specified
securities as “investment” were ineligible for deduction u/s.
80P(2)(a)(i) of the Act.

It is true that the apex court, in the case of Totgars
Co-operative Sale Society Ltd.(supra), dealt with a case where the
assessee – co-operative society was also providing credit facilities to the
members besides marketing of agricultural produce grown by its members. On the
available facts, it appears that, in that case, the interest income from bank
was received from the sale consideration received from marketing agricultural
produce of its members, which was retained by the society in many cases before
the same was finally handed over to the members. The said retained amount which
was payable to its members from whom produce was bought, was invested in a
short-term deposit/security. Such an amount which was retained by the assessee
– society was a liability and it was shown in the balance sheet on the
liability side. Relying on such facts found by the Supreme Court, the Karnataka
High Court sought to distinguish the said decision and held that it was not
applicable to the facts of the case before it. Significantly, the Apex court
itself qualified its decision by observing that the decision was confined to
the facts of the said case . In the circumstances, it may be fair to not apply
the ratio of the said decision to the facts of any other case, unless the facts
therein are found to be identical, and are established to have been considered by the Apex court.

It is most relevant to note that the Apex court in Totgars’
case had no occasion to consider the decisions delivered by the highest
court regularly on the subject, holding that the interest income of a
co-operative bank from its investments with banks or government securities was
eligible for deduction u/s. 80P of the Act. We are of the opinion that had they
been brought to the notice of the court, the decision could have been
different. Another factor that requires that the application of the decision of
the court shall be restricted to Totgars’ case only, is that the court, at no
place, was required to consider whether the income in question could be
considered to be attributable to profits and gains of business or not. The
court was rather concerned about whether the income would be treated as
“profits and gains of business” or from other sources. Again, had the court
been persuaded to consider the language of section 80P and the meaning of the
term “attributable”, we are sure the decision could have been different.

It is also true that this culling of the fact by the
Karnataka High court, from the Supreme court’s decision in Totgar’s
case, has been later on found to be not representing the full facts by the
Gujarat high court by examining the order of the high court passed in Totgars’
case. While that may be the case, it is at the same time important to take into
consideration the fact that the Andhra Pradesh High Court, like the Karnataka
High Court, has also held that the interest income is attributable to carrying
on the main business of banking, and therefore it was eligible for deduction
u/s. 80P(1) of the Act. [Andhra Pradesh State Co-operative Bank Ltd.,200
Taxman 220]. The Andhra Pradesh High Court, while deciding the issue in
favour of the assessee society, did consider the decision of the Apex court in
Totgars’ case. In the circumstances, it may be that the Karnataka High Court
erred in deciding the issue on hand by distinguishing the facts of its case
with that of the facts in Totgar’s case. However the decision could not have
been different once it was appreciated that the income in question was
attributable to the profits and gains of business.

There appears to be merit in the conclusion of the Karnataka
and Andhra Pradesh High Courts, which have based their decisions by following
the ratio of the oft followed decision of the Apex court in Cambay’s case,
dealing with the true meaning of the word ‘attributable’ used in chapter VI-A.
The Apex Court had an occasion to consider the meaning of the word
‘attributable’ in the case of Cambay Electric Supply Industrial Co. Ltd. vs.
CIT 113 ITR 84 as under:

‘As regards the aspect
emerging from the expression “attributable to” occurring in the
phrase “profits and gains attributable to the business of the specified
industry (here generation and distribution of electricity) on which the learned
Solicitor-General relied, it will be pertinent to observe that the legislature,
has deliberately used the expression “attributable to” and not the
expression “derived from”. It cannot be disputed that the expression
“attributable to” is certainly wider in import than the expression
“derived from”. Had the expression “derived from” been
used, it could have with some force been contended that a balancing charge
arising from the sale of old machinery and buildings cannot be regarded as
profits and gains derived from the conduct of the business of generation and
distribution of electricity. In this connection, it may be pointed out that
whenever the legislature wanted to give a restricted meaning in the manner
suggested by the learned Solicitor-General, it has used the expression
”derived from”, as, for instance, in section-80J. In our view, since the
expression of wider import, namely, “attributable to”, has been used, the
legislature intended to cover receipts from sources other than the actual
conduct of the business of generation and distribution of electricity.’

The word “attributable to” is certainly wider in
import than the expression “derived from”. Whenever the legislature
wanted to give a restricted meaning, they have used the expression
“derived from”. The expression “attributable to” being of
wider import, the said expression is used by the legislature whenever they
intended to gather receipts from sources other than the actual conduct of the
business.

The Apex Court, in various decisions, has consistently held
the view that interest income on investments made by the banks was attributable
to the profits and gains of business and was eligible for deduction u/s. 80P of
the Act. [Karnataka State Co-operative Apex Bank, 252 ITR 194 (SC),
Mehsana District, Central Co-operative Bank Ltd., 251 ITR 522 (SC), Nawanshahar
Central Co-operative Bank Ltd.289 ITR 6 (SC), Bombay State Co-operative
Bank Ltd. 70 ITR 86 (SC) (para 16), Bangalore Distt. Co-op. Central Bank
Ltd. 233 ITR 282 (SC), Ponni Sugars & Chemicals Ltd. 306 ITR 392
(SC), Ramanathapuram District Co-operative Central Bank Ltd. 255 ITR 423
(SC), Nawanshahar Central Co-operative Bank Ltd.,349 ITR 689 (SC)].
These decisions are an authority for the proposition that, even though the
investment made does not form part of its main activity, stock in trade or working
capital, still the interest income therefrom would qualify for exemption u/s.
80P of the Income-tax Act.

The Apex court in Nawanshahar Central Cooperative Bank
Ltd.’s case (supra), observed as under. “this Court has consistently held
that investments made by a banking concern are part of the business of banking.
The income arising from such investments would, therefore, be attributable to
the business of bank falling under the head “Profits and gains of
business” and thus deductible under section 80-P(2)(a)( i) of the
Income-tax Act, 1961. This has been so held in Bihar State Coop. Bank Ltd. 39
ITR 114 (SC). Karnataka State Coop. Apex Bank, 259 ITR 144 and Ramanathapuram
Distt. Coop. Central Bank Ltd.255 ITR 423(SC).The principle in these cases
would also cover a situation where a cooperative bank carrying on the business
of banking is statutorily required to place a part of its funds in approved
securities.”

Attention is also invited to clause (b) of sub-section 2 of
section 80P, which clause while providing for deduction for certain primary
societies provides for a deduction in respect of “the whole of the amount of
profits and gains of such business” as against “the whole of the amount of
profits and gains of business attributable to any one or more of such
activities” covered by clause (a) of sub-section 2 of section 80P. A
bare reading of the contrasting provisions clearly shows that scope of clause
(a) is wider than clause (b), plainly on account of the insertion of the terms
‘attributable and activities’. These terms cannot be treated as redundant and
should be given the appropriate meaning.

It is well-settled that a provision for
deduction or tax relief should be interpreted liberally in favour of the
assessee. Such a provision should be construed as to fully achieve the object
of the legislature and not to defeat it. [South Arcot District Cooperative
Marketing Society Ltd.116 ITR 117 (SC), Bajaj Tempo Ltd.196 ITR 188 (SC) and
N.C. Budharaja & Co., 70 Taxman 312(SC).] Liberally interpreting sub-section
2(a)( i) of section 80P of the Act, the conclusion in favour of the assessee
appears to be a better conclusion.

shailesh.kwebmaker

17. [2016] 161 ITD 546 (Chennai Trib.) DCIT vs. Suthanther Assumtha A.Y.: 2010-11 Date of Order: 9th September, 2016.

Section 32, Appendix I to Rule 5 and
Circular No. 652, dated 14-6-1993: An assessee is entitled for higher
depreciation on pay loaders, dozers and water tankers used by it in its
business of transportation of goods on hire.

FACTS

The assessee was engaged in the business of
transportation and had claimed higher rate of depreciation @ 30% on pay
loaders, dozers and water tankers.

During the relevant assessment year, the
main part of assessee’s transportation business was done for M/s Anand
Transport.

The Assessing Officer (AO) studied the
agreement entered by the assessee with
Anand Transport and found that assessee had to supply pay loaders for
hatch work, loading material into trucks from wharf, transporting to designated
stock yard by trucks, stacking at stock yard, loading from stock yard into
trucks, carting from stock yard to railway siding and loading of goods into
railway wagon.

According to AO, vehicles which were used in
the business of running them on hire were entitled for higher depreciation.

As per the AO, the cranes and pay loaders
were used by the assessee for his own business of transportation and there was
no hiring of vehicles. Hence AO disallowed higher rate of depreciation.

According to the CIT(A), there was an
element of ‘hiring’ in the business activities of the assessee and hence
directed the AO to allow depreciation @ 30%.

On appeal by the revenue before the
Tribunal:

HELD

There is no dispute that the assessee was
engaged in the business of transportation of coal and iron ore.

Part III(3)(ii) of Appendix I to the Income
Tax Rules allows higher rate of depreciation @ 30% to following category of
Machinery and Plant –

‘Motor buses, motor lorries and motor taxis
used in a business of running them on hire’.

By virtue of Circular No. 652, dated
14-6-1993, higher rate of depreciation @ 30% mentioned in Part III(3)(ii) of
Appendix to the Income Tax Rules would get an extended meaning than what
literally follows on their reading.

As per Circular No. 652 (supra), an
assessee shall be entitled to higher rate of depreciation @ 30% on motor
vehicles used by it in its business of transporting of goods on hire.

In our opinion, the agreement entered by the
assessee with M/s Anand Transport clearly shows that its duty was to transport
the goods provided by Anand Transport from one place to another. We cannot say
that element of ‘hiring’ was absent.

Hence, we do not find any reason to
interfere with the order of the CIT(A) and the assessee would be eligible for
higher rate of depreciation on the vehicles used by it in its business of
transportation of goods on hire.

Note – Reliance
had been placed on Bombay High Court in the case of SC Thakur & Bros.
[2010] 322 ITR 463 and JCIT vs. Avinash Transport in ITA No. 1909/Kol/2012
dated 13.8.2015

shailesh.kwebmaker

15. Tribunal jurisdiction u/s. 254(2) of the Act – Once a matter is disposed off by the Tribunal it would be functus officio – It can only exercise limited jurisdiction to rectify its order – No clarification can be sought

CIT vs. Shri Suresh G. Wadhwa. [
Income tax Appeal no. 904 of 2014 dt : 05/12/2016 (Bombay High Court)].

[Shri Suresh G. Wadhwa vs. JCIT,. [ MA
NO. 387/MUM/2013 Arising out of ITA No 6395/MUM/2010; Bench : I ; dated
04/12/2013 ; A Y: 2009-10. Mum. ITAT ]

The Tribunal passed an order dated 2^nd
August, 2013 u/s. 254(1) of the Act relating to the AY : 2009-10. The AO was
not interpreting/understanding the said order correctly. In the above view, the
assessee filed an application u/s. 254(2) of the Act seeking clarification of
the order dated 2^ndAugust, 2013, so as to explain its correct
meaning. By the impugned order, the Tribunal allowed the assessee’s
miscellaneous application seeking a clarification of its order dated 2^nd
August, 2013. The Tribunal in the impugned order dated 4^th December,
2013 records that under the garb of clarification of an order, a party’s right
to interpret the Tribunal’s order cannot be pre-empted. If the parties are
aggrieved by the interpretation of the Tribunal’s order by the lower
authorities, it would only be fair to challenge the same in an appropriate
proceedings. Notwithstanding the above, the Tribunal allowed the application by
the impugned order clarifying its earlier order dated 2^nd August,
2013. This the Tribunal did by holding that though such an application for
clarification may not strictly fall u/s. 254(2) of the Act, yet such an
application would be entertained in exercise of its inherent powers and in
support relied upon the Apex Court order in Honda Siel Power
Products Ltd. vs. Commissioner of Income Tax, 295 ITR 466.

The Revenue preferred appeal before
the High Court against the order of the Tribunal passed u/s. 254(2) of the Act.
The Court observed that the Tribunal after passing an order u/s. 254(1) of the
Act has became functus officio in respect of the proceedings which led
to the final order dated 2^nd August, 2013 passed in respect of AY :
2009-10. The Tribunal’s powers are for rectification are specifically set out
in section 254(2) of the Act. There is no provision in the Act enabling the
Tribunal to clarify its order after it has became functus officio particularly
when the clarification is not in respect of clerical/typographical errors which
have crept into the order. The Tribunal has no powers of Review. It cannot in
the garb of clarifying its order already passed u/s. 254(1) of the Act, seek to
review the same. The issue is of jurisdiction of the Tribunal to entertain such
an application for clarification. Undoubtedly, an inherent power of procedural
review is available with every Tribunal but not of substantive review. Procedural
review would be cases where the procedure/process of adjudicating the dispute
is not followed, to illustrate an order passed ex parte or when no
notice of hearing is received by party, etc. i.e. the process of
arriving at justice is vitiated. (Grindlays Bank Ltd. vs.
Central Govt. Industrial Tribunal, 1980 (suppl.) SCC 420). Seeking clarification and/or amplification of an order
already passed without it falling within the parameters of an rectification
application, would lead to chaos and uncertainty. No order of the Tribunal
would then be final, as it would always be subject to clarification. Once the
Tribunal has passed an order u/s. 254(1) of the Act, it becomes functus
officio and loses jurisdiction over the lis. It is axiomatic that
once a matter is disposed of by the Tribunal/Court, it would be functus
officio. The Tribunal can only exercise limited jurisdiction as provided in
section 254(2) of the Act, to rectify its order in view of apparent error on
record or in case of procedural issues leading to an order passed u/s. 254(1)
of the Act. Thus, the Tribunal ought not to have entertained such an application on the part of the assessee.

The reliance placed upon
the decision of the Apex Court in Honda Siel Power Products Ltd. (supra)
is inappropriate. In the facts of that case, a binding decision of a coordinate
bench was cited before the Tribunal during the hearing of the appeal and the
same was not considered in the order of the Tribunal. It was in the above
context, that the Tribunal had allowed the application for rectification made
by the party. However, it was reversed by the High Court. On further appeal,
the Apex Court restored the order of the Tribunal. It held that the Tribunal
allowed the application applied u/s. 254(2) of the Act for rectification as a
binding order cited during the hearing before the Tribunal was not considered
in the impugned order of the Tribunal. In fact, this would be a case of
procedural review as held by the Apex Court in Grindlays Bank (supra)
and also fall within the scope of section 254(2) of the Act. It must be noted
that the Apex Court in Honda Siel Power Product Ltd. (supra) did not
exercise inherent powers in the facts before it, but allowed the application
u/s. 254(2) of the Act. Therefore, the reliance of Honda Siel Power Product
Ltd. (supra) is misplaced.

The impugned order dated 4^th
December, 2013 was quashed and set aside.

shailesh.kwebmaker

14. Reopening of assessment – No reason to believe that the income chargeable to tax has escaped assessment – reopening notice was bad in law. Section 148

CIT vs. Devkumar Haresh
Vaidya. [ Income tax Appeal no 750 of 2014, dt : 05/12/2016 (Bombay High
Court)].

[Devkumar Haresh Vaidya
(IT) vs. ACIT . [ITA No. 7325/MUM/2012; Bench : J ; AY 2007-08 dt: d 31/07/2013
; Mum. ITAT ]

The Assessee filed its ROI
for AY 2007-08 declaring a total income
of Rs. 24.69 lakh. The same was accepted u/s. 143(1) of the Act. Thereafter,
the AO received information from the Deputy Director of Income Tax
(Investigation), Surat that property situated at New Delhi (said property) was
sold on 23^rd August, 2006 for a total consideration of Rs.148.93
crore by the 12 family members, including the assessee and the assessees’s
share in the said amount was Rs.6.21 crore. Consequently, a notice u/s. 148 of
the Act was issued seeking to reopen the assessment for AY: 2007-08. The reason
for reopening the assessment was that said property had been sold to one
Mineral Management Services (I) Ltd. Thus, the sale was assessable to tax in
the A.Y. 2007-08 as it was so assessed in the hands of Mineral Management
Services (I) Ltd. in that year.

The assessee challenged
the notice pointing out that he had offered to tax the entire consideration of
Rs.6.21 crore (Rs. 4 crore in his hands and Rs.2.21 crore as a part of his late
father’s income was offered to tax) in the earlier A.Y. 2006-07. Moreover, he
had also claimed the benefit of section 54EC of the Act in A.Y. 2006-07. This
was accepted by the AO in scrutiny proceedings u/s. 143(3) of the Act. It was
pointed out that the said property was a family property in which his mother
(Devhuti Vaidya) had undivided and indeterminate rights/share in the said
property. Therefore, though the assessee and his family members did not have
possession of the said property, they had filed caveat objecting the
grant of probate to the Will of the assessee’s maternal grand father Mr.
Anantrai Pattani in favour of his maternal uncle Mr. Kumar Pattani. In the
above view, as a part of the settlement arrived at between the assessee and his
family members with his uncle Mr. Kumar Pattani, an Agreement for Sale dated 25^th
October, 2005 by which the assessee sold his rights in the said property to one
M/s. Duce Property and Services Pvt. Ltd. and withdrew his objections to grant
of probate to Mr. Kumar Pattani. All this in consideration of Rs.12 crore (as a
family) and Rs.4 crore as a part thereof being for the transfer of his interest
/ right in the immovable property was also received in A.Y. 2006-07.

All the above facts were
examined by the AO while passing the assessment order for the A.Y. 2006-07 and
held that the assessee had sold his rights/share in the immovable property and
sought benefit of the investment made of the sales proceeds u/s. 54EC of the
Act. It was also pointed out that as is evident from the reasons for reopening
the assessment that the amendment made in section 54EC of the Act effective
from A.Y. 2007-08 which would restrict the benefit of that provision to Rs.50
lakh had triggered the reopening notice.

This was evident from the
following observations recorded in the reasons, which reads as under :“ In
view of above amendment, if the assessee would have shown the capital gain
correctly in the A.Y. 2007-08, then she would not have been eligible for
deduction of more than Rs.50 lakhs even if she would have complied with the
time limit provision of the section 54EC.”

However, the AO by order
passed u/s. 143(3) r/w section 147 of the Act, did not accept the assessee’s
objections. Consequently, the AO brought to tax an amount of Rs.6.21 crore on
the above account. (Rs.4 crore being the assessee’s share and Rs.2.21 crore
being his share in his late father Mr. Haresh Vaidya’s interest, who had
expired in the meantime.).

On appeal, the CIT(A) also
dismissed the assessee’s appeal.

On further appeal, the
Tribunal held that the AO could not have any reason to believe that income
chargeable to tax has escaped assessment. In particular, it held that the
assessee had offered capital gains to tax in the AY 2006-07 and the same was
accepted after examination / consideration while passing an order u/s. 143(3)
of the Act. Thus, the AO having already assessed the income arising on sale of
rights in the said property as evidenced by the Agreement for Sale dated 25^th
August, 2005 and letter dated 17^th October, 2005 evidencing the
family arrangement coupled with having received the consideration in the
Assessment Year 2005-06 which was also offered to tax in that year could not
have had any reason to believe that income chargeable to tax has escaped
assessment. The impugned order also records the fact that there were disputes
amongst the legal heirs of late Mr. Anantrai Pattani including pending probate
proceedings before the High Court. The dispute between the assessee and his
uncle Mr. Kumar Pattani stood settled on the basis of offer made by the uncle
in his letter dated 17^th October, 2005 to the assessee and his
family members to give up their rights in respect of the said property
(including not contesting the probate petition) on his uncle paying a sum of
Rs.12 crore in the aggregate.

Further, the fact that the
communication received from the Deputy Director of Income Tax (Investigation),
Surat which was the material for issuing the impugned notice, also seems to
indicate that the entire exercise was only for denying the benefit of section
54EC of the Act in view of the amendment thereto with effect from AY 2007-08.
The Tribunal held that reopening notice was bad in law.

The Hon. High Court held
that once the assessee has offered the capital gains to tax on the basis of the
Agreement for Sale dated 25^th October, 2005 read with the letter
dated 17^thOctober, 2005 and the receipt of consideration for sale
of his interest in said property and accepted on due examination u/s. 143(3) of
the Act, the AO could not have had any reason to believe that income chargeable
to tax has escaped assessment. In fact, this is a case of change of opinion,
inasmuch as for the A.Y. 2006-07, the AO in scrutiny proceedings accepted that
the transaction qua the respondent is taxable in A.Y. 2006-07 and now
seeks to tax it in A.Y. 2007-08.

The report received from
the DDIT (Inv), Surat essentially seeks to deny the exemption u/s. 54EC of the
Act in view of the amendment thereto. When the capital gains has been offered
to tax in earlier assessment year and accepted by the Revenue in scrutiny
proceedings, then a mere change in law in the subject assessment year with
regard to extent of exemption will not give any reason to believe that income
chargeable to tax in the subject assessment year had escaped assessment.
Therefore, the appeal was dismissed.

shailesh.kwebmaker

13. Rectification – Retrospective Amendment u/s. 115JB – Rectification made by the A.O on the issue in the order passed u/s. 143(3) r.w.s. 254 of the Act- Such mistake, if any, was in the order originally passed by the A.O. u/s. 143(3) of the Act – Not permissible: u/s. 154 of the Act

CIT vs. Weizmann Ltd. [
Income tax Appeal no 1020 of 2014 dt : 09/12/2016 (Bombay High Court)].

[M/s Weizmann Ltd.,vs.
ACIT. [ITA No. 768 /MUM/2012; Bench : G ; date:31/10/2013 ; A Y: 2001- 2002.
(MUM) ITAT ]

On 27^thFebruary,
2004, the assessment order was passed u/s. 143(3) for the subject assessment
year. The assessing officer accepted the assessee’s claim of book profits u/s.
115JB. The book profits as claimed was after allowing of amounts set aside as
provisions for diminution in the value of assets. The assessee being aggrieved
by the assessment order on certain other issues had preferred an appeal to the
appellate authority and carried its grievance up to the Tribunal. On 29^thAugust,
2007, the Tribunal restored some of the issues by which the assessee was
aggrieved to the Assessing Officer. It is relevant to note that the issue of
allowing of amounts set aside as provision for diminution of the value of
assets was not an issue which was restored to the Assessing Officer for
readjudication.

Consequent to the above,
the Assessing Officer passed an order dated 30^th December, 2008 u/s.
143(3) r.w.s 254 of the Act giving effect to the order dated 29^th
August, 2007 of the Tribunal.

The Finance (No.2) Act of
2009 amended section 115JB of the Act with retrospective effect from 1^stApril,
2001. The amendment inter alia added to Explanation I to section 115JB
of the Act, clause (i) providing that for purposes of computing that the book
profits thereunder, the profit shown in the profit and loss account is to be
increased by the amounts set aside as provision for diminution in the value of
assets.

In view of the above amendment the A.O. by
order dated 19^th August, 2010 u/s. 154 rectified its order dated 30^thDecember, 2008 and made addition of Rs. 1,28,60,000/- to the book profit
of the assessee on account of provision for diminution in the value of
investment relying on the amendment made in the provisions of section 115JB
that with retrospective effect on 1-4-2001.

The assessee challenged
the order passed by the A.O. u/s. 154 of the Act by preferring an appeal before
the CIT(A) disputing the addition of Rs. 1,28,60,000/- made by the A.O. to the
book profit on account of provision for diminution in the value of investment.
The ld. CIT(A) did not find merit in the said appeal of the assessee and
dismissed the same.

The assessee preferred an
appeal before the Tribunal. The assessee submitted that the order u/s. 143(3)
r.w.s. 254 of the Act, was passed by the A.O. as per the specific directions
given by the Tribunal while restoring only the limited issues to the file of
the A.O. He submitted that the issue relating to the allowability of provision
for diminution in the value of investment was not before the Tribunal and since
the same was not restored by the Tribunal to the file of the A.O., the
consideration of the same was beyond the scope of order passed by the A.O. u/s
143(3) r.w.s. 254 of the Act. He relied on the decision of Hon’ble Bombay
High Court in the case of CIT vs. Sakseria Cotton Mills Ltd. (1980) 124 ITR 570.

The Tribunal held that it
cannot be said that there was any mistake in the order of the A.O. passed u/s
143(3) r.w.s. 254 of the Act on 30-12-2008 in allowing the deduction on account
of provision for diminution in the value of investment calling for any
rectification u/s. 154 of the Act. Such mistake, if any, was in the order originally
passed by the A.O. u/s. 143(3) of the Act on 27-2-2004 and not in the order
passed on 30-12-2008. The rectification made by the A.O. on this issue to the
order passed u/s. 143(3) r.w.s. 254 of the Act by an order dated 19-8-2010
passed u/s. 154 of the Act thus was not permissible. The Tribunal, therefore,
directed the A.O. to delete the addition made by way of rectification order
u/s. 154 of the Act.

The Revenue preferred an
appeal before the High Court. The High Court held that the issue stands concluded
by the decision of this Court in Sakseria Cotton Mills Ltd. (supra) in
favour of the assessee. The distinction sought to be made by the Revenue on the
basis of the amendment to section 115JB of the Act in 2009 with retrospective
effect from 2001 does not address the fundamental issue of non merger of the
order dated 27^th February, 2004 with the order dated 30^thDecember,
2008. Therefore, any rectification of the order dated 27^thFebruary,
2004 is required to be done within 4 years from 27^th February, 2004
as provided u/s. 154 of the Act. It is not disputed before us that issue of the
provisions made for diminution in value of assets which is sought to be
rectified is an issue which was never the subject matter of consideration in
the order dated 30^th December, 2008 passed u/s. 143(3) r/w section
254 of the Act. Therefore, in these circumstances, it could not be rectified
u/s. 154 of the Act. In the above view, the revenue appeal was dismissed.

shailesh.kwebmaker

45. Speculative transaction – Business loss – A. Y. 2009-10 – Hedging transactions entered into to cover variation in foreign exchange rate – Impact on business of import and export of diamond – Transactions entered only in regular course of business activity – Not speculative transactions

CIT vs. D. Chetan and Co.; 390 ITR 36 (Bom):

The Assessee was engaged in the business of import and export
of diamonds. For the A. Y. 2009-10, the assessee explained that the amount of
Rs. 78.10 lakhs claimed as loss was on account of hedging transactions entered
into to safeguard variation in exchange rates affecting its transact5ions of
import and export. The Assessing Officer disallowed the claim on the ground
that it was a notional loss of a contingent liability debited to the profit and
loss account. The Commissioner (Appeals) and the Tribunal 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 concluded that the transaction
entered into by the assessee was not in the nature of speculative activities.
Further, the hedging transactions were entered into so as to cover variation in
foreign exchange rate which would impact its business of import and export of
diamonds. These concurrent findings of fact were not shown to be perverse in
any manner.

ii) The Assessing Officer in the assessment order
did not find that the transaction entered into by the assessee was speculative
in nature. At no point of time did the department challenge the assertion of
the assessee that the activity of entering into forward contract was in the
regular course of its business only to safeguard against the loss on account of
foreign exchange variation. The Department never contended that the transaction
was speculative but only disallowed on the ground that it was notional.

iii) Thus, it was to be concluded that the
transactions entered were only in regular course of business and not speculative.
Therefore, no substantial question of law arose.”

shailesh.kwebmaker

44. Salary – Perquisite – Fringe Benefit Tax – Sections 17 and 115WA of the Act – Once the employer is taxed on the fringe benefits same cannot be taxed as perquisite in hands of employee

Kamlesh K. Singhal vs. CIT; 389 ITR 247 (Guj):

The assessee was employed in ONGC. For the A. Y. 2007-08, the
Assessing Officer issued notice u/s. 148 of the Act, on the ground that his
employer had reimbursed the conveyance maintenance and repair expenditure and
uniform allowance to the assessee but the employer had neither reflected it in
the salary certificate issued nor had deducted the tax at source on those
amounts. Pursuant to the notice, he passed an order u/s. 143(3) r.w.s. 147
levying 20% and 100% tax respectively, on the fringe benefits and made
additions to the assessee’s income accordingly. The assessee filed a revision
petition contending that it would amount to double taxation as his employer had
paid fringe benefits tax u/s. 115WA. The Commissioner rejected the petition.

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

“i) Once a certain benefit was held to be a
fringe benefit and the employer was taxed accordingly under Chapter XII-H of
the Act, the same benefit could not be included in the income of the
assessee-employee treating it as a perquisite.

ii) The disallowance of 20% of the reimbursed
conveyance and repair expenses and 100% of the uniform allowance made by the
assessing Officer was reversed. The Assessing Officer was to pass a
consequential order accordingly. The order passed by the Commissioner was
unsustainable.”

shailesh.kwebmaker

43. Income – Accrual – A. Ys. 2005-06 to 2007-08 – Assessee obtaining contract – Work shared by assessee with another person – Amount received for work shared proportionate to work – Amount received by assessee and such other person shown separately – No evidence of sub-contract – Amount received by other person cannot be added to assessee’s income

CIT vs. G. Balraj; 390 ITR 50 (Karn):

The assessee was a PWD contractor and according to the
assessee, he had entered into an agreement with B Construction, whereby a
particular percentage of the income of the contract was to be shared in a
particular proportion. The assessee had shown his income to the extent of the
amount received by it. However, in the assessment proceedings, the Assessing
Officer finding that as tax was deducted at source from the total amount of the
contract(received by the assessee as well as by B Construction), brought the
entire amount under the contract to tax in the assessee’s hands. 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) There was enough material to show that the
amount received from the contract was directly shared by the assessee and B
Construction in accordance with their proportionate share and that it was not a
case where the money/the amount realised from the contract was apportioned as
the income of the assessee and thereafter, a portion of it or a major portion
was paid by the assessee to B Construction. When after receipt of the contract
amount, the shares were identified and taken by both the parties of the joint
venture, it could not be treated as sub-contract.

ii) There
was no material brought by the Revenue to show that there was any contract
entered into by the assessee to assign the work to B Construction as
sub-contractor. Further, when the respective share was received by the
assessee, it had been shown as the income by the assessee in the return of
income. Similarly, for the respective share of B Construction it had shown its
income of the amount received by it. Under these circumstances, the findings of
the Tribunal that it was a joint venture between the assessee and B
Construction was not contrary to the material or based on conjectures or
surmises.”

shailesh.kwebmaker

42. Educational institution – Exemption u/s. 10(23C)(vi) of the Act – A. Y. 2014-15 – Application for approval can be filed before end of financial year and further information if needed can be sought from assessee – Application filed in the financial year rejected on the ground that it was filed prematurely – Not justified

Shri Guru Ram Dass Ji Education Trust vs. CCIT; 389 ITR
423 (P&H):

The assessee-trust was running educational institutions.
Since its receipts exceeded Rs. 1 crore in the F. Y. 2013-14, it made an
application for approval u/s. 10(23C)(vi) of the Act for the A. Y. 2014-15 onwards. The application was rejected on the
ground that the assessee had prematurely filed the application and that it
could only have been filed after the expiry of the F. Y. 2013-14 and before
September 30, 2014.

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

“i) The fourteenth proviso to section
10(23C) of the Income-tax Act, 1961 states that an application under the
section can be filed on or before 30th September of the relevant assessment
year, from which the exemption is sought. The proviso simply gives an outer
date for making an application and does not say that the application is to be
made between 1^stApril and 30^th September of the
assessment year. If an application is filed prior to 1^st April of
the relevant assessment year and after filing thereof, any further information
is still needed by the Department, before taking a final decision thereon, that
information can be sought from the applicant.

ii) A trust might know or have reason to believe
prior to 1^st April that its receipts were likely to exceed Rs. 1
crore. There was no reason why such an institution ought not to be permitted to
make the application even before the 1^stday April of the relevant
year.

iii) All the accounts for the year ending March
31, 2014, when asked for, were duly provided by the assessee much before the
passing of the order. Further, note 1(a) and note 3 to Form 56D clearly
indicated that the application could be filed even prior to 1^st
April of the relevant assessment year, from which the exemption was sought.

iv) The
Chief Commissioner was directed to consider the application filed by the
assessee for the grant of exemption u/s. 10(23C) of the Act, on the merits.”

shailesh.kwebmaker

41. Charitable purpose – Charitable trust – Exemption u/s. 11 of the Act – A. Y. 2008-09 – Expenditure incurred in excess of income from accumulated funds – Trust entitled to exemption

CIT vs. Krishi Upaj Mandi Samiti; 390 ITR 59 (Raj):

The assessee, a charitable trust, incurred expenditure for
charitable purposes during the previous year relevant to the A. Y. 2008-09 in
excess of the income derived during the relevant period. The excess expenditure
was incurred by transferring the fund from interest bearing public deposit
account to non-interest bearing public deposit account. The Assessing Officer
held that the excess expenditure having been incurred from charity
fund/accumulated fund of earlier years, the assessee was nor entitled to
exemption u/s. 11(1)(a) of the Act – and accordingly, assessed the income as
the taxable income. The Tribunal held that the assessee was entitled to
exemption u/s. 11 of the Act.

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

“i) When the income of a trust is used or put to
use to meet the expenses incurred for religious or charitable purposes, it is
applied for charitable or religious purposes. The application of the income for
charitable or religious purposes takes place in the year in which the income is
adjusted to meet the expense incurred for charitable or religious purposes.

ii) In other words, even if the expenses for
charitable or religious purposes have been incurred in an earlier year and the
expenses are adjusted against the income of a subsequent year, the income of
that year can be said to have been applied for charitable or religious purposes
in the year in which the expenses were incurred for charitable and religious
purposes had been adjusted.

iii) The Tribunal holding the assessee entitled to
claim exemption u/s. 11(1)(a) of the Act during the relevant assessment year
was justified.”

shailesh.kwebmaker

40. Capital gain – Exemption u/s. 54EC of the Act – A. Y. 2008 -09 – Investment in specified bonds from the amounts received as an advance is eligible for section 54EC deduction – The fact that the investment is made prior to the transfer of the asset is irrelevant

CIT vs. Subhash Vinayak Supnekar (Bom); ITA No. 1009 of
2014 dated 14/12/2016; (www.itatonline.org)

An Agreement to Sale for the subject property was entered
into on 21^st February, 2006. The final sale took place under a Sale
Deed dated 5^th April, 2007. The assessee invested an amount of Rs.50
lakh from the advance received under the Agreement to Sale in the Rural Electrification
Corporation Ltd. bonds on 2^nd February, 2007. The Assessing Officer
as well as the Commissioner of Income Tax (Appeals) held that the assessee is
not entitled to the benefit of section 54EC of the Act, as the amounts were
invested in the bonds prior to the sale of the subject property on 5^th
April, 2007. The Tribunal allowed the claim of the assessee by following the
decision of its coordinate bench in Bhikulal Chandak HUF vs. Income Tax
Officer 126 TTJ 545 wherein it has been held that where an assessee makes
investment in bonds as required u/s. 54EC of the Act on receipt of advance as
per the Agreement to Sale, then the assessee is entitled to claim the benefit
of Section 54EC of the Act.

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

“i) The short question is whether an amount
received on sale of a capital asset as an advance on the basis of Agreement to
Sale and the same being invested in specified bonds before the final sale,
would entitle the assessee to the benefit of Section 54EC of the Act.

ii) The Sale Deed dated 5^th April, 2007
records in clause (d) thereof the fact that the Agreement to Sale had been
entered into on 21^st February, 2006 in respect of the subject
property and the amounts being received by the vendor (respondent assessee)
under that Agreement to Sale. Thus, these amounts when received as advance
under an Agreement to Sale of a capital asset are invested in specified bonds
the benefit of Section 54EC of the Act is available. In the above view, the
Tribunal holds that the facts of the present case are similar to the facts
before the Tribunal in Bhikulal Chandak HUF (supra). The Revenue does
not dispute the same before us. Moreover, on almost identical facts, this Court
in Parveen P. Bharucha vs. DCIT, 348 ITR 325, held that the earnest
money received on sale of asset, when invested in specified bonds u/s. 54EC, is
entitled to the benefit of section 54EC. This was in the context of reopening
of an assessment and reliance was placed upon CBDT Circular No. 359 dated 10^thMay, 1983 in the context of section 54E.

iii) The Revenue had preferred an appeal against
the order of the Tribunal in Bhikulal Chandak HUF (supra) to this Court
(Nagpur Bench) being Income Tax Appeal No.68 of 2009. This Court by an order
dated 22^nd August, 2010 refused to entertain the Revenue’s above
appeal from the decision of the Tribunal in Bhikulal Chandak HUF (supra).
In the above view, the question as proposed for our consideration in the
present facts does not give rise to any substantial question of law.”

shailesh.kwebmaker

39. Capital gain – Exemption u/s. 54 of the Act – A.Y. 2003-04 – Sale of residential property on 04/02/2003 – Agreement to purchase another residential property on 08/09/2003 and invested the capital gain within specified time – Assessee entitled to exemption u/s. 54 even if there is delay in completing the transaction

CIT vs. Mrs. Shakuntala Devi; 389 ITR 366 (Karn):

The assessee sold a flat
in Mumbai for a total consideration of Rs. 1,71,00,000/- on 04/02/2003 and the
consequent capital gain was Rs. 1,44,68,032/-. The assessee entered into an
agreement for purchase of the another residential property on 08/09/2003 for a
consideration of Rs. 3,25,00,000/- and invested the capital gain for the same.
The assessee’s claim for exemption u/s. 54 for the A. Y. 2003-04 was rejected
by the Assessing Officer on the ground that the transaction has not been
concluded, no registration of the sale deed has taken place and the balance
consideration was yet to be paid. The Tribunal held that the assessee is
entitled to exemption u/s. 54 of the Act.

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

“i) The Tribunal had rightly held that the date
of purchase was to be taken as the basis for reconing the period of two years
prescribed u/s. 54 of the Act extending the benefit following therefrom.

ii) In the instant case the consideration paid by
the assessee under the memorandum of understanding dated 08/09/2003 would fully
cover the consideration of capital gains portion for being eligible to claim
exemption u/s. 54 of the Act.”

shailesh.kwebmaker

38. Business expenditure – Interest on borrowed capital – Section 36(1)(iii) of the Act – A. Y. 1989-90 – Advance of loans at lower rate of interest to subsidiary concerns in financial difficulty for business purposes – Commercial expediency- Assessee entitled to deduction

Hindalco Co. vs. CIT; 389 ITR 430 (All):

The assessee paid interest at the rate of 16% on its
borrowings from the bank. The Assessing Officer found that the assessee had
advanced loans to its subsidiary companies at a lower rate of interest, 6% or
12%. He determined the rate of interest at 12%, as the rate at which loans were
advanced to the sister concerns and disallowed the difference between the
interest at market rate and the rate at which loans were advanced to sister
companies u/s. 36(1)(iii) of the Act. The Tribunal upheld the disallowance.

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

“i) The financial condition of the assessee’s
sister concerns was not good and to help them run smoothly, the assessee
advanced them loans at a lower rate of interest. Both sister concerns were
subsidiaries of the assessee and there was nothing per se adverse.

ii) For the welfare and proper functioning of the
sister concerns, the assessee had decided to advance loans so that ultimately
they could function properly, and the assessee being the holding company would
also benefit. Therefore, the loans advanced to its sister concerns were for
commercial expediency and the assessee was entitled to the deduction of
interest u/s. 36(1)(iii) of the Act.”

shailesh.kwebmaker

Allowability of Expenditure towards Corporate Social Responsibility

Issue for Consideration

Explanation 2 to Section
37(1) declares that, for the removal of doubts, any expenditure incurred by an
assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 shall not be deemed to be an
expenditure incurred by the assessee for the purposes of business or
profession.

Companies Act, 2013 has made it mandatory for certain
companies to spend at least 2% of the average net profits towards Corporate
Social Responsibility (‘CSR’) as per the policy formulated by the CSR committee
of the company in this regard. While this is the first time a statutory
obligation has been cast upon companies to incur expenditure in the social or
charitable sphere, it is not uncommon for corporate as well as non-corporate
assessees to voluntarily incur charitable expenditure, which may or may not
have a direct nexus to their business operations.

Where such expenditure is expected to benefit the business in
some manner, either by benefitting its employees or by creating goodwill within
the community at large, it is usually claimed as business expenditure under
section 37(1). The issue has arisen on the allowability of such expenditure, on
account of conflicting decisions of the Tribunal. While the Raipur Tribunal has
upheld the claim in the specific facts of the case, the Bengaluru Tribunal has
taken a contrary view, disallowing the claim in respect of charitable expenses.

Jindal Power Limited’s case

The issue came up before
the Raipur Tribunal in the case of ACIT vs. Jindal Power Ltd. 179 TTJ 736.

In the said case, during
assessment year 2008-09, the company had claimed deduction in respect of
expenditure incurred on construction of school building, devasthan/temple,
drainage, barbed wire fencing, educational schemes and distributions of clothes
etc. voluntarily. Without much of a discussion on the factual aspects, the AO
observed that no material had been placed to substantiate the claim or in
support of existence of the facts of development activities. The AO also placed
reliance on the decision of the Patna Tribunal in the case of Central
Coalfields Ltd. for assessment years 1983-84 to 1986-87, wherein it was held
that the expenses were in the nature of charity and though laudable, they could
not be said to have been incurred for the purpose of business.

The CIT(A) made detailed observations on CSR stating that
“CSR policy functions as a built-in, self-regulating mechanism whereby a
business monitors and ensures its active compliance with the spirit of the law,
ethical standards, and international norms. The goal of CSR is to embrace
responsibility for the company’s actions and encourage a positive impact
through its activities on the environment, consumers, employees, communities,
stakeholders and all other members of the public sphere who may also be
considered as stakeholders. CSR is titled to aid an organization’s mission as
well as a guide to what the company stands for and will uphold to its
consumers.” Further, the CIT(A) noted the CSR policy of the assessee company
and that the expenses incurred on water supply for perennial availability of
portable water, roads and culverts, toilets and others, water tanks, other
community works, temple renovation, school building renovation etc. in the
villages for up-gradation as well as expenses for the welfare of the employees
were a part of implementation of CSR policies of the company. The assessee
relied upon various decisions including the decisions in the case of SECL 85
ITD 608 (Nag.) and Madras Refineries Ltd. 266 ITR 170 (Mad.).
Applying the ratio of the said decisions, the CIT(A) held that the expenditure
under the above heads incurred by the appellant company as a good corporate
citizen and as measure of gaining goodwill of the people living in and around
its industries through the aforesaid activities were admissible expenditures.
Only those expenses, which were neither substantiated with proper evidences nor
had any nexus with the CSR policies of the appellant company, were disallowed.

In the appeal before the Tribunal, the fundamental objection
of the AO was that the expenses were voluntary, not mandatory and not for
business purposes. In respect of the contention that expenses, which were
voluntary in nature and not mandatory, were not admissible as deduction, the
Tribunal referred to the judgment of House of Lords in the case of Atherton
v. British Insulated & Helsbey Cables Ltd. 10 Tax Cases 155 (HL), which
has been approved by the Supreme Court in the case of Chandulal Keshavlal &
Co. 38 ITR 601, wherein it was held that a sum of money expended not with a
necessity and with a view to direct immediate benefit to the trade, but
voluntarily and on the grounds of commercial expediency and in order to
indirectly facilitate carrying on of business, may yet be expended wholly and
exclusively for the purpose of the trade and hence be admissible. The Tribunal
also considered the decision of the Supreme Court in the case of Sassoon J
David & Co. (P) Ltd. 118 ITR 261, which laid down the principle that
the fact that somebody other than the assessee also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction if it otherwise satisfied the tests laid down by law.

Further, on the contention of whether such expenses were for
the purpose of business or not, the Tribunal referred to the decision in the
case of Hindustan Petroleum Corporation Ltd 96 ITD 186 (Mum.) which held
that there could be certain amounts, though in the nature of donations, which may
be deductible under section 37(1) as well and merely because an expenditure was
in the nature of donation, or ‘promoted by altruistic motives’, it did not
cease to be an expenditure deductible under section 37(1). It also took into
consideration the decision in the case of Madras Refineries Ltd. (supra),
wherein it was observed that monies spent by the assessee as a good corporate
citizen and to earn the goodwill of the society help creating an atmosphere in
which the business can succeed in a greater measure with the help of such
goodwill, and therefore, were required to be treated as business expenditure
eligible for deduction under section 37(1) of the Act.

The Tribunal noted that Explanation 2 to Section 37(1) was
introduced with effect from 1^st April 2015 and observed that it
could not be construed to the disadvantage of the assessee in the period prior
to this amendment. It further noted that this disabling provision referred only
to such CSR expenses incurred under Section 135 of the Companies Act, 2013,
and, as such, it could not have any application for the period not covered by
this statutory provision, which itself came into existence in 2013. It also
placed reliance on the principle of lex prospicit non respicit (law looks
forward not backward) laid down in the Supreme Court’s five judge
constitutional bench’s landmark judgment, in the case of Vatika Townships
Pvt Ltd 367 ITR 466 (SC), that unless a contrary intention appeared,
legislation was presumed not to be intended to have a retrospective operation
and that law passed today could not apply to the events of the past. The
Tribunal also reiterated the well settled legal position that when a
legislation conferred a benefit on the taxpayer by relaxing the rigour of
pre-amendment law, and when such a benefit appeared to have been the objective
pursued by the legislature, it would be a purposive interpretation giving it a
retrospective effect, but when a tax legislation imposed a liability or a
burden, the effect of such a legislative provision could only be prospective.

Interestingly, the
Tribunal observed that the disallowance was restricted to the expenses incurred
by the assessee under a statutory obligation under section 135 of Companies Act
2013, and thus, there was now a line of demarcation between the expenses
incurred by the assessee on discharging CSR under such a statutory obligation
and under a voluntary assumption of responsibility. The Tribunal further held
that for the former, the disallowance under Explanation 2 to Section 37(1) came
into play, but, as for the latter, there was no such disabling provision as
long as the expenses, even in discharge of corporate social responsibility on
voluntary basis, could be said to be “wholly and exclusively for the
purposes of business”.

Thus, based on all the
aforesaid arguments, since the expenses in question were not incurred under the
statutory obligation, as also for the basic reason that Explanation 2 to
Section 37(1) came into play with effect from 1st April 2015, the Tribunal
concluded that the disabling provision of the said Explanation did not apply to
the facts of this case.

Kanhaiyalal Dudheria’s case

The issue once again came
up for consideration before the Bengaluru Tribunal in the case of Kanhaiyalal
Dudheria v. JCIT 165 ITD 14

In this case, during assessment year 2011-12, the assessee
firm claimed deduction in respect of expenditure incurred on construction of
houses under an MOU with the Government of Karnataka, that were later handed
over to the Government for helping the people affected by floods. The assessee
claimed that the said expenditure was incurred to yield benefit in the form of
goodwill and therefore, the same was allowable as business expenditure. The AO,
after referring to the MOU, came to the conclusion that the said expenditure
was not incurred wholly and exclusively for the purpose of business and
therefore held that the same was not allowable as deduction u/s 37(1) of the
Act. The CIT(A) upheld the order of the AO.

In the appeal before the Tribunal, the assessee firm relied
on the decisions in the case of Jindal Power Ltd. (supra) and Infosys
Technologies Ltd. 360 ITR 714 (Kar.) stating that on account of incurrence
of expenditure, goodwill was created in the people in the surrounding villages,
which would help in carrying out business and thus,
the expenditure should be allowed as a deduction. On behalf of the revenue, it
was argued that the said expenditure was towards charity and it was nothing but
application of income. The revenue drew support from the decision in the case
of Badrinarayan Shrinarayan Akodiya 101 ITR 817 (MP).

The Tribunal, relying on the decision in the case of Sassoon
J. David & Co. (P.) Ltd. (supra), emphasized that although for claiming
deduction u/s 37(1), it was not required to establish the necessity of
incurring of such expenditure, the onus lay on the assessee to prove that the
expenditure was incurred for the purpose of business. Since in the facts of the
case, the assessee did not establish that the expenditure was incurred for business
purpose, the Tribunal held that the expenditure amounted to application of
income voluntarily towards charity which could not be allowed as a deduction.

The Tribunal also noted that it cannot be said that the
appellant had incurred this expenditure wholly and exclusively for the purpose
of business since there was no nexus between the expenditure incurred and the
benefit derived by the business of the assessee.

Observations

Prior to insertion of
Explanation 2, section 37(1) along with Explanation 1 laid down a four-fold
test for any expenditure to be allowable in computing the income under the head
“Profits and gains of business or profession” –

– it must
not be of the nature described in sections 30 to 36;

– it must
not be capital or personal in nature;

– it must
be laid out or expended wholly and exclusively for the purposes of business or
profession; and

– it must
not be incurred for a purpose which is an offence or which is prohibited by
law.

There was no requirement,
however, to prove the necessity of incurring such expenditure. In other words,
whether the expenditure was incurred on account of a statutory obligation or
otherwise, did not have a bearing on the allowability of the expenditure.
Expenses in the nature of CSR were considered to be allowable or not allowable
as a deduction in light of the above tests.

It is common for many
taxpayers to contribute to the betterment of their employees and their
families, or the community or society, or the locality where their business
operations are based, etc. in a variety of ways. In most of the cases, there is
some perceived benefit to the business operations, either in the form of better
morale and productivity of employees or through generation of goodwill and
reputation for the business. As a result, in all such cases, the expenditure is
considered to have been spent for the purposes of the business and claimed as
deduction against the business profits. However, in cases where the spending is
not connected with the business of the assessee in any manner whatsoever, it
partakes the character of donation or charity and is not an allowable
expenditure under section 37(1).

At the same time, the mere
fact that a particular expenditure is in the form of donation, more
particularly eligible for deduction under section 80G, would not by itself
imply that it is not deductible under section 37(1). In the case of Mysore
Kirloskar Ltd. v. CIT 166 ITR 836 (Kar.), which was referred to in the case
of Infosys Technologies Ltd. (supra), it was held that if the contribution
by an assessee was in the form of donations of the category specified under
section 80G, but if it could also be termed as an expenditure of the category
falling under section 37(1), then the right of the assessee to claim the whole
of it as allowance under section 37(1) could not be denied if it was “laid
out or expended wholly and exclusively for the purpose of business”.

The debate on the
voluntary nature of the expenses and the necessity of incurring such
expenditure has been definitively settled in the case of Sassoon J. David
and Co. (P.) Ltd. (supra), where the issue arose on deductibility
under section 10(2)(xv) of the Income-tax Act, 1922 (corresponding to section
37(1) of the Income-tax Act, 1961) of expenditure on retrenchment compensation
incurred voluntarily. The Apex Court in the said case has observed as under –

“It has to be observed here that the expression “wholly and
exclusively” used in section 10(2)(xv) of the Act does not mean
“necessarily”. Ordinarily it is for the assessee to decide whether
any expenditure should be incurred in the course of his or its business. Such
expenditure may be incurred voluntarily and without any necessity and if it is
incurred for promoting the business and to earn profits, the assessee can claim
deduction under section 10(2)(xv) of the Act even though there was no
compelling necessity to incur such expenditure. It is relevant to refer at this
stage to the legislative history of section 37 of the Income-tax Act, 1961
which corresponds to section 10(2)(xv) of the Act. An attempt was made in the
Income-tax Bill of 1961 to lay down the “necessity” of the
expenditure as a condition for claiming deduction under section 37. Section
37(1) in the Bill read “any expenditure. . . . laid out or expended wholly,
necessarily and exclusively for the purposes of the business or profession
shall be allowed” The introduction of the word “necessarily” in
the above section resulted in public protest. Consequently when section 37 was
finally enacted into law, the word “necessarily” came to be dropped.
The fact that somebody other than the assessee is also benefited by the
expenditure should not come in the way of an expenditure being allowed by way
of deduction under section 10(2)(xv) of the Act if it satisfies otherwise the
tests laid down by law.”

Although the facts in the
above case were different and the issue under examination was in respect of
retrenchment compensation, the ratio laid down by the Supreme Court in respect
of allowability of voluntary expenditure under section 10(2)(xv) of the 1922
Act and section 37(1) of the 1961 Act would be applicable even in case of CSR
expenditure incurred by taxpayers without any statutory requirement or any
other compulsion.

The issue that remains
disputed then is, in which cases or under what circumstances, will the
expenditure be considered to be “wholly and exclusively for the purposes of the
business or profession”? Here again, the courts have agreed that the words
“for the purpose of business” used in section 37(1) should not be
limited to the meaning of “earning profit alone” and that business
expediency or commercial expediency may require providing facilities like
school, hospital, etc., for the employees or their families. It has also been
held that any expenditure laid out or expended for their benefit, if it
satisfied the other requirements, must be allowed as deduction under section
37(1) of the Act. However, the onus of establishing the nexus between the
expenditure incurred and the business and proving that the expenditure
“satisfies the other requirements” must be discharged by the assessee. The
Supreme Court in the case of Chandulal Keshavlal & Co. (supra) has laid
down certain tests in this regard as under –

“Another fact that
emerges from these cases is that if the expense is incurred for fostering the
business of another only or was made by way of distribution of profits or was
wholly gratuitous or for some improper or oblique purpose outside the course of
business then the expense is not deductible. In deciding whether a payment of
money is a deductible expenditure one has to take into consideration questions
of commercial expediency and the principles of ordinary commercial trading. If
the payment or expenditure is incurred for the purpose of the trade of the
assessee it does not matter that the payment may inure to the benefit of a
third party—Usher’s Wiltshire Brewery v. Bruce 6 TC 399 (HL). Another test is
whether the transaction is properly entered into as a part of the assessee’s
legitimate commercial undertaking in order to facilitate the carrying on of its
business ; and it is immaterial that a third party also benefits thereby —
[Eastern Investments Ltd. v. CIT [1951] 20 ITR 1 (SC)]. But in every case it is
a question of fact whether the expenditure was expended wholly and exclusively
for the purpose of trade or business of the assessee.”

[Emphasis supplied]

The above principle
emerges in both the cases discussed in this article. In the case of Jindal
Power Limited (supra), even though CSR expenses were allowed based on an
understanding of the need for CSR by businesses and that these expenses were a
part of the implementation of the CSR policy of the company, the Tribunal
disallowed those expenses which were not substantiated with evidence and were not
in line with the company’s CSR policy. Similarly, in the case of Kanhaiyalal
Dudheria (supra), deduction of expenses was not allowed on account of failure
on part of the assessee to establish that the expenditure was incurred for
business purpose.

The introduction of
statutory provisions for CSR in Companies Act, 2013 and a corresponding
amendment in the Income-tax Act, 1961 has added another dimension to the
existing controversy.

Section 135 of the
Companies Act, 2013 mandates that every company having –

– net
worth of Rs. 500 crores or more, or

– turnover
of Rs. 1,000 crores or more, or

– net
profit of Rs. 5 crores or more

during any financial year,
shall spend, in every financial year, at least 2% of its average net profits
towards CSR activities as per the CSR policy of the company. It further states
that the company shall give preference to the local area and areas around where
it operates for the CSR spending.

On the one hand, the above
provisions make it mandatory for certain Companies to undertake charitable
spending, while, on the other hand, Finance (No. 2) Act, 2014 introduced
Explanation 2 to section 37(1) with effect from 1st April 2015, to read as
under –

“For the removal of doubts, it is hereby declared that for the purposes
of sub-section (1), any expenditure incurred by an assessee on the activities
relating to corporate social responsibility referred to in section 135 of the
Companies Act, 2013 (18 of 2013) shall not be deemed to be an expenditure
incurred by the assessee for the purposes of the business or profession.”

The above explanation
states that CSR expenditure shall not be deemed to have been incurred for the
purposes of business. Consequently, such expenditure is not allowable as a
deduction. The Explanatory Memorandum to the Finance Bill states that the
objective of CSR is to share the burden of the Government in providing social
services by companies having net worth/turnover/profit above a threshold and if
such expenses are allowed as tax deduction, this would result in subsidising of
around one-third of such expenses by the Government by way of tax expenditure.
However, it also states that the CSR expenditure which is of the nature
described in section 30 to section 36 of the Act shall be allowed as a
deduction under those sections subject to fulfillment of conditions, if any,
specified therein.

By declaring that
statutory CSR expenditure is not deemed to have been incurred for the purpose
of business, rather than clarifying that such expenditure is not an allowable
expense, Explanation 2 to section 37(1) may end up adding another angle to the
issue. It may be possible to take a view that Explanation 2 to section 37(1)
merely clarifies that the statutory CSR expenditure is not automatically deemed
to have been incurred for the purpose of business on account of the legislative
obligation (as was the presupposition in the arguments against allowability of
voluntary CSR expenses). In other words, statutory CSR expenditure would also
be considered to be incurred for the purposes of business and therefore be
deductible, so long as it satisfies the other tests and requirements discussed
earlier. The fact that the legislature intends to allow CSR expenditure of the
nature described in sections 30 to 36 would imply that the expenditure ought to
be allowed as a deduction if it is otherwise deductible.

Nevertheless, it is
pertinent to note that the explanation only makes a reference to the
expenditure incurred on CSR activities referred to in section 135 of the
Companies Act, 2013 and not to all expenditure in the nature of CSR. Further,
the explanation has been prospectively inserted with effect from 1^stApril
2015. Interestingly, the case of Jindal Power Limited (supra) pertains
to the period prior to the amendment. The Raipur Tribunal had rightly held that
since Explanation 2 was inserted prospectively and as it was a disabling
provision, it did not apply in that case to the expenditure incurred prior to
the amendment. This clearly implies that CSR expenditure, whether statutory or
voluntary, incurred prior to assessment year 2015-16 would be allowable,
provided it meets the other requirements of section 37(1). Additionally, the
Tribunal observed that there was now a clear distinction between statutory and
voluntary CSR expenditure and that the restriction placed in Explanation 2 to
section 37(1) would at best apply to the CSR expenditure incurred under the
statutory requirements. In other words, if any assessee – company or other than
company – voluntarily spends on CSR activities, whether prior to or after the
Companies Act, 2013 became applicable, the said expenditure would be allowable,
as long as it can be demonstrated to be incurred “wholly and exclusively for
the purposes of business or profession”.

Also noteworthy is the
fact that the CSR expenditure is mandated in the Companies Act, 2013 only for
companies and any expenditure of similar nature by non-corporates will always
be of a voluntary character, as in the case of Kanhaiyalal Dudheria (supra). As
the explanation makes a specific reference to section 135 of the Companies Act,
2013, the question of invoking the same for CSR expenditure incurred by
non-corporate entities does not arise. Quite aptly, therefore, Explanation 2
has not been considered in Kanhaiyalal Dudheria’s case and the allowability of
the CSR expenditure has been decided on the basis of settled principles in
respect of section 37(1) prior to the amendment.

Last but not the least, a
question may arise regarding the validity of the restriction imposed by
Explanation 2 to section 37(1). Where an expenditure is required to be
statutorily incurred and failure to comply with such statutory requirements
could attract penalties, it has a direct nexus to the business of the taxpayer.
In our view, deeming such an expenditure to not be for the purpose of business
or profession is inappropriate. In fact, if similar expenses incurred before
the imposition of the statutory obligation have been held to be deductible, the
deeming fiction was not desired in view of the existing safeguards in place in
section 37(1). Ironically, even after the amendment, the following category of
expenditures will still be allowable as a deduction –

– CSR
expenses incurred by non-corporate entities, which are demonstrated to be laid
out for the purposes of business or profession;

– CSR
expenses incurred voluntarily by companies; and

– CSR expenses incurred by companies in
discharge of the obligation under section 135 of the Companies Act, 2013, which
are covered under section 30 to 36 of the Income-Tax Act, 1961.

This disparity between the deductibility of the
CSR expenses is uncalled for. It is therefore a possibility that the
restriction of Explanation 2 to Section 37(1) may be read down by the Courts.

shailesh.kwebmaker

TDS U/s. 194-Ib on Payment of Rent by Certain Individuals or Hindu Undivided Family

Background

Section 194-I of the
Income-tax Act, 1961 (“the Act”) interalia requires an individual or a
Hindu Undivided Family (HUF) carrying on business or profession of which
turnover or gross receipts in the immediately preceding previous year exceed
the monetary limits mentioned in section 44AB of the Act to deduct tax at source
while making payment of rent, to a resident. Under section 194-I, liability to
deduct tax arises if the amount of rent exceeds Rs. 1,80,000 in a year. Under
section 194-I tax is required to be deducted @ 10%.

Therefore, an individual or a Hindu undivided family not
carrying on a business or a profession or carrying on a business or profession
the turnover or gross receipts of which did not exceed the monetary limit
mentioned in section 44AB of the Act in the immediately preceding previous year
is not required to deduct tax at source from payment by way of rent.

With a view to widen the scope of tax deduction at source,
the Finance Act, 2017 has, with effect from 1.6.2017, inserted section 194-IB
in the Act. This article attempts to analyse the provisions of section 194-IB
of the Act.

Provision of section 194-IB in brief

An individual or an HUF (other than those covered by s.
194-I) responsible for paying to a resident, any income by way of rent
exceeding Rs. 50,000 for a month or part of a month during the previous year,
shall deduct an amount equal to five per cent of such income as income-tax
thereon. The deduction is required to be
made at the time of credit of rent for the last month of the previous year or
the last month of tenancy if the property is vacated during the year, to the
account of the payee or at the time of payment thereof whichever is
earlier. The deductor is not required to
obtain TAN. In case the payee does not
have PAN and the provisions of section 206AA apply, the amount of deduction
shall not exceed the amount of rent payable for the last month of the previous
year or the last month of tenancy, as the case may be.

Cumulative Conditions for application of Section 194-IB

i) the payer is an individual or a Hindu
undivided family;

ii) in the immediately preceding previous year the
turnover or gross receipts of the business / profession carried on by such
individual or HUF, if any, did not exceed the monetary limits mentioned in
section 44AB;

iii) the payer is responsible for paying income by
way of rent for use of any land or building or both. For the purpose of this section, rent is
defined in an Explanation to section 194-IB;

iv) the amount of rent exceeds Rs. 50,000 for a
month or part of a month during the previous year;

v) the payee is a resident.

Consequences

If the above mentioned
conditions are cumulatively satisfied, the payer is required to deduct tax @ 5%
of such income as income-tax.

time of deduction

Tax is required to be deducted on earlier of the following two
dates –

i) credit to the account of the payee of rent
for the last month of the previous year or the last month of tenancy, if the
property is vacated during the year; OR

ii) at
the time of payment thereof in cash or by issue of a cheque or draft of by any
other mode. It needs to be noted that
the word `thereof’ signifies the payment of rent for last month of the
previous year or the last month of tenancy, if the property is vacated during
the year.

Other points

i) The payer is not required to obtain TAN;

ii) In case the provisions of section 206AA apply
(i.e. the payee does not have PAN) the amount of deduction shall not exceed the
amount of rent payable for last month of the previous year or the last month of
the tenancy, as the case may be.

Who should be the payer / To whom is the section applicable?

Section 194-IB applies to a payer of rent who is an
individual or an HUF (other than those referred to in the second proviso to
section 194-I). The amount of rent should be in excess of the amount mentioned
in the section (given in subsequent paragraphs).

Therefore, the section will apply to a salaried employee, a
farmer, a retired person, an individual or an HUF carrying on business or
profession whose total turnover or gross receipts in the immediately preceding
previous year does not exceed the monetary limits mentioned in section 44AB of
the Act, an individual not carrying on business and whose total income is less
than the maximum amount not chargeable to tax.

Since the term `individual’ has been held to also include
group of individuals, the section may apply to trustees of a trust [DIT vs.
Sharadaben Bhagubhai Mafatlal Public Charitable Trust (2001) 247 ITR 1 (Bom)].
It may also apply to Executors of the estate of a deceased person [see CIT
vs. G B J Seth 6 Taxman 318 (MP)].

Who should be the payee?

The payee of rent should be a
resident. If the payee is a
non-resident, then tax may be deductible u/s.195 of the Act but not under this
section. The legal status of the payee is
not relevant. The payee could be a listed company, a private limited company, a
firm, a trust, LLP, individual, HUF, etc.

Threshold for deduction of tax

Tax is required to be
deducted only if the amount of rent exceeds Rs. 50,000 for a month or a part of
a month during the previous year. Once the rent for a month or part of a month
exceeds Rs. 50,000, tax is deductible on the entire amount of rent. Unlike the
other provisions of TDS, the payments made during the previous year are not
required to be aggregated for deduction of tax at source. To illustrate, if the amount of rent paid in
first 3 months is at the rate of Rs.
45,000 per month and for next 6 months @ Rs. 55,000 per month and for last 3
months at Rs. 40,000 per month, tax is required to be deducted only from
rent of those months where the amount of rent exceeds Rs. 50,000 for a month or
part of a month. Therefore, amount
of tax to be deducted at source will be Rs. 16,500 [5% of Rs. 3,30,000 (55,000
x 6)].

It needs to be noted that
in case of rent for part of a month, the monthly rate of rent is not relevant
but what is relevant is that the amount paid / payable for a part of the month
should be in excess of Rs. 50,000. To
illustrate, if amount of rent paid for 15 days is Rs. 40,000 tax will not be
required to be deducted (though rent per month is Rs. 80,000) but if the amount
of rent paid for 3 weeks is Rs. 60,000 then tax is required to be deducted
under this section.

Is the limit of Rs. 50,000 per month or part of a month qua each property or qua the payee?

A
question arises as to whether the limit of Rs. 50,000 per month or part of a
month is qua each property or qua each payee. To illustrate if Mr. T has
taken on rent from Mr. L a residential house on a monthly rent of Rs. 15,000
and also a factory for a monthly rent of Rs. 40,000, if the limit of Rs. 50,000
is qua each property, Mr. T is not required to deduct tax at source u/s.
194-IB whereas if the limit of Rs. 50,000 is qua the payee, Mr. T is
required to deduct tax in accordance with the provisions of section
194-IB. It appears that the limit of Rs.
50,000 per month or part of a month is not qua the property, but qua
the aggregate of all the rents which an individual or a HUF may pay to a payee.
The threshold of Rs. 50,000 per month or part of a month will have to be
examined qua each payee and not qua each property. Therefore, Mr.
T will be required to deduct tax in accordance with the provisions of section
194-IB.

Meaning of `rent’

The section requires deduction of tax from payment of “rent”. The word “rent” is defined in Explanation to
section 194-IB as follows –

“Rent means any payment, by whatever
name called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any land or building or both.”

The definition of ‘rent’ is
similar to the definition in section 194-I. Considering the definition of rent,
it is clear that payment for use of any land or building or both constitutes
rent. However, payment for use of furniture will not be covered by this section.

Whether payment for use of a part of a building is covered?

A question arises as to whether payment for use
of a part of the building is covered by the tax deduction obligation imposed by
this section? It is relevant to note
that the legislature has in sections 27, 194IA, 194LA, 194LAA, 269AB
specifically mentioned part of a building.
However, in the context of section 194-I, CBDT has in Circular number
718, dated 22.08.1995 (for section 194-I) clarified as under:

“Query No. 5 : Whether section 194-I
is applicable to rent paid for the use of only a part or a portion of any land
or building?

Answer : Yes, the definition of the
term “any land” or “any building” would include a part or a
portion of such land or building.”

Further, in view of the legal maxim OmneMajuscontinet in
se minus which means “the greater contains the less” Atma Ram
vs. State of Punjab, AIR 1959 SC 519; ICI India Ltd. vs DCIT, (2004) 90 ITD 258
(Kol)] ], it is possible to argue that rent for part of a building would
also be covered by the provisions of this section.

Therefore, it appears that the
payment for use of a part of a building, say a flat or an office in a building
or an industrial gala in an industrial estate would constitute rent and would
be subject to TDS if other conditions of this section are satisfied.

Composite rent

Where rent is a composite amount
comprising of payment for use of land or building or both as also for other
facilities and amenities and the amount for use of land or building is known
separately then tax is required to be deducted only on the payment for use of
land or building or both. However, if
the amount of payment for use of land or building or both is not known
separately, can one contend that the section will not apply and no deduction need
be made? One really needs to look at the substance of the arrangement – if it
is primarily for use of land or building, then provisions of section 194-IB
would apply. It is relevant to note that in the context of section 194-I, CBDT,
vide Circular No. 715 dated 8.8.1995, has clarified that tax would be
deductible on the entire amount. The
relevant portion of the said Circular reads as follows -.

“Question 24: Whether in a case
of a composite arrangement for user of premises and provision of manpower for
which consideration is paid as a specified percentage of turnover, section
194-I of the Act would be attracted ?

Answer If the composite arrangement
is in essence the agreement for taking premises on rent, the tax will be
deducted u/s. 194-I from payments thereof.”

Payment to hotel

A question arises as to
whether payment to a hotel for rooms hired would be covered by the provisions
of this section. In the context of
section 194-I, the CBDT vide Circular No. 715, dated, 8-8-1995 clarified
that payments made by persons for hotel accommodation taken on regular basis
will be in the nature of rent subject to TDS u/s.194-I (see question 20 of the
Circular).The CBDT further clarified the above, vide Circular No. 5,
dated 30-7-2002 which reads as under:

“Furthermore,
for purposes of section 194-I, the meaning of ‘rent’ has also been considered.
“‘Rent’ means any payment, by whatever name called, under any lease . . .
or any other agreement or arrangement for the use of any land. . .”
[Emphasis supplied]. The meaning of ‘rent’ in section 194-I is wide in its
ambit and scope. For this reason, payment made to hotels for hotel
accommodation, whether in the nature of lease or licence agreements are
covered, so long as such accommodation has been taken on ‘regular basis’. Where
earmarked rooms are let out for a specified rate and specified period, they
would be construed to be accommodation made available on ‘regular basis’.
Similar would be the case, where a room or set of rooms are not earmarked, but
the hotel has a legal obligation to provide such types of rooms during the
currency of the agreement.”

Further, Andhra Pradesh High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709] held that amount paid to the hotels
for use and occupation of hotel rooms squarely falls within the meaning of
rent.

In view of the above, it appears
that if payment is made to the hotels on a regular basis, it will constitute
rent. However, for payment to hotels for
occasional use see the discussion hereafter.

Lease premium

For the following reasons, payment of lease premium would not
require deduction of tax at source under this section –

i) Lease premium is a capital receipt;

ii) In the context of section. 194-I, courts have,
considering the facts of the case, held that payment of lease premium does not
require deduction of tax at source. Reference may be made to the following
decisions –

(a) Rajesh Projects (India) (P.) Ltd. vs. CIT
[2017] 78 taxmann.com 263 (Delhi)

(b) ITO vs. Navi Mumbai SEZ Pvt. Ltd. [2013]
38 taxmann.com 218 (Mum. – Trib.)

(d) ITO vs. Wadhwa& Associates Realtors (P.)
Ltd. [2013] 36 taxmann.com 526 (Mum. – Trib.)

iii) The CBDT vide Circular No. 35, dated
13-10-2016 has also clarified that TDS under section 194-I is not
required in case of lump sum lease payment or one time upfront lease payment.

License fee paid under a leave and license agreement for use
of a flat/office/industrial gala

A question arises as
to whether the payment for use of land or building or both made under a leave
and license agreement will qualify as `rent’.
The definition of rent interaliacovers payment by whatever name called
under “any other agreement or arrangement for the use of land or building or
both”.

The expression “any other agreement or arrangement” is not
defined in the section. Considering the context in which the expression has been
used, it appears that income-tax would require to be deducted on payment of
rent made under a leave and license agreement.

In
the context of section 194-I, the meaning of the expression “any other
agreement or arrangement” is explained by High Court in case of Krishna
Oberoi vs. UOI [[2002] 123 Taxman 709 (AP)] as under :

“9. The expressions ‘any payment, by
whatever name called’, and ‘any other agreement or arrangement’ occurring in
the definition of the term ‘rent’ in Explanation to section 194-I have
widest import. According to Black’s Law Dictionary, the word ‘any’ is
often synonymous with either ‘every’ or ‘all’. Its generality may be restricted
by the context in which that word occurs in a statute. The Supreme Court in Lucknow
Development Authority vs. M.K. Gupta AIR 1984 SC 787 dealing with the use
of the word ‘service’, in the context it has been used in the definition of the
term in Clause (o) of section 2 of the Consumer Protection Act, has opined that
the word ‘any’ indicates that it has been used in wider sense extending from
‘one to all’. In G. Narsingh Das Agarwal vs. Union of India [1967] 1 MLJ
197, the Court opined that the word ‘any’ means ‘all’ except where such a wide
construction is limited by the subject-matter and context of the statute. The
Patna High Court in Ashiq Hassan Khan vs. Sub-Divisional Officer, AIR
1965 Pat.446 (DB) and Chandi Prasad vs. Rameshwar Prasad Agarwal AIR
1967 Pat. 41 has held that the word ‘any’ excludes ‘limitation or
qualification’. In State of Kerala vs. Shaju[1985] Ker. LJ 33, the Court
held that the word ‘any’ is expressive. It indicates in the context ‘one or
another’ or ‘one or more’, ‘all or every’, ‘in the given category’; it has no
reference to any particular or definite individual, but to a positive but
undetermined number in that category without restriction or limitation of
choice. Thus, having regard to the context in which the expressions ‘any
payment’ and “any other agreement or arrangement” occurring in the
definition of the term “rent” (have been used) it only means each and
every payment (that has been) made to the petitioner-hotel under each and every
agreement or arrangement with the customers for the use and occupation of the hotel rooms.”

Warehousing charges

In the context of section 194-I, the CBDT vide
Circular No. 718, dated 22-8-1995 clarified that TDS is required to be deducted
on warehousing charges. The relevant para of the said Circular reads as under:

” Query No. 3 : Whether the tax
is to be deducted at source from warehousing charges ?

Answer : The term ‘rent’ as defined
in Explanation (i) below section 194-I means any payment by whatever name
called, under any lease, sub-lease, tenancy or any other agreement or
arrangement for the use of any building or land. Therefore, the warehousing
charges will be subject to deduction of tax u/s.194-I.”

Is the section applicable to occasional renting?

A question arises as to whether tax deduction
obligation under this section arises even in a case where an individual takes
on rent say a land or building occasionally for a period of one day/few days,
say for a wedding in the family and the amount of rent exceeds Rs. 50,000 for a
day, or where a person stays in a hotel for a few days and the aggregate room
rent exceeds Rs. 50,000. Considering the
language of the section, it appears that the section envisages letting for a
continuous period, e.g., s/s.(2) requires deduction at the time of credit of
rent for the last month of the previous year or last month of tenancy. Similar
is the language in s/s.(4) which deals with the amount of tax to be deducted in
a case where provisions of s. 206AA are applicable. Also, if one looks at the
particulars to be filled in Statement-cum-Challan in Form No. 26QC through
which tax deducted has to be paid to the credit of Central Government one finds
that it requires details of “Period of tenancy” and the notes in the said Form
26QC state that Period of tenancy will be the period (i.e. months) for which
tenant is paying the rent. Also, “Total
value of rent payable” is required to be mentioned. It is stated that Total
value of rent payable is equal to number of months for which rent is payable
multiplied by value of rent per month. These particulars and notes could be
indicative of the position that the section does not contemplate deduction of
rent in respect of occasional letting.
However, the matter is not free from doubt and it can also be argued
that a day is also a part of a month and if the amount of rent for the period
the land or building is taken on rent is more than Rs. 50,000 the tax deduction
obligation under this section is triggered if the payer is covered by this
section. In view of the penal
consequences which arise due to non-deduction, a safer view would be to deduct
tax even in such cases. Though, in a
case where one has for some reason failed to deduct tax in some genuine case
one may be able to contend that the section requires letting for some
continuous period.

Rate at which tax is required to be deducted

Tax is required to be deducted @
5%.

Rate at which tax is required to be deducted where payee does
not have PAN

In
a case where payee does not have PAN, section 206AA requires the deductor to
deduct tax at highest of the three rates mentioned in section 206AA. Therefore,
in a case where the payee does not have PAN, by virtue of provisions of section
206AA, deduction of tax could be @ 20%. However, sub-section (4) of section
194-IB clearly states that in a case where provisions of section 206AA apply,
deduction shall not exceed the amount of rent payable for the last month of the
previous year or the last month of the
tenancy, as the case may be. To illustrate, if rent has been paid @ Rs.60,000
per month from 1.6.2017 to a person who does not have PAN, the amount of tax
required to be deducted at source would be Rs. 1,20,000 [20% of rent paid i.e. 20% (Rs. 60,000 x
10)]. However, by virtue of s/s. (4),
the deduction shall not exceed the amount of rent payable for last month of the
previous year. Therefore, deduction in this case will be restricted to Rs.
60,000.

Payment of rent by deducting tax at a rate lower than 5% or
without deduction of tax at source

Section
197 which enables an assessee to obtain from the AO a certificate authorising
the payer to deduct tax at a lower rate has not been amended to incorporate a
reference to this section. Therefore, an
assessee will not be able to obtain a certificate from the AO authorising the
payer to deduct tax at a rate lower than the one mentioned in section 194-IB
i.e. 5%. Also, the payee may be having
brought forward losses or may not be liable to pay tax on the income by way of
rent being received by him since his total income may be likely to be less than
the maximum amount chargeable to tax.
However, since the provisions of section 197A have not been amended, the
payee will not be able to issue a declaration in Form No. 15G / 15H authorising
the payer to deduct tax at a lower rate.

Does section require deduction of tax only once during the
previous year?

While it appears that the section requires deduction of tax only once
during the previous year, it may not necessarily be so in all cases. As has
been mentioned above, deduction is at the time of credit of rent of the last
month of the previous year or rent of the last month of tenancy, as the case
may be, to the account of the payee or at the time of payment thereof whichever
is earlier. To illustrate, in a case
where an individual, living throughout the financial year 2017-18 in a rented
flat changes the flat rented by him (assuming rent is more than Rs. 50,000 per
month) say on September 30, 2017 and also on December 31, 2017, he will be
required to deduct tax thrice during the financial year 2017-18 on September
30, 2017 and December 31, 2017 (being last month of tenancy) and on March 31,
2018 (being last month of the previous year) assuming of course, that he has
credited rent to the account of the payee or has paid the rent on these dates
or thereafter.

If the rent for last month
of the previous year or last month of tenancy is not credited by the payer to
the account of the payee, the tax deduction obligation will arise at the time
of payment of such rent. In such a case, if the two dates fall in different
financial years, there will be difficulty on account of mismatch of TDS as
well. To illustrate if assuming that in
the illustration referred to in the above para, if the individual assessee did
not credit rent to the account of any of the 3 landlords but paid rent to all 3
landlords on June 30, 2018, he will be required to deduct tax at the time of
payment i.e. on June 30, 2018 and therefore the credit for TDS will be
reflected in Form 26AS of the landlords in the AY 2019-20 whereas they may be
required to offer rental income for taxation in AY 2018-19.

Is the deductor required to obtain TAN?

Sub-section
(3) of section 194-IB clearly provides that the provisions of section 203A
shall not apply to a person required to deduct tax in accordance with
provisions of section194-IB. Therefore, an individual or a HUF deducting tax in
accordance with section194-IB is not required to obtain TAN.

Time of payment of tax deducted to the credit of Central
Government

Rule 30(2B) requires that the tax
deducted shall be paid within 30 days from the end of the month in which
deduction is made. The payment shall be
accompanied by a Challan-cum-statement in Form 26QC. This procedure is similar
to the procedure as that for tax deducted at source on payments for purchase of
an immovable property u/s. 194-IA.

Certificate of deduction

The payer of rent is
required to furnish to the payee a certificate of deduction of tax at source in
Form No. 16C within a period of 15 days form the due date for furnishing the
challan-cum-statement in Form 26QC. The
certificate is to be generated and downloaded from the web portal specified by
the Principal Director General of Income-tax (Systems) or the Director General
of Income-tax (Systems) or the person authorised by him.

Payer to have PAN

Payment of tax at source
can be made only if the payer has PAN. Therefore, persons deducting tax at
source under this section, will have to obtain PAN, though they may otherwise
not be required to do so.

Rent for the period prior
to 1.6.2017

Section 194-IB has been
inserted with effect from 1.6.2017. Therefore, in a case where the time of
deduction was before 1.6.2017, the provisions of this section will not apply.
However, if the time of deduction is on or after 1.6.2017, then the provisions
of this section will apply, and tax will have to be deducted at source even
though the rent pertains to a period prior to 1.6.2017. To illustrate, if rent
for April 2017 and May 2017 was paid prior to 1.6.2017, then tax is not required
to be deducted at source under this section, but if the rent for the month of
May 2017 is paid on 10^th June, 2017, then tax will be required to be
deducted at source under this section (ofcourse, if all the other conditions
are satisfied). Also, if an individual
has not paid rent for financial year 2016-17 but pays it after 1.6.2017, then
tax will be required to be deducted at source in accordance with the provisions
of this section.

Consequences of non-deduction

In a case where an individual of a HUF, required to deduct
tax in accordance with the provisions of s. 194-IB fails to do so or having
deducted the amount fails to pay the whole or part of the tax, such individual
or HUF will be deemed to be an assessee-in-default u/s. 201 of the Act. This shall be in addition to his obligation
to pay interest/penalty under other provisions of the Act.

Conclusion

Salaried employees paying
rent whether or not claiming exemption u/s.10(13A); individuals/HUFs paying
rent on occasional basis such as individuals going for a vacation and paying
rent for a bungalow/group of bungalows, rent for ground taken on occasion of
marriage in the family, etc.; small businessmen who are not covered by
tax audit, etc. would be required to consider the applicability of the
provisions of this section.

shailesh.kwebmaker

Tax Issues in Computation of Taxable Income for Companies Adopting Ind-AS

The Challenge:

Tax Practioners would need to have knowledge of both
standards i.e. Indian Accounting Standards (Ind-AS) and Income Computation and
Disclosure Standards (ICDS) to assist the companies adopting Ind-AS in
finalising their tax returns

One
of the challenges that tax practitioners will face while finalising tax returns
for assessment year (AY) 2017-18, is in computation of the taxable income of
companies, which have adopted Ind-AS for the first time in the financial year
(FY) 2016-17. It is normally the profits
as per the profit and loss account which is the starting point for computation
of taxable income. So far, only adjustments required to be made under the
Income-tax Act (the Act) were being made to the computation of taxable income.
However, with the advent of Ind-AS and the corresponding introduction of ICDS,
which is also applicable for the first time from AY 2017-18, a significant
number of adjustments would have to be made to the profit as per the profit and
loss account, to arrive at the taxable income. This requires a proper
understanding not only of ICDS, but also of the differences between accounts
prepared under Ind-AS and those prepared under the earlier accounting standards
(existing AS).

In this article, an attempt has
been made to analyse and list out some significant adjustments which are likely
to be made to the profit and loss account, to arrive at the taxable income of
the companies’ whose accounts are prepared adopting Ind-AS.

Indian Accounting Standards (Ind-AS)

The MCA had notified
IFRS-converged Ind-AS as Companies (Indian Accounting Standards) Rules, 2015
vide Notification dated 16^th February 2015. The said Notification
also laid down the roadmap for the applicability of Ind-AS for certain class of
companies as under:

Roadmap for implementation of Ind-AS

Sr. No.

Companies covered

Voluntary
phase

Under Phase I, any company had the
option to adopt Ind-AS on voluntary basis for FY 2015-16.

Mandatory
phase 1

Adoption
of Ind-AS is mandatory for the FY 2016-17 for:

(a) Companies
listed/in process of listing on Stock Exchanges in India or Outside India
having net worth > INR 500 crores,

(b) Unlisted
Companies having net worth > INR 500 crore, and

Mandatory
phase 2

Ind-AS
from FY 2017-18 would be mandatory for:

(a) Companies
which are listed/or in process of listing inside or outside India on Stock
Exchanges not covered in Phase I (other than companies listed on SME
Exchanges),

(b) Unlisted
companies having net worth INR 500 crore> INR 250 crore, and

Mandatory
phase 3

Banks
and NBFCs would be required to adopt Ind-AS from FY 2018-19. Insurance
companies would be required to adopt
Ind-AS from FY 2020-21.

All companies adopting
Ind-AS are required to present comparative information for earlier FY, as per Ind-AS. Accordingly, they will have to apply Ind-AS for preparation of
standalone as well as consolidated Balance sheet and consolidated Statement of
Profit and Loss for FY 2015-16. Once Ind-AS is applicable to the entity for one
year, it has to be mandatorily followed for all subsequent FYs.

Companies listed on SME exchange are not required to apply
Ind-AS. Companies not covered by the above roadmap shall continue to apply
existing Accounting Standards notified in Companies (Accounting Standards)
Rules, 2006 issued by the ICAI as revised vide notification dated 30^thMarch
2016 (“existing AS”).

Income Computation and Disclosure Standards (ICDS)

The Central Government vide Notification No. SO 892(E) dated
31^stMarch 2015 notified 10 ICDS. These ICDS were applicable from FY
2015-16 (AY 2016-17). Subsequent to notification of the ICDS, a number of
representations were received for postponement/cancellation of ICDS. The
implementation of ICDS was kept on hold by the CBDT in July 2016.

In September 2016, the CBDT rescinded the earlier notified
ICDS, and notified revised ICDS (I to X) applicable from FY 2016-17 (AY
2017-18).

Adjustments required to the Profit as per Statement of Profit
& Loss for Companies adopting Ind-AS

1. Revenue recognition from sale
of goods on deferred payment basis

Revenue recognition as
per Ind-As

As per Ind-AS 18 which deals with Revenue recognition,
revenue shall be measured at the fair value of
the consideration received or receivable. Paragraph 11 of Ind-AS 18 provides as
under:

“11. In most cases, the consideration is in the form of cash or cash
equivalents and the amount of revenue is the amount of cash or cash equivalents
received or receivable. However, when the inflow of cash or cash equivalents is
deferred, the fair value of the consideration may be less than the nominal
amount of cash received or receivable. For example, an entity may provide
interest-free credit to the buyer or accept a note receivable bearing a
below-market interest rate from the buyer as consideration for the sale of
goods. When the arrangement effectively constitutes a financing transaction,
the fair value of the consideration is determined by discounting all future
receipts using an imputed rate of interest. The imputed rate of interest is the
more clearly determinable of either:

(a) the prevailing rate
for a similar instrument of an issuer with a similar credit rating; or

(b) a rate of
interest that discounts the nominal amount of the instrument to the current
cash sales price of the goods or services.”

In such arrangements of deferred receipt of consideration,
the fair value of the consideration is measured by discounting all future
receivables using an imputed rate of interest i.e. a rate of interest that
discounts the nominal amount of the instrument to the current cash sales price
of the goods or services.

The difference between the
fair value and the nominal amount of the consideration would be considered as
interest. Such interest would be recognised as revenue using the effective
interest rate (EIR) method as per Ind-AS 109. EIR is a method of calculating
the amortised cost of a financial asset or a financial liability and allocating the interest income or interest expense
over the relevant period.

Revenue
recognition as per ICDS

As per ICDS IV which deals with basis
of revenue recognition, the revenue from sale of goods is to be recognised when
the seller of goods has transferred to the buyer the property in the goods for
a price or all significant risks and rewards of ownership have been transferred
to the buyer and the seller retains no effective control of the goods
transferred to a degree usually associated with ownership.

As per ICDS IV, the term “Revenue” has been defined to mean
gross inflow of cash, receivables or other consideration arising in the course
of the ordinary activities of a person from the sale of goods.

Difference
between Ind-AS and ICDS

There is a significant difference in the basis of revenue
recognition as per Ind-AS 18 and ICDS IV in respect of sale of goods on
deferred payment basis. As per Ind-AS 18, the seller has to bifurcate the total
sales into fair value of consideration and interest. Fair value of
consideration would be recognised as revenue straightaway in the year of sale,
whereas interest income would have to be recognised as revenue over the
relevant credit period.

The concept of bifurcation of sale consideration in respect
of sale of goods on deferred payment basis is not present in ICDS. As per ICDS,
entire income from sale of goods will be recognised as revenue in the year of
sale, without any bifurcation of total sales consideration into fair value of
consideration and interest.

An Example

An example would explain the above
difference between the treatment under Ind-AS 18 and ICDS IV. A company which
has adopted Ind-AS has sold goods for Rs. 22 lakh on 1^stMarch 2017
to a customer with 10 months credit period. The same goods are sold to other
customers on cash basis at Rs. 20 lakh. Accordingly, as per Ind-AS 18, the
company would have to recognise revenue from sale of goods at Rs. 20 lakh. Rs.
2 lakh would be considered as interest, which would be recognised as revenue in
terms of Ind-AS 109.

Accordingly, a credit
period of 10 months starts from 1 March 2017, Rs. 20,000, being 1/10th of interest
of Rs. 2,00,000, would be recognised as revenue in the FY 2016-17. Balance
interest of Rs. 1,80,000 would be recognized as revenue in the FY 2017-18.
Hence, what would be recognized as revenue in the FY 2016-17 would be Rs. 20
lakh of sales and Rs. 20,000 of interest. Rs. 1,80,000 of interest would be
recognized as revenue in the FY 2017-18. However, as per ICDS IV, entire sale
consideration of Rs. 22 lakh would be recognised as revenue in FY 2016-17.

Impact of
the above differences

CBDT vide Notification No. 10/2017
dated 23 March 2017, in response to question no. 5 has clarified that “ICDS
shall apply for computation of taxable income under the head ” Profit and gains
of business or profession” or “Income from other sources” under the Income Tax Act.
This is irrespective of the accounting
standards adopted by companies i.e. either Accounting Standards or Ind-AS.”

In view of the above
clarification of the CBDT, the company would have to recognise entire sale
consideration of Rs. 22 lakh as revenue in its computation of income for AY
2017-18, even though what has been recognized as revenue in Ind-AS compliant
financials is only Rs. 20.02 lakh.

The company, while preparing computation of taxable income
would have to give effect to such differences which arise as per Ind-AS as well
as the Act/ ICDS. The company would also have to maintain details of such
income streams which gets recognised as revenue in different FYs on account of
different basis of revenue recognition as per Ind-AS and ICDS.

2. Revenue recognition from composite/bundles transactions

Impact
Revenue Recognition as per Ind-AS

As per paragraph 13 of
Ind-AS 18, the revenue recognition criteria are usually required to be applied
separately for each transaction. However, where the transaction is a composite/
bundled transaction, the revenue recognition criteria has to be applied
separately for each identifiable component of a single transaction, in order to
reflect the substance of the transaction. As per the example given in Ind-AS
18, when the selling price of a product includes an identifiable amount for
subsequent servicing, that amount relatable to subsequent servicing is deferred
and recognised as revenue over the period during which the service would be
performed.

As per paragraph 19 of
Ind-AS 18, “revenue and expenses that relate to the same transaction or
other event are to be recognised simultaneously, as the matching concept of
revenues and expenses. As per the example given in Ind-AS 18, all expenses
including future warranties and other costs to be incurred after the shipment
of the goods, can normally be measured reliably. Such expenses which are to be
incurred in future, directly relatable to sale of goods should be recognised as
expenses in the year of sale, when the other conditions for the recognition of
revenue are satisfied. However, when the expenses to be incurred in future
cannot be measured reliably, any consideration already received for the sale of
the goods should be recognised as a liability”.

Accordingly, where sale of goods comprises of composite/
bundled transaction, the company would have to identify each individual
transaction forming part of composite/ bundled transaction. The company would
have to apply revenue recognition criteria to each transaction. Any expenses to
be incurred on such composite/ bundled transaction have to be measured reliably
and provided for as a liability. Where such expenses to be incurred cannot be
measured reliably, any consideration already received for the sale of the goods
has to be recognised as a liability.

Revenue recognition as per ICDS

As per ICDS IV, there is no provision for splitting up of the
sale consideration in respect of a composite/bundled transaction. The revenue
would be the gross inflow arising from sale of goods, and shall be recognised
when the seller of goods has transferred to the buyer, the property in the
goods for a price or all significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control over the
goods transferred. Therefore, where no separate charge is levied for the
servicing, the entire sales proceeds would be treated as revenue from the sale
of goods.

As per ICDS X, a present obligation arising from past events,
the settlement of which is expected to result in an outflow from the person of
resources embodying economic benefits should be provided for as a liability.
Therefore, a provision for warranty expenses to be incurred on sales effected,
made on a scientific or actuarial basis, would be allowable as a deduction
[which is also in accordance with the Supreme Court decision in the case of Rotork
Controls India (P) Ltd vs. CIT (2009) 314 ITR 62(SC)].

Difference between Ind-AS and ICDS

Ind-AS, in respect of transaction involving composite/
bundled transactions requires the revenue recognition criteria to be applied
separately for each identifiable component of a single transaction. Revenue and
expenses relating to the same transaction or other event should be recognised simultaneously.
Where such expenses to be incurred in future cannot be measured reliably, any
consideration already received for the sale of the goods should be recognised
as a liability.

ICDS IV however does not give any
guiding principles on bifurcation of consideration for each identifiable
component of a single transaction, forming part of composite/ bundled
transaction. ICDS IV does not allow treatment of consideration already received
for the sale of goods as a liability, where expenses to be incurred cannot be
measured reliably.

An example

An
example on the above would explain the difference between the Ind-AS 18 and
ICDS IV. A company which has adopted Ind-AS, is in the business of
manufacturing and sale of cars. It sold a car to a customer at Rs. 5 lakh on 1^stJanuary 2017. The sale of car also includes free after sale service for a
period of 2 years and free warranty for 1 year. The standard price of after
sale service for 2 years, included in sale price of Rs. 5 lakh, would be Rs.
50,000.

As per Ind-AS 18, the company would have to separately
identify each component of single transaction of sale of car i.e. it has to
bifurcate composite/ bundled transaction of sale of car into separate
identifiable transaction viz. sale of car, rendering of after sale services and
providing warranty.

Accordingly, Rs. 4,50,000 (i.e. sale consideration of Rs. 5
lakh less Rs. 50,000 towards 2 years after sale services) would be recognised
as revenue in the FY 2016-17. Revenue recognition in respect of after sales services
of Rs. 50,000 has to be spread over the 2 years period. Rs. 6,250 for January
to March 2017 has to be recognized as revenue in the FY 2016-17 and balance Rs.
43,750 would be recognised as revenue in the FY 2017-18 and FY 2018-19.

The company would have to estimate the expenditure it would
incur in future over the free warranty, which can be recognised as expenses,
based on principle of matching concept in the year of sale of car. If it is not
in a position to estimate expenses to be incurred as per Ind-AS 18, sale
consideration relatable to free warranty should be recognised as liability in
FY 2016-17 and should be recognised as revenue in subsequent years.

ICDS IV, however is silent on bifurcation of consideration
for each identifiable component of a single transaction, forming part of
composite/ bundled transaction. Further, ICDS does not allow treatment of
consideration already received for the sale of goods as liability, where
expenses to be incurred in future cannot be measured reliably.

Impact of the above differences

Taxation of after-sales
services

In view of the fact that ICDS
does not give any guiding principles on bifurcation of each identifiable
component of composite/bundled transaction, the company may not be able to
bifurcate the consideration of Rs. 50,000 for after sale services of 2 years from
the sales price of cars. Therefore, the gross sales price may have to be
considered as revenue in the year of sale. The question arises whether the
company can claim deduction for the estimated future expenditure that it may
incur on after sales service.

Based on the provisions of
paragraph 5 of ICDS X, if such expenditure is estimated on a scientific basis,
such future liability may be recognised as a provision under the ICDS, which is
a liability. This is on account of the fact that there is a present obligation
as a result of a past event, it is reasonably certain that an outflow of
resources embodying economic benefits will be required to settle the
obligation, and a reliable estimate can be made of the amount of obligation.
Therefore, one can take a view that the estimated liability for after sales
service is an allowable deduction u/s. 37 read with ICDS X.

Warranty expenses

It is a common practice for car manufacturers to make
provision for warranty expenses in the books, based on past experience,
historical data of actual warranty expenses incurred or some ad-hoc estimate
and claim deduction thereof u/s. 37 of the Act.

The issue on allowability
of warranty provision has been settled by the Supreme Court. The Supreme Court
in the case of Rotork Controls vs. CIT (314 ITR 62) (SC) has allowed the
assessee’s claim for deduction of warranty provision as expense on the ground
that “warranty became integral part of the sale price of the product and a
reliable estimate of the expenditure towards such warranty was allowable.”
In this case, the Supreme Court held that all the conditions for recognising a
liability were fulfilled – arising out of obligating events, involving outflow
of resources and involving reliable estimation of obligation.

However, in the tax return, where the company is not in a
position to estimate expenditure to be incurred on warranty on some
scientific/reliable basis, it would not be in a position to postpone revenue
recognition from the sale consideration of car. Such treatment is permitted as
per Ind-AS, but has no specific permission in ICDS. However, where such
warranty provision is made on a scientific basis, under paragraph 5 of ICDS X,
the liability for warranty would be regarded as a provision, which is defined
as a liability which can be measured only by using a substantial degree of
estimation, and would therefore be an allowable deduction.

The company would have to maintain details of such different
basis of revenue recognition as per Ind-AS and ICDS i.e. after sales services
in the above example, to arrive at correct taxable income.

3. Revenue
recognition in case of rendering of services

Revenue recognition as per Ind-AS

As per Ind-AS 18, the recognition of revenue from rendering
of services is measured by reference to the stage of completion of a
transaction i.e. the percentage of completion method. Under this method,
revenue is recognised in the accounting periods in which the services are
rendered. As per paragraph 20 of Ind-AS 18, “percentage of completion method has
to be followed where the outcome of a transaction can be measured reliably.
Such reliable measurement of outcome requires fulfilment of the following
conditions:

(a) the amount of revenue can be measured reliably;

(b) it is
probable that the economic benefits associated with the transaction will flow
to the entity;

(d) the
costs incurred for the transaction and the costs to complete the transaction
can be measured reliably”.

As per paragraph 26 of Ind-AS 18, “when the outcome of the
transaction involving the rendering of services cannot be estimated reliably,
revenue shall be recognised only to the extent of the expenses incurred and are
recoverable”.

As per paragraph 27 of this Ind-AS, “where execution of
the transaction has just started or has only reached preliminary stage
(referred to as early stage of a transaction), it may not be possible to
estimate outcome of the transaction involving the rendering of services. In
such situation, it is permissible for the entity to recognise revenue only to
the extent of costs incurred that are expected to be recoverable”.

Paragraph 28 states “when the outcome of a transaction
cannot be estimated reliably and it is not probable that the costs incurred
will be recovered, revenue is not recognised and the costs incurred are
recognised as an expense”.

Revenue recognition as per ICDS

As per ICDS IV dealing with
Revenue Recognition, revenue from service transactions shall be recognised by
the percentage of completion method. It is expressly provided that ICDS III on
Construction contracts shall apply to the recognition of revenue and associated
expenses, for a service transaction. In view of the express applicability of
ICDS III to a service transaction, where service transactions are at an early
stage, it would be possible for the entity to recognise revenue only to the
extent of the expenses incurred (as under Ind AS). However, ICDS IV provides
that the early stage of a contract cannot extend beyond 25% of the stage of
completion. Therefore, under ICDS IV, recognition of revenue by percentage of
completion method is compulsory beyond 25% of the stage of completion.

When services are provided by an indeterminate number of acts
over a specific period of time, revenue may be recognised on a straight line
basis over the specific period.

ICDS, however provides a
concession to certain service contracts with duration of less than 90 days. In
respect of such service contracts with duration less than 90 days, the assessee
has an option to treat revenue from such contracts to be recognised when the
rendering of services under that contract is completed or substantially
completed.

Difference between the Ind-AS
and ICDS

Ind-AS as well as ICDS requires recognition of revenue from
rendering of services as per the percentage of completion method for all
services. Under Ind-AS, percentage of completion method is to be adopted only
once reliable measurement of outcome is possible, which is possible only when
revenues and expenses can be measured reliably, and stage of percentage of
completion can also be measured reliably. There is no specific stage specified
in the Ind-AS from when the percentage of completion method becomes applicable,
but it would depend upon the conditions being satisfied in each case. However,
under ICDS IV, percentage of completion method would have to be followed once
the 25% stage of completion is reached, irrespective of whether the outcome can
be measured reliably.

Similarly, under Ind-AS, it is possible that when the outcome
of a transaction cannot be estimated reliably and it is not probable that the
costs incurred will be recovered, revenue is not recognised and the costs
incurred are recognised as an expense, resulting in a loss. However, under ICDS
IV read with ICDS III, if 25% threshold has been crossed, only the
proportionate loss based on the percentage of completion can be recognised.
ICDS is silent as to what happens in the early stages when outcome cannot be
reliably measures and the costs will not be recovered.

Further, ICDS additionally
grants an option to the assessee to recognize revenue from the contract with
project duration less than 90 days only on completion of contract or when it is
substantially completed. There is no such provision in Ind-AS 18.

An example

An example on the above would explain the difference between
Ind-AS 18 and ICDS IV. The company is engaged in the logistic business, whereby
it arranges inbound/ outbound transportation of goods. The company has huge
volume of transactions. In all cases of inbound/outbound transportation of
goods, the completion of transport of goods does not take more than 90 days period.

As on the last day of reporting period, the said company has
various pending logistic contracts, which have not reached 100% completion. The
company accordingly has to measure contract revenue from such contracts in
progress, only to the extent of percentage of logistics work complete. The said
estimation requires information of percentage of logistics work completed for
all contracts in progress, and the shipments in many of the contracts may be
mid-road/mid-sea/mid-air on the last day of the reporting period.

For Ind-AS purposes, the
company has to work out revenue from rendering of services by following
percentage of completion method, where the outcome of the contract (including
the stage of completion) can be reliably measured. Accordingly, it would have
to work out the percentage of contract completed for each contract in progress,
and the proportionate revenue and expenditure of each contract in progress, as
on the last day of the reporting period, where the outcome (including stage of
completion) can be reliably measured. However, as per ICDS, while filing the
tax return, the company can opt to offer the entire income from logistics
contracts only on completion of the entire work.

In many cases of logistics contracts, it may not be possible to
reasonably estimate the stage of completion. In that situation, under Ind AS,
the revenue from the contract would be recognised only to the extent of costs
incurred, and the profit would effectively be accounted for on completion of
the contract, as is the case under ICDS.

Impact of the above differences

The company, for commercial
reasons, may want to offer income from logistics contracts, with duration less
than 90 days, to income tax by following ICDS, only on completion of the
contract, where completion of services falls in a different FY. Such a company
would have the option to recognise revenue from contracts with duration of less
than 90 days, only on completion of the
contract. This would be irrespective of the fact that as per Ind-AS, it has recognised contract revenue by reference to the stage of
completion of the contract activity, at the reporting date. In normal
circumstances, where any contract commences as well as is completed in the same
year, revenue recognition as per Ind-AS 18 and ICDS IV would be the same.
However, where any contract with duration of less than 90 days commences and is
completed in a different FY, the company would have to maintain detailed
records, both for Ind-AS purposes as well as ICDS, where it opts for
recognising income on completion basis.

4. Revenue recognition
in case of Construction contracts

Revenue recognition as per Ind-AS

As per Ind-AS 11
‘Construction Contracts’, the recognition of revenue and expenses is required
to be made by reference to the stage of completion of a contract i.e.
percentage of completion method. Under this method, contract revenue is matched
with the contract costs incurred in reaching the stage of completion, resulting
in the reporting of revenue, expenses and profit which can be attributed to the
proportion of work completed.

As per paragraph 32 of Ind-AS 11, when the outcome of a
construction contract cannot be estimated reliably (a) revenue shall be
recognised only to the extent of contract costs incurred that probably will be
recoverable, and (b) contract costs shall be recognised as an expense in the
period in which they are incurred.

Paragraph 33 of Ind-AS 11 explains a situation, where it
would be necessary for the entity to recognise contract revenue only to the
extent of contract costs. As per the said paragraph, “where the Construction
contract is at the early stages of a contract, it is often the case that the
outcome of the contract cannot be estimated reliably. In such a situation,
contract revenue can be recognized only to the extent of contract costs
incurred that are expected to be recoverable”. Ind-AS 11 also requires
recognition of expected loss, when it is probable that total contract costs
will exceed total contract revenue. This amount of expected loss is allowed to
be recognised as an expense immediately, irrespective of whether work has
commenced on the contract and the stage of completion of contract activity.

Revenue recognition as per ICDS

As per ICDS III dealing with Construction contracts, contract
revenue and contract costs associated with the construction contract should be
recognised as revenue and expenses respectively by reference to the stage of
completion of the contract activity, at the reporting date.

The said ICDS however gives concessional treatment to
contracts in the early stage of execution i.e. contracts which have not
completed a percentage of up to 25% of the total construction. During the early
stages of a contract, where the outcome of the contract cannot be estimated
reliably, contract revenue can be recognized only to the extent of costs incurred.

Difference between the Ind-AS
and ICDS

Ind-AS 11 as well as ICDS III, both permit recognition of
revenue only to the extent of expenses incurred, where the project is at an
early stage of execution and outcome cannot be estimated reliably. Ind-AS
however does not give any specific percentage of the construction activity to
be completed for the construction project to be categorised as ‘early stage of
execution’. Accordingly, for the construction activity where even 30% of the
total construction has been completed, revenue may be recognized only to the
extent of cost incurred, if based on the facts of the particular construction
contract it is established that the outcome cannot be estimated reliably.

The Institute of Chartered Accountants of India (ICAI) has
issued ‘The Guidance Note on Accounting of Real Estate Transactions (revised
2016)’ (GN) which is applicable to entities to which Ind-AS is applicable. As
per the said GN, a reasonable level of development is not achieved if the
expenditure incurred on construction and development costs is less than 25% of
the construction and development costs. As per the GN, a reasonable level of
development is measured with reference to ‘construction and development cost’
and excludes ‘Cost of land and cost of development rights’ as well as
‘Borrowing cost’. Though the GN applies only to real estate transactions and
not to construction contracts, it may be possible to apply this level of 25%
for construction contracts.

ICDS III, however expressly provides that the early stage of
a contract shall not extend beyond 25% of the stage of completion.

Further, Ind-AS requires a company to recognize the entire
expected loss, when total contract costs is likely to exceed total contract
revenue. However, ICDS does not specifically provide for recognition of
expected loss. The expected loss can be recognised only on percentage of
completion method, i.e. proportionately.

Impact of the above differences

The stage of profit
recognition by following percentage of completion method under Ind-AS and ICDS
may differ on account of the differing concepts of early stage of contract
where outcome cannot be reasonably estimated. While, as per accounts, profits
may not be recognized, it is possible that, under ICDS, profits have to be
recognised.

Where such company has recognised the entire loss on the
contract in the profit and loss account on the ground that total contract costs
is likely to exceed total contract revenue, it would not have the benefit of
the entire expected loss as per ICDS. In the tax return, irrespective of that
fact that there would be a loss at the end of the project, it would have to
recogniswe contract revenue (and therefore estimated total loss) by following
the percentage of completion method, at the year-end.

5. Purchases of goods
on deferred payment terms

Cost of purchase as per Ind-AS
2

As per Ind-AS 2, the cost of inventories shall comprise all
costs of purchase, costs of conversion and other costs incurred in bringing the
inventories to their present location and condition. Further, where the inventory
is purchased on deferred payment terms, and the purchase price is higher than
the purchase price for such inventory on normal credit terms basis, the
arrangement effectively contains a financing element. In such a situation, the
difference between the actual purchase price and the purchase price of goods
with normal credit terms, is recognized as financing cost.. The said financing
cost has to be charged to the statement of profit and loss, over the period of
the financing.

Cost of purchase as per ICDS
II As per ICDS II which deals with valuation of inventories, the costs of
purchase shall consist of purchase price including duties and taxes, freight
inwards and other expenditure directly attributable to the acquisition.
However, interest and other borrowing costs shall not be included in the cost
of inventories.

Difference between the Ind-AS
and ICDS

There is a difference in the cost of purchase as per Ind-AS 2
and ICDS II. As per Ind-AS 2, where goods are purchased on deferred payment
terms, the difference between the purchase price with normal credit terms and
the amount paid with deferred payment term, is considered as interest expense
and would have to be excluded from the purchase price of goods. However, as per
ICDS II, entire purchase price paid, irrespective of outright purchase price or
purchase on deferred payment terms, is considered as cost of purchase. This
would result in difference in the valuation of stock, as well as timing
difference on account of charge of the financing cost to the Profit & Loss
Account over the finance period in accordance with Ind AS, as against treatment
as purchase as per ICDS.

An example

An example on the above would explain the difference between
the Ind-AS 2 and ICDS II. The company has purchased goods from the seller at
Rs. 75,000 on 1^stJanuary 2017 with 12 months credit period. The
same goods could be purchased at Rs. 65,000 with normal credit period of 3
months generally allowed in the Industry. As per Ind-AS 2, difference of Rs.
10,000 would be considered as interest expense, which can be charged to profit
and loss account over the period of financing. Accordingly, interest expense of
Rs. 10,000 beyond normal credit period of up to 31^stMarch 2017,
would be considered as interest expense only in FY 2017-18. Where the company
has purchased such inventory out of borrowed funds, any interest paid would
have to be expensed out to the profit and loss account and would not be
considered as ‘cost of inventory’.

However, as per ICDS II, entire purchase cost of Rs. 75,000,
irrespective of deferred payment terms, would be treated as cost of purchases,
and would be included in the cost of inventory, if the said goods are lying in
stock as on 31^st March 2017.

Impact of the above differences

Accordingly, there would be
difference between the cost of purchases as per Ind-AS and ICDS. The company
would have to maintain records of such interest expense arising because of
deferred payment basis and which has been charged to profit and loss account in
subsequent FY. Such interest which has been charged to the profit and loss
account both in current FY as well as in subsequent FY would, under ICDS, have
to be treated as part of purchase cost/ inventory valuation in the current FY.

The company would also have to maintain details of all such
differences which arise because of difference in Ind-AS and ICDS.

6. Initial cost of
fixed assets purchased on deferred settlement terms

Initial cost of fixed assets as per Ind-AS 16

As per Ind-AS 16, an item of Property, Plant and Equipment
(PPE) that qualifies for recognition as an asset shall be measured at its cost.
The cost of such asset is the cash price
equivalent at the recognition date. If payment is deferred beyond normal
credit terms, difference between the cash price equivalent and the total
payment towards purchase of assets, is recognized as interest over the period
of credit, unless such interest is capitalised in accordance with Ind-AS 23
which deals with borrowing cost. Ind-AS 23 lays down conditions as to when
borrowing cost can be added to the cost of
assets purchased.

Actual cost as per ICDS V

As per ICDS V dealing with tangible fixed assets, the actual
cost of an acquired tangible fixed asset shall comprise of its purchase price,
import duties and other taxes, excluding those subsequently recoverable, and
any directly attributable expenditure on making the asset ready for its
intended use.

Difference between the Ind-AS
and ICDS

There is a material difference in the cost of fixed assets as
per Ind-AS 16 and ICDS V. As per Ind-AS 16, cash price equivalent at the
recognition date would be regarded as initial cost of fixed assets. However, as
per ICDS V, entire purchase price of the fixed assets, irrespective of deferred
payment terms, would be considered as actual cost of fixed assets. Accordingly,
any financing cost arising because of bifurcation of payment towards purchase
of assets into cash price equivalent and the financing element, would have to
be added to written down value of the respective ‘block of assets’ in the year
of purchase, irrespective of its treatment as per Ind-AS.

An example

An example on the above would explain the difference between
the Ind-AS 16 and ICDS V. The company has purchased a machine for Rs. 5,00,000
on 31^stMarch 2017 with 12 months credit period. The said machine
had cash price of Rs. 4,50,000. As per Ind-AS 16, difference of Rs. 50,000
would be considered as finance cost over the period of financing. Accordingly,
Rs. 50,000 would be considered as finance cost in FY 2017-18, as the same
pertains to period after 31^stMarch 2017.

Impact of the above differences

Accordingly, there would be difference between the cost of
PPE as per Ind-AS and ICDS. The company would have to maintain records of such
finance cost arising because of difference between the cash price equivalent
and the total payment towards purchase of PPE. Such cost, which would be
charged to the statement of profit and loss in subsequent FYs, would have to be
added to the cost of the respective ‘block of assets’, in order to comply with
ICDS provisions. The company would be entitled to depreciation on such cost in
the current year itself and would increase its block of assets by the said
amount, even though the same would be charged to the statement of profit and
loss in the next FY.

7. Interest free loan
to subsidiary or to employee (for long term)

Recognition of
interest free loan given as per Ind-As 109

Ind-AS 109 requires that financial assets and liabilities
should be recognised on initial recognition at fair value, as adjusted for the
transaction cost. In accordance with Ind-AS 109 ‘Financial Instruments’, in
case the loan is for a period exceeding one year (i.e. long term) the lender
would recognise the loan at its fair value as per the EIR method. Accordingly, interest
free loan exceeding one year given by the parent company to its subsidiary or
by an employer to its employee would be recorded at fair value, which would be
less than the amount of loan given. In spite of the fact that the said loan was
interest free, notional interest on fair value of the loan would be credited as
interest income in the profit and loss.

Recognition of interest free loan given to subsidiary/employee
as per ICDS

Under ICDS, there is no concept of recognition of financial
assets at fair value. There is also no concept of recognition of notional
interest as income in the statement of profit and loss. For income tax
purposes, the said interest free loan given would be recorded at the nominal
amount of the loan. No interest would be regarded as accruing on the loan,
since it is contractually an interest-free loan.

Difference between the Ind-AS
and ICDS

As per Ind-AS, every year the imputed interest income will be
provided in the statement of profit and loss for the year, with the corresponding
debit to the value of loan reflected as an asset. Over the years, loan amount
will finally be reinstated to what would be the repayable amount (the amount
that was received originally). Simultaneously, an appropriate amount will be
transferred from equity to the statement of profit and loss account, which will
have the effect of negating the interest income in the statement of profit and
loss. .

Impact of the above differences

Such notional interest which has been credited to the
statement of profit and loss of the parent company/employer would not be
“income” as per the Act. Accordingly, the same would have to be reduced from
the total income of the parent company/employer to arrive at taxable income.

8. Borrowing cost

Borrowing cost as per Ind-AS
23

As per Ind-AS 23 dealing with borrowing costs, the borrowing
costs includes interest expense calculated using the effective interest method,
finance charges in respect of finance leases recognised in accordance with
leases and exchange differences arising from foreign currency borrowings to the
extent that they are regarded as an adjustment to interest costs.

Ind AS 23 defines a qualifying asset as an asset that
necessarily takes a substantial period of time to get ready for its intended
use or sale. As per paragraph 7 of Ind-AS 23, the following types of assets may
be qualifying assets: (a) inventories, (b) manufacturing plants, (c) power
generation facilities, (d) intangible assets, (e) investment properties and (f)
bearer plants. Financial assets and inventories that are manufactured or
otherwise produced, over a short period of time are not qualifying assets.
Further, assets that are ready for their intended use or sale when acquired are
not qualifying assets.

As per paragraph 12 of Ind-AS 23, “the amount of borrowing
costs eligible for capitalization is the actual borrowing costs incurred during
the period less any investment income on the
temporary investment of those borrowings.”

Further, as per paragraph 14 of Ind-AS 23, “where the
entity has borrowed funds generally (and not for specific purpose of acquiring
qualifying assets) but used such borrowed funds for acquisition of a qualifying
asset, borrowing costs eligible for capitalisation are to be determined, by
applying a capitalisation rate to the expenditures on that asset”.

As per paragraph 22 of Ind-AS 23, “an entity shall cease
capitalising borrowing costs, when substantially all the activities necessary
to prepare the qualifying asset for its intended use or sale are complete”.

Borrowing costs as per ICDS IX read with section 36(1)(iii)

Section 36(1)(iii) provides for deduction of interest in
respect of capital borrowed for the purposes of business. The proviso to
section 36(1)(iii) requires that interest in respect of capital borrowed for
acquisition of an asset from the date of borrowing till the date the asset is
put to use, is not allowable as a deduction.

As per ICDS IX, borrowing costs are interest and other costs
incurred by a person in connection with the borrowing of funds and include (i)
commitment charges on borrowings, (ii) amortised amount of discounts or
premiums relating to borrowings, (iii) amortised amount
of ancillary costs
incurred in connection
with the arrangement of
borrowings and (iv) finance charges in respect of assets acquired under finance
leases or under other similar arrangements.

As per ICDS IX, the term
“Qualifying asset” for the purposes of capitalisation of specific borrowing
costs means: (i) land, building, machinery, plant or furniture, being tangible
assets, (ii) know-how, patents, copyrights, trade-marks, licenses, franchises
or any other business or commercial rights of similar nature, being intangible
assets and (iii) inventories that require a period of twelve months or more to
bring them to a saleable condition.

As per ICDS IX, general borrowing costs are capitalized to
the qualifying assets based on a particular formula. For the purpose of
capitalisation of general borrowing costs, the term “Qualifying Asset” means
any asset which necessarily requires a period of 12 months or more for its
acquisition, construction or production. Further, an entity shall cease
capitalizing borrowing costs, when such asset is first put to use or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Difference between the Ind-AS
and ICDS

A major difference between Ind AS 23 and ICDS IX is in
respect of capitalisation of costs of borrowings taken specifically for
acquisition of an asset. Under ICDS IX read with the proviso to section
36(1)(iii), cost of borrowings taken for acquisition of all fixed assets, up to
the date of put to use, is to be capitalised. However, under Ind AS 23, qualifying
assets, where such borrowing costs are to be capitalised, are only those assets
which necessarily take a substantial period of time to get ready for their
intended use or sale, and not all fixed assets. This requires judgement to be
applied and can be subjective – the period for qualifying assets under Ind-AS
23 can be even 6 months or even 24 months.

There is also a material difference in the concept of
borrowing costs as per Ind-AS 23 and ICDS IX.As per Ind-AS 23, borrowing cost
is calculated using the effective interest method, whereas as per ICDS, it is
calculated at actual interest and other costs incurred.

Exchange differences arising in respect of foreign currency
borrowing, forms part of borrowing costs as per Ind-AS, whereas the same does
not form part of borrowing cost as per ICDS.

As per Ind-AS, any income from temporary investment of
borrowed funds is to be reduced from the borrowing cost required to be
capitalised, whereas such reduction is not permissible in ICDS.

There is also a material difference in the formula for
capitalising general borrowing cost, in that under ICDS, the cost of general
borrowing is apportioned in the ratio of the qualifying assets to the total
assets based on the opening and closing values of such assets, without
considering the amount of or movement in borrowings during the year Under Ind
AS, the weighted average cost of general borrowing is applied to the value of
qualifying assets for the relevant period.

As per Ind-AS 23, inventories that do not necessarily take a
substantial period of time for getting ready for sale will not qualify as
qualifying assets. The term “substantial period of time” is not defined, and
hence could be even less than 12 months. However, as per ICDS, the period of
time is defined as 12 months, and hence inventories that require less than 12
months to bring them to a saleable condition are not qualifying assets.

As per Ind-AS, an entity shall cease capitalizing borrowing
costs to assets, when substantially all the activities necessary to prepare
such asset for its intended use or sale are complete. However, as per ICDS, the
capitalization would cease where fixed assets are put to use, or when
substantially all the activities necessary to prepare such inventory for its
intended sale are complete.

Impact of the above differences.

There are various differences between Ind-AS and ICDS on
definition of borrowing cost and qualifying assets, treatment of income arising
from temporary investment of borrowed fund, formula for capitalising borrowing
cost in case of general borrowings and finally, on the time of cessation of
capitalisation. These would result in different capitalisation of borrowing
costs as per accounts, and in computation of income as per ICDS. Accordingly,
the interest debited to Statement of Profit and Loss and that allowable as a
deduction would also differ. These differences would also impact the
depreciation.

9. Financial assets

Financial assets as per Ind-AS
109

As per Ind-AS 109, all financial asset are required to be
subsequently measured at fair value through profit & loss (FVTPL), fair
value through other comprehensive income (FVOCI) or at amortised cost (normally
for debt instruments), at each balance sheet date, depending upon their initial
classification by the entity.

Investments

Investments are not covered by ICDS, but any gain or loss is
to be considered as capital gains on transfer of such investments. Therefore,
any item in statement of profit or loss or other comprehensive income, on
account of remeasurement of financial assets, is to be ignored for computation
of taxable income.

Any security on acquisition as stock in trade shall be
recognised at actual cost. At the end of any previous year, securities held as
stock-in-trade shall be valued at actual cost initially recognised or net
realizable value at the end of that previous year, whichever is lower.
Securities not listed on a recognized stock exchange or listed but not quoted
on a recognised stock exchange with regularity from time to time, shall be
valued at actual cost initially recognized.

For the purpose of applying the above principles, the
comparison of actual cost initially recognised and net realisable value shall
be done category-wise and not for each individual security. For this purpose,
securities shall be classified into the following categories, namely:-

(a) shares,

(b) debt securities,

(d) any other securities, not covered above.

The value of securities held as stock-in-trade of a business
as on the beginning of the previous year shall be:

(a) the cost
of securities available, if any, on the day of the commencement of the business
when the business has commenced during the previous year; and

(b) the
value of the securities of the business as on the close of the immediately
preceding previous year, in any other case.

Difference between the Ind-AS
and ICDS

There is material difference in the valuation of securities
held as stock in trade as per Ind-AS 109 and ICDS IX. As per Ind-AS, the
valuation of securities are required to be made at fair value. However, as per
ICDS, the listed securities, held for trading shall be valued at actual cost
initially recognised or net realisable value at the end of that previous year,
whichever is lower, Further, ICDS requires valuation on securities to be made
category-wise., and not on individual investment basis as per Ind-AS.

Impact of the above differences

In view of the above difference, there would be differences
in gain or loss recognised by the company in its profit and loss account vis-à-vis
as per tax return. The company would have to maintain detailed records of
transactions of securities traded as well as held as inventory, by applying
principles laid down in Ind-AS as well as ICDS.

10. Actual cost of assets
– Cost of Dismantling and restoration

Cost of an asset as per Ind-AS
16

As per Ind-AS 16, an item of property, plant and equipment
that qualifies for recognition as an asset shall be measured at its cost. Cost
for this purpose also includes “the initial estimate of the costs of
dismantling and removing the item and restoring the site on which it is
located, the obligation for which an entity incurs.”

Actual cost of asset as per ICDS IV

As per ICDS IV, the actual cost of an acquired tangible fixed
asset shall comprise its purchase price, import duties and other taxes,
excluding those subsequently recoverable, and any directly attributable
expenditure on making the asset ready for its intended use. Any initial
estimate of the costs of dismantling, removing the item and restoring the site
on which it is located, is not treated as actual cost.

Difference between the Ind-AS
and ICDS

Actual cost of assets as per Ind-AS includes cost of the
initial estimate of the costs of dismantling, removing the item and restoring
the site on which it is located. However, the same has to be ignored as per the
ICDS.

Impact of the above differences

Accordingly, any increase in actual cost of the assets
because of cost of dismantling being included as per Ind-AS has to be ignored
while computing actual cost of assets as per ICDS V.

Impact on Book Profits under Minimum Alternative Tax

In the above article, the impact on book profits under
section 115JB has not been considered, since the starting point for that
purpose is the profit as per statement of profit and loss account, and the
further adjustments required to be made are listed out in sub-sections (2A),
(2B) and (2C) of section 115JB.

Conclusion

These are only some of the significant differences which one
may come across, while computing the income chargeable to tax under the
Income-tax Act, 1961, where the accounts have been prepared by adopting Ind AS.

There are many more differences which one may
come across during the course of review of the accounts. Being aware of such
differences is essential for a tax auditor or tax advisor, and hence it is
essential to understand the differing accounting treatment being necessitated
on account of adoption of Ind AS.

shailesh.kwebmaker

Sections 2(42A), 54 – Date of letter of allotment can be considered to compute the period of holding to assess the entitlement of exemption u/s. 54.

12. Nandita Patodia vs. ITO (Mumbai)

Members : G. S. Pannu (AM) and Amarjit Singh (JM)

ITA No.: 5982/Mum/2013

A.Y.: 2010-11.
Date of Order: 31^stMarch, 2017

Counsel for assessee / revenue: Anuj Kishnadwala / Pradeep
Kumar Singh

FACTS

The assessee, an individual, filed return of income declaring
total income of Rs. 11,16,013. In the return of income, the assessee claimed
exemption u/s. 54 in respect of long term capital gain of Rs. 45,58,478 arising
on sale of two flats being flat nos. 801 and 802 in Neelkanth Palm Realty. The
exemption was claimed on the ground that the assessee has purchased a new
residential house for Rs. 68,26,400 being Flat No. 701 in Neelkanth Palm Thane.

In the course of assessment proceedings, the Assessing
Officer (AO) found that the agreements for purchase of the flats sold were
dated 26.3.2009 and 27.3.2009. Considering the holding period by adopting these
dates, the gain would be short term capital gain. The assessee had adopted
30.3.2005, being the date of letter of allotment, to be the date of acquisition
of these flats. The AO finalised the assessment by regarding the date of the
agreement as the date of acquisition of flats sold and charged to tax the
capital gain as short term capital gain. He denied exemption claimed u/s. 54 of
the Act.

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
where it was contended that the Mumbai Tribunal in the case of Anupama
Agarwal vs. DCIT [ITA No. 472/Mum/2015 dated 23.9.2016], the assessee’s
sister has considered the holding period from 30.03.2005 being the date of
letter of allotment.

HELD

The Tribunal observed that from the order passed by the
Tribunal in the case of Anupama Agarwal (supra) it is quite clear that
in the case of the sister of the assessee the date of allotment and payment of
first installment was considered by ITAT for assessing whether the gain arising
on sale was short term gain or a long term gain. It held that –

(i) the case of the assessee is squarely covered
by the case of Anupama Agarwal (supra); and

(ii) the ratio given in the case of Madhu Kaul
vs. CIT and another [363 ITR 54 (Punj. & Har.)] and CIT vs. S. R.
Jeyshankar [373 ITR 120 (Mad)] are also quite applicable to the facts of
the present case in which the date of allotment letter was considered to assess
the holding period to ascertain the entitlement of exemption u/s. 54 of the
Act.

The Tribunal set aside the finding of the CIT(A) and directed
the AO to consider the allotment letter dated 30.3.205 to determine the long
term / short term capital gain and accordingly the entitlement of exemption
u/s. 54 of the Act.

The appeal filed by
the assessee was allowed.

shailesh.kwebmaker

Section 271(1)(c) – Taxability of compensation received by the assessee on account of hardship faced due to delay in delivery of flat is a debatable issue and therefore penalty cannot be levied.

11. Shri Laxmankumar R. Daga vs. ITO (Mumbai)

Members : Mahavir Singh (JM) and N. K. Pradhan (AM)

ITA No.: 3326/Mum/2014

A.Y.: 2004-05. Date
of Order: 15^th March, 2017

Counsel for assessee / revenue: Ms. Nikita Agarwal / Maurya
Pratap

FACTS

In the course of assessment proceedings, the Assessing
Officer (AO) noticed that the assessee had received compensation of Rs.
16,50,000 on account of hardship faced due to delay in delivery of flat at
Suraj Apartments from the developer. He
taxed this amount as compensation received on surrender of tenancy rights and
charged it to tax as long term capital gains. He levied a penalty of Rs.
4,80,725 u/s. 271(1)(c) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A)
where it contended that he had disclosed the receipt on account of compensation
on the face of the balance sheet and the said balance sheet was a part of
return of income and the auditor in Form 3CD had specifically mentioned this
amount as a capital receipt. Reliance was also placed on the decision of Mumbai
Tribunal in the case of Kushal K. Bangia vs. ITO [ITA No. 2349/Mum/2011
dated 31.1.2012 for AY 2007-08], wherein the Tribunal has held that `receipts
during redevelopment are capital receipts and not revenue and such receipts
reduce the cost of assessee and should be taken into account when such
redeveloped properties are sold’. However, the CIT(A) upheld the action of the
AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the amount of compensation was duly
reflected in the balance sheet filed along with the return of income as
compensation / damage received from M/s MR & DR Thacker and was added to
the proprietor’s capital. Having noted the decision of the Tribunal in the case
of Kushal K. Bangia (supra), it held that the taxability of compensation
of Rs. 16,50,000 received by the assessee as long term capital gain by the AO
is a debatable issue. It held that an analogy may be drawn here from the decision
of the Delhi High Court in CIT vs. Mushashi Autoparts India Pvt. Ltd. [330
ITR 545 (Del)] where the court held that penalty cannot be levied in a case
where the assessee, prior to commencement of business had received interest,
which was capitalised as pre-operative expenses. In the assessment, the amount
was regarded as taxable. The Court held that treating the amount as taxable
income cannot by itself justify levy of penalty. The Tribunal deleted the
penalty levied by the AO u/s. 271(1)(c) of the Act.

The appeal filed by the assessee was allowed.

shailesh.kwebmaker

Section 251 – An order enhancing the assessment made, passed by CIT(A), without giving an opportunity of being heard to the assessee, violates the principles of natural justice and is bad in law and cannot be sustained.

10. Jagat P. Shah (HUF) v.
ACIT (Mum)

Members : Mahavir Singh
(JM) and Rajesh Kumar (AM)

ITA No.: 2584/Mum/2015

A.Y.: 2009-10. Date of Order: 21^st March, 2017

Counsel for assessee /
revenue: Rahul Hakani / M. C. Om Ningshen

FACTS

The assessee disclosed net income in F & O transactions
amounting to Rs. 90,017. According to the assessee, the unexpired future &
option contract as on 1.4.2008 was Rs. 50,93,939 which was added to the
business loss of Rs. 5,82,655 thereby reducing the said loss to be carried forward.

The AO in the remand report changed the valuation of
unexpired contract and came to the conclusion that the net profit should be
calculated at Rs. 6,48,780 by way of enhancement or net profit should be
sustained at Rs. 40,89,667 instead of Rs. 50,93,939 as made by the AO while
framing the original assessment.

The CIT(A), without giving any notice of enhancement u/s. 251
of the Act passed an order enhancing the net profit to Rs. 66,48,780.

Aggrieved, the assessee preferred an appeal to the Tribunal
where as an additional ground it was contended that the action of CIT(A) in
enhancing the assessment without giving an opportunity to the assessee violated
the principles of natural justice.

HELD

The Tribunal noted that the CIT(A) has passed the order on
the basis of remand report of the AO enhancing the assessment by taking net
profit to Rs. 66,48,780 without issuing any show cause notice u/s. 251 of the
Act. The Tribunal held that CIT(A) should have given opportunity to the
assessee to present his case which was not given and therefore violated the
principles of natural justice. It held that, the order passed by CIT(A) without
giving opportunity to the assessee is bad in law and cannot be sustained. The
Tribunal set aside the order passed by CIT(A) and restored the matter back to
the file of the AO to decide the same as per law after providing fair and
reasonable opportunity to the assessee.

Compiler’s note: The amounts stated under the caption “Facts”
are not reconciling / clear but the same are as mentioned in the order of the
Tribunal.

shailesh.kwebmaker

Sections 10(38), 28(i), 45 and CBDT Circular No. 6 of 2016 – If the assessee so desires, the Assessing Officer has to treat the capital gain earned on listed shares and securities held for a period of more than 12 months, as income from capital gains. However, once such a stand is taken by the assessee it shall remain applicable in subsequent assessment years also.

11. [2017] 81 taxmann.com
220 (Chandigarh – Trib.)

Emm Bee Fincap (P.) Ltd.
vs. DCIT

A.Ys.: 2005-06, 2006-07
and 2008-09 Date of Order: 17^thApril, 2017

FACTS

In the return of income, the assessee had declared Long Term
Capital Gain of Rs. 1,14,77,193 as exempt u/s 10(38) of the Act. In the course
of assessment proceedings, the Assessing Officer (AO) found that the assessee
was involved in no other business activities other than transactions in shares.
He further observed that this was its primary business since its inception. The
AO noted that the transaction of shares were being continuously and
systematically undertaken year from year since inception, involving tremendous
volume which pointed out to a profit motive. The AO held that the entire share
transactions were business activity. While coming to this conclusion, the AO
mentioned that neither the details of purchase and sale of shares nor proof of
the same being in the nature of investment or stock-in-trade (referred to CBDT
Circular No. 4 of 2007, dated 15.6.2007) as also the manner and mode of the
transactions were provided nor were books of account for any of the years under
assessment were produced for verification. The AO held the entire share
transactions as business activity and treated the gains earned thereon as the
business income of the assessee and added back the same to the taxable income
of the assessee making an addition of Rs. 1,14,77,193/- in the process.

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
where attention of the Tribunal was drawn to Circular No. 6 of 2016 issued by
CBDT and pointed out that CBDT in the said circular had given instructions that
in respect of listed shares and securities held for a period of more than 12
months immediately preceding the date of its transfer, the assessee, at its
option can treat the income derived therefrom as capital gain which shall not
be disputed by the AO.

HELD

The Tribunal found that
CBDT in the said circular, has laid down further guidelines to be followed by
AO while deciding the issue, the objective being reducing litigation on an
issue where there is lot of uncertainty and hence tremendous litigation. The
Tribunal held that it is evident from the said circular that the CBDT has given
instruction to the AO to treat the capital gain earned on listed shares and
securities held for a period of more than 12 months, as income from capital
gains if the assessee so desires. It noted that the said instructions states
that once such a stand is taken by the assessee, it shall remain applicable in
subsequent assessment years also.

In the light of the said
circular, the Tribunal restored the issue of determining the nature of the
gains earned by the assessee on the transactions of purchase and sales of
shares, back to the file of the AO and directed the AO to decide the issue
afresh in the light of the aforesaid circular of the CBDT after taking into
consideration the facts of the case in hand.

shailesh.kwebmaker

Loan or Advance to HUF by Closely Held Company – Whether Deemed Dividend U/S. 2 (22)(e) – Part II

(Continued from the
last issue)

2.5 As mentioned in para 2.4 read with para
2.1.2.1 of Part-I of this write-up, the
Tribunal had decided the issue in favour of assessee merely by following the
decision of the co-ordinate bench in the case of Binal Sevantilal Koradia (HUF)
[Koradia (HUF) ‘s case] which in turn had followed the decision of the Special
Bench of the Tribunal in Bhaumik Colour’s case [313 ITR 146(AT)]. As further
mentioned in para 2.4 read with para 2.3 of Part –I of this write-up, the High
Court had reversed the decision of the Tribunal merely by referring to the provisions
of section 2(22)(e) and stating that it is not disputed that the Karta is a
member of the HUF which has taken a loan from G. S. Fertilizers Pvt. Ltd.
(GSF). 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 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).

Gopal and Sons HUF vs. CIT(A)- (2017) 145 DTR 289 (SC)

3.1 The
issue of taxability of the loan taken by the assessee HUF from GSF as deemed
dividend u/s 2(22)(e) in the hands of the assessee HUF for the Asst. Year.
2006-07 came-up for consideration before the Apex Court at the instance of
assessee HUF.The following question of law was raised before the 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?”

3.2 On behalf of the assessee HUF, it was
contended that the tribunal had correctly explained the legal position that HUF
cannot be either beneficial owner or registered owner of the shares and hence
the amount of such loan cannot be taxed as deemed dividend u/s 2(22)(e) in the
hands of the assessee HUF.

3.2.1 In support
of the above contention, raised on behalf of the assessee HUF, reliance was
placed on the observations of the Apex Court in the case of C.P. Sarathy
Mudaliar (83 ITR 170) referred to in para 1.3.1 of Part-I of this write-up in
which, in substance, it is stated that an HUF cannot be a shareholder of the
company and the shareholder of a company is the individual who is registered as
shareholder in the books of the company. In that case, as mentioned in para 1.3
of Part-I of this write-up, the Court took the view that a loan granted to a
beneficial owner of the shares who is not a registered shareholder can not be
regarded as loan advanced to a ‘shareholder’ of the company within the mischief
of section 6A(e) of the 1922 Act.

3.3 On
the other hand, the counsel appearing on behalf of the Revenue had relied on
the findings of the AO and CIT(A) and submitted that on the facts of this case,
the Revenue was justified in taxing the amount in question as deemed dividend
in the hands of the assessee HUF.

3.4 For
the purpose of deciding the issue, the Court noted the facts of the assessee
HUF referred to in para 2.1 of Part-I of this write-up. The Court also referred
to the relevant provisions of section 2(22)(e) including Explanation 3 which
defines the expression “concern” (which includes HUF) and the meaning of
substantial interest of a person in a ‘concern’, other than a company, which
effectively states that a person shall deemed to have substantial interest in a
concern (in this case HUF) if he is, at any time during the previous year,
beneficially entitled to not less than 20% of the income of such ‘concern’ (in
this case HUF).

3.4.1 The Court then also referred to the contention
of the assessee HUF before the CIT(A) that the assessee being HUF, it was not
the registered shareholder and that the GSF had issued shares in the name of
Shri Gopal Kumar Sanei, the Karta of the HUF, and not in the name of the
assessee HUF as shares could not be directly allotted to an HUF and hence, the
New Provisions of section 2(22)(e) cannot be attracted. In this context and in
the context of the provisions of section 2(22)(e), the Court then observed as
under :

“Taking note of the aforesaid
provision, the CIT(A) rejected the aforesaid contention of the assessee. The
CIT(A) found that examination of annual returns of the Company with Registrar
of Company (ROC) for the relevant year showed that even if shares were issued
by the Company in the name of Shri. Gopal Kumar Sanei, Karta of HUF, but the
Company had recorded the name of the assessee/HUF as shareholders of the
Company. It was also recorded that the assessee as shareholder was having
37.12% share holding. That was on the basis of shareholder register maintained
by the Company. Taking aid of the provisions of the Companies Act, the CIT(A)
observed that a shareholder is a person whose name is recorded in the register
of the shareholders maintained by the Company and, therefore, it is the
assessee which was registered shareholder. The CIT(A) also opined that the only
requirement to attract the provisions of section 2(22)(e) of the Act is that
the shareholder should be beneficial shareholder. On this basis, the addition
made by the AO was upheld.”

3.5 The Court then noted the view taken by
the Tribunal and its reliance on the decision of the co-ordinate bench in
Koradia HUF’s case (supra) referred to in para 2.1.2 of Part-I of this
write-up. The Court then stated that the High Court has reversed the decision
of the Tribunal with one line observation, viz., ‘the assessee did not dispute
that the Karta is a member of HUF which has taken the loan from the Company
and, therefore, the case is squarely within the provisions of section 2(22)(e)
of the Income-tax Act’.

3.6 The Court then stated that Sec. 2(22)(e)
creates a fiction, thereby bringing any amount otherwise than as dividend in to
the net of dividend under certain circumstances. It gives artificial definition
of dividend. It treats the amount as deemed dividend which is not a real
dividend. As such, the Court reiterated the settled position that a provision
which is a deemed provision and fictionally creates certain kinds of receipts
as dividend is to be given strict interpretation. Therefore, unless all the
conditions contained in the provision are fulfilled, the receipt cannot be
deemed as divided. Further, the Court reiterated another settled principle,
viz., in case of a doubt or where two views are possible, benefit shall accrue
in favour of the assessee.

3.7 After referring to the legal position with
regard to deeming fiction, the Court, in the context of the section 2(22)(e),
stated that certain conditions need to be fulfilled in order to attract these
provisions The Court then pointed out that for the purpose of this case,
following conditions need to be fulfilled

“(a) Payment is to be made by way of advance or
loan to any concern in which such shareholder is a member or a partner.

(b) In the
said concern, such shareholder has a substantial interest.

3.8 After referring to the provisions contained
in Explanation 3 [referred to in para 3.4 above], the Court observed as under :

“In the instant case, the payment in
question is made to the assessee which is a HUF. Shares are held by Shri. Gopal
Kumar Sanei, who is Karta of this HUF. The said Karta is, undoubtedly, the
member of HUF. He also has substantial interest in the assessee/HUF, being its
Karta. It was not disputed that he was entitled to not less than 20% of the
income of HUF. In view of the aforesaid position, provisions of section
2(22)(e) of the Act get attracted and it is not even necessary to determine as
to whether HUF can, in law, be beneficial shareholder or registered shareholder
in a Company.”

3.9 Finally, the Court decided the issue in
favour of Revenue and concluded as under :

“ It is also found as a fact, from the
audited annual return of the Company filed with ROC that the money towards
share holding in the Company was given by the assessee/HUF. Though, the share
certificates were issued in the name of the Karta, Shri Gopal Kumar Sanei, but
in the annual returns, it is the HUF which was shown as registered and
beneficial shareholder. In any case, it cannot be doubted that it is the beneficial
shareholder. Even if we presume that it is not a registered shareholder, as per
the provisions of section 2(22)(e) of the Act, once the payment is received by
the HUF and shareholder (Mr. Sanei, karta, in this case) is a member of the
said HUF and he has substantial interest in the HUF, the payment made to the
HUF shall constitute deemed dividend within the meaning of clause (e) of
section 2(22) of the Act. This is the effect of Explanation 3 to the said
Section, as noticed above. Therefore, it is no gainsaying that since HUF itself
is not the registered shareholder, the provisions of deemed dividend are not
attracted.”

3.9.1 With the above conclusion, the Court stated
that the judgment of the Apex Court in the case C.P. Sarathy Mudaliar (supra)
will have no application. That was a judgment rendered in the context of
section 2(6A)(e) of the 1922 Act wherein there was no provision like
Explanation 3.

Conclusion

4.1 With the above judgment of the Apex Court,
it is now settled that in case of a loan given by a closely held company to an HUF (post May
‘87), and if other conditions of the second limb of the New Provisions of
section 2(22)(e) are satisfied, the deemed dividend becomes taxable in the
hands of the HUF. The contention that HUF as such is not a registered
shareholder and therefore, the New
Provisions of section 2(22)(e) are not attracted even if it is the beneficial
owner of the shares is not likely to support the case of the assessee to avoid
taxation of deemed dividend under the New Provisions in the hands of the HUF.

4.1.1 From the above judgment of the Apex Court, it
would appear that once a loan is given to an HUF by a closely held company and
the registered shareholder of such company with requisite shareholding is a
member of the HUF having substantial interest (i.e. beneficially entitled to
not less than 20% of the income of the HUF), the second limb of the New
Provisions of section 2(22)(e) will be
attracted. In such a case, as observed by the Court (refer para 3.8 above), it
would not be necessary to determine as to whether HUF can, in law, be
beneficial shareholder or registered shareholder in a company.

4.1.2 Based
on the judicial decisions referred to in part I of this write-up, the view
which prevailed that for the purpose of invoking second limb of the New
Provisions of section 2(22)(e) (dealing with loan given to a ‘concern’),only
such shareholder (with requisite shareholding) who is registered as well as
beneficial owner of the shares should be member or partner in a ‘concern’
should not hold good in view of the observations of the Apex Court (refer paras
3.8 and 3.9 above). However, the requirement that he should be beneficially
entitled to not less than 20% of the income of such ‘concern’ at any time
during the previous year (substantial interest in a ‘concern’) continues.

4.1.3 The above judgment is also relevant for the
purpose of deciding the taxable person under the second limb of the New
Provisions to section 2(22)(e) in cases
where a loan is given to any ‘concern’ referred to in Explanation 3(a) to
section 2(22)(e). It seems that, the issue referred to in para 1.4.2.1 of part
I of this write-up should now impliedly get settled to the effect that in such
cases, the deemed dividend is taxable in the hands of the ‘concern’ to whom the
loan is given by the company. This gives support to the view expressed in CBDT
Circular No. 495 dtd. 22/9/1987 wherein it has been opined that the deemed
dividend, in such case, would be taxed in the hands of a ‘concern’ (i.e.
non-shareholder). As such, in this context, the judicial precedents referred to
in that para will not be useful.

4.2 In the above case, the share certificates
were issued by the company in the name of the Karta but in the annual returns
of the company filed with the ROC, the HUF was shown as registered and
beneficial shareholder. This was the undisputed findings of the lower
authorities and on that basis, the Court, it seems, was inclined to treat the
HUF as registered shareholder also.

However, on these facts, the Court
concluded that it cannot be doubted that it is the beneficial owner and even if
it is not a registered shareholder, the payment received by the HUF wherein the
concerned shareholder is a member with substantial interest constitutes, in
view of the Explanation 3 to the section 2(22)(e), deemed dividend under the
second limb of the New Provisions of section 2(22)(e) in the hands of the HUF
(of course, to the extent provided in the section).

4.3 In
the above case, the Court also has clearly stated that for the purpose of this
case, to attract the second limb of the New Provisions of section 2(22)(e),
three conditions are required to be fulfilled (mentioned in para 3.7 above).
One such condition requires that in the ‘concern’ to whom the loan is given (in
which the specified shareholder is a member or a partner), such shareholder
should have a substantial interest (i.e. in this case, he should be
beneficially entitled to not less than 20% of the income of the HUF).

4.3.1 It is interesting to note that in the above
case, the Court has proceeded on the basis that it was not disputed that the
Karta (who was claimed to be the registered shareholder) is beneficially
entitled to not less than 20% of the income of the HUF. Therefore, the Court
has not gone into the correctness of the satisfaction of this condition and in
law, there could be debate on satisfaction of this condition.

4.3.2 From the facts of the above case and context
in which the question raised before the Apex Court is ultimately decided, it
would appear that in this case, the Court was not concerned with the issue of
applicability of the second limb of the New Provisions of section 2(22)(e) to
cases where only the beneficial owner of share in a closely held company (with
requisite percentage) is a member of a ‘concern’ with substantial interest and
such company has given a loan to such ‘concern’.

4.4 In the above case, the Apex Court has
reiterated the settled position that section 2(22)(e) is a deeming fiction and
therefore, it has to be strictly construed. The Court has also reiterated other
settled principle that in case of doubt or where two views are possible in
construing a provision under the Act, the view favourable to the assessee
should be taken.

4.5 In
the above case, the Court was concerned with the effect of the second limb of
the New Provisions of section 2(22)(e) read with Explanations 3 and therefore,
effect of the judgment should be confined only to that part of the provisions.

4.6
In view of the above judgment of the Apex Court, in the context of the
issues under the consideration, many decisions of the courts/Tribunal (referred
to in part I of this write-up) including the decision of the Special Bench in
Bhaumik Colour’s case (supra) will be affected and will have to be read
and applied accordingly.

shailesh.kwebmaker

Payments for Use of Online Database – Whether Royalty?

Issue for
Consideration

Under the
Income-tax Act, payment of royalty is one of the items which is subjected to
deduction of tax at source u/s. 194J, if the payment is made to a resident, or
u/s. 195, if the payment is made to a non-resident. The term “royalty” has been
defined in Explanation 2 to section 9(1)(vi) of the Income-tax Act, as well as
in various double taxation avoidance agreements (DTAAs) that India has signed
with different countries.

The definition
in explanation 2 to section 9(1)(vi) defines the term “royalty” as under:

Explanation 2. —For the purposes of this
clause, “royalty” means consideration (including any lump sum
consideration but excluding any consideration which would be the income of the
recipient chargeable under the head “Capital gains”) for—

(i) the transfer of all or any rights
(including the granting of a licence) in respect of a patent, invention, model,
design, secret formula or process or trade mark or similar property;

(ii) the imparting of any information
concerning the working of, or the use of, a patent, invention, model, design,
secret formula or process or trade mark or similar property;

(iii) the use of any patent, invention,
model, design, secret formula or process or trade mark or similar property;

(iv) the imparting of any information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill;

(iva) the use or right to use any industrial,
commercial or scientific equipment but not including the amounts referred to in
section 44BB;

(v) the transfer of all or any rights (including
the granting of a licence) in respect of any copyright, literary, artistic or
scientific work including films or video tapes for use in connection with
television or tapes for use in connection with radio broadcasting, but not
including consideration for the sale, distribution or exhibition of
cinematographic films; or

(vi) the rendering of any services in
connection with the activities referred to in sub-clauses (i) to (iv), (iva)
and(v).

Explanations 3
to 6 to section 9(1)(vi) clarify various aspects of and terms used in the
definition of royalty. Explanations 4 to 6 were inserted by the Finance Act
2012, with retrospective effect from 1.4.1976. Explanations 3 to 6 read as
under:

Explanation 3. —For the purposes of this
clause, “computer software” means any computer programme recorded on
any disc, tape, perforated media or other information storage device and
includes any such programme or any customized electronic data.

Explanation 4. —For the removal of doubts, it
is hereby clarified that the transfer of all or any rights in respect of any
right, property or information includes and has always included transfer of all
or any right for use or right to use a computer software (including granting of
a licence) irrespective of the medium through which such right is transferred.

Explanation 5. —For the removal of doubts, it
is hereby clarified that the royalty includes and has always included
consideration in respect of any right, property or information, whether or not—

(a) the possession or control of such right,
property or information is with the payer;

(b) such right, property or information is
used directly by the payer;

Explanation 6. —For the removal of doubts, it
is hereby clarified that the expression “process” includes and shall
be deemed to have always included transmission by satellite (including
up-linking, amplification, conversion for down-linking of any signal), cable,
optic fibre or by any other similar technology, whether or not such process is
secret;

The issue has
arisen before the courts as to whether fees for subscription to an online
database, containing standard information available to all subscribers, amounts
to royalty or not. While the Karnataka High Court has taken the view that such
payments amount to royalty, the Authority for Advance Ruling has taken a
contrary view, holding that such payments are not royalty.

Factset Research
Systems’ case

The issue came
up before the Authority for Advance Rulings in the case of Factset Research
System Inc., in re (2009) 317 ITR 169 (AAR).

In this case,
the assessee was a US company, which maintained a database outside India
containing financial and economic information, including fundamental data of a
large number of companies worldwide. Its customers were financial
intermediaries and investment banks, which required access to such such data.
The database contained public information collated, stored and displayed in an
organised manner by the assessee, such information being available in the
public domain in a raw form. Through the database combined with the use of
software, the assessee enabled its customers to retrieve this publicly
available information within a shorter span of time and in a focused manner.
The database contained historical information, and the software to access the
database, and other related documentation were hosted on its mainframes and
data libraries maintained at the data centres in the USA.

To access and
view the database, the customers had to download a client interface software
(similar to an Internet browser). Customers could subscribe to specific
database as per their requirements, and could view the data on their computer
screens. The assessee entered into a Master Client License Agreement with its
customers, under which it granted limited, non-exclusive, non-transferable
rights to its customers to use its databases, software tools, etc. the
assessee did not carry on any business operations in India, and it had no agent
in India acting on its behalf, or having an authority to conclude contracts.
Subscription fees were received by it directly outside India from its
customers.

The assessee
sought an advance ruling on the taxability of such subscriptions received by
it, under the Income-tax Act or under the India-USA DTAA. It claimed before the
AAR that such fees received from customers in India were not taxable in India,
as they did not constitute royalty or fees for technical services either under
the Income-tax Act or under the India-USA DTAA. Further, as it did not have any
permanent establishment in India, the fees could not be taxed as business
income in view of article 7 of the India-USA DTAA.

The AAR
examined the material terms of the Master Client License Agreement. It noted
that the assessee granted the licensee limited , non-exclusive,
non-transferable rights to use the software, hardware, consulting services and
databases. The consulting services were provided through certain consultants,
who demonstrated FactSet’s products and its uses to customers. Such services
were not really required, as the assessee provided helpdesk facilitation free
of cost, though there was more such facilitation centre in India. It was further
clarified that no hardware was being provided to customers in India.

The AAR noted
that the services were provided solely and exclusively for the licensee’s own
internal use and business purposes only and that too in the licensee’s business
premises. Only the licensee’s employees, who had a password or user ID, could
access the service. The licensee could not use or permit any individual or
entity under its control to use the services and the licensed material for any
unauthorised use or purpose. All proprietary rights, including intellectual
property rights in the software, databases and all related documentation
(licensed material) remained the property of the assessee or its third-party
data/software suppliers. The licensee was permitted to use the assessee’s name
for the limited purpose of source attribution of the data obtained from the
database, in the internal business reports and other similar documents. The
licensee was solely responsible for obtaining required authorisation from the
suppliers for products received through them, and in the absence of such
authorisation, the assessee had the right to terminate the licensee’s access to
any supplier product.

The licensee
agreed not to copy, transfer, distribute, reproduce, reverse engineer, decrypt,
decompile, disassemble, create derivative works from, or make any part of the
service, including the data received from the service, available to others. The
licensee could use in substantial amounts of the Licensed Materials in the
normal conduct of its business for use in reports, memoranda and presentations
to licensee’s employees, customers, agents and consultants, but the assessee
(suppliers and their respective affiliates) reserved all ownership rights and
rights to redistribute the data and databases. Under the agreement, the
licensee acknowledged that the service and its component parts constituted
valuable intellectual property and trade secrets of the licensor and its
suppliers. The licensee agreed to cooperate with the licensor and suppliers to
protect the proprietary
rights in the software and databases during the term of the agreement.

The agreement
further provided that on termination of the agreement, the licensee would cease
to use all the licensed material, return any licensor hardware on request, and
expunge all data and software from its storage facility and destroy all
documentation, except such copies of data to the extent required by law. The
licensee could not use any part of the services to create a proprietary
financial instrument or to list on its exchange facilities.

On behalf of
the assessee, it was argued before the AAR that the assessee provided to the
subscriber, a mere right to view the information or access to the database,
while online. No transfer, including licensing of any right in respect of
copyright, was involved in this case. The right that the customer got was a
right to use copyrighted database and not copyright in the database. According
to the assessee, clause (v) of explanation 2 to section 9(1)(vi) did not encompass
the use of copyrighted material. The data was available in the public domain,
and was presented in the form of statements/charts after analysis, indexing,
description and appending notes for facilitating easy access. These value
additions were outside the public domain, and the copyright in them was not
transferred or licensed to the subscribers. The copyright which the assessee
had was similar to the head notes and indexing part of law reports. It was
submitted that none of the other clauses of explanation 2 could be invoked to
bring the subscription fee within the ambit of royalty u/s. 9(1)(vi).

So far as the
DTAA was concerned, it was argued that the fee had not been paid for the use of
or the right to use any copyright. The term “use” in the context of royalty
signified exploitation of property in the form of copyright, but not use of the
copyrighted product. The customers did not acquire any exclusive rights
enumerated in section 14(a) of the Indian Copyright Act.

On behalf of
the Department, reliance was placed on sections 14(a)(i) and (vi) of the Indian
Copyright Act for the argument that the rights specified therein were granted
to the customers, and that therefore there was a transfer of rights in respect
of the copyright. It was further argued that the data could be rearranged
according to the needs of the subscriber, and this amounted to adaptation
contemplated by sub clause (vi) of section 14(a) of the Indian Copyright Act.
Clause (iv) of explanation 2 to section 9(1)(vi) was also sought to be invoked
by the Department, by claiming that this amounted to imparting any information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill.

The AAR noted
that the assessee’s database was a source of information on various commercial
and financial matters of companies and similar entities. What the assessee did
was to collect and collate the said information/data, which was available in
public domain, and put them all in one place in the proper format, so that the
customer could have easy and quick access to this publicly available
information. The assessee had to bestow its effort, experience and expertise to
present the information/data in a focused manner, so as to facilitate easy and
convenient reference to the user. For this purpose, it was called upon to do
collation, analysis, indexing and noting, wherever necessary. These value
additions were the product of the assessee’s efforts and skills, and they were
outside the public domain. In that sense, the database was the intellectual
property of the assessee, and copyright attached to it.

In answer to
the question as to whether, in making the centralised data available to the
licensee for a consideration, whether it could be said that any rights which
the applicant had as a holder of copyright in the database were being parted in
favour of the customer, the AAR’s view was in the negative. The copyright or
other proprietary rights over the literary work remained intact with the
assessee, notwithstanding the fact that the right to view and make use of the
data for internal purposes of the customer was conferred upon the customer.
Several restrictions were placed on the licensee, so as to ensure that the
licensee could not venture on a business of his own, by distributing the data
downloaded by him or providing access to others. The grant of license was only
to authorise the licensee to have access to the copyrighted database, rather
than granting any right in or over the copyright as such.

In the view of
the AAR, the consideration paid was for the facility made available to the
licensee, and the license was a non-exclusive license. An exclusive license
would have conferred on the licensee and persons authorised by him, to the
exclusion of all other persons, including the owner of the copyright, any right
comprised in the copyright in a work. According to the AAR, the expression
“granting of license” in explanation 2 to section 9(1)(vi) took its colour from
the preceding expression “transfer of all or any rights”. It was not used in
the wider sense of granting a mere permission to do a certain thing, nor did
the grant of license denude the owner of copyrights of all or any of his
rights. According to the AAR, a license granting some rights and entitlements
attached to the copyright, so as to enable the licensee to commercially exploit
the limited rights conferred on him, is what is contemplated by the expression
‘granting of license’ in clause (v) of explanation 2.

The AAR
rejected the department’s argument that there was a transfer of rights in
respect of the copyright, by noting that the applicant was not conferred with
the exclusive right to reproduce the work (including the storing of it in
electronic medium) as contemplated by sub clause (i) of section 14(a) of the
Copyright Act. The exclusive right remained with the assessee, being the owner of
the copyright. By permitting the customer to store and use the data in the
computer for its internal business purpose, nothing was done to confer the
exclusive right to the customer. Such access was provided to any person who
subscribed, subject to limitations. The copyright of the assessee had not been
assigned or otherwise transferred, so as to enable the subscriber to have
certain exclusive rights over the assessee’s works. The AAR noted that the
Supreme Court, in SBI vs. Collector of Customs 2000 (115) ELT 597, in a
case where the property in the software had remained with the supplier and
license fee was payable by SBI for use of the software in a limited way, at its
own centres for a limited period, had held that “countrywide use of the
software and reproduction of software are two different things, and license fee
for countrywide use cannot be considered as the charges for the right to
reproduce the imported goods.”

The AAR
further negated the Department’s argument that permitting the data to be rearranged
amounted to adaptation, by holding that that was not the adaptation
contemplated by sub clause (vi) of section 14(a) of the Copyright Act read with
the definition of adaptation as per section 2(a). Therefore, according to the
AAR, no right of adaptation of the work had been conferred on the subscriber,
and the subscription fees received by the assessee from the licensee (user of
the database) did not fall within the scope of clause (v) of explanation 2 to section 9(1)(vi).

Examining the
position from the perspective of the DTAA, the AAR observed that the use of or
right to use any copyright of a literary or scientific work was not involved in
the subscriber getting access to the database for his own internal purpose. It
was akin to offering of a facility for viewing and taking copies for its own
use, without conferring any other rights available to a copyright holder. The
AAR observed that the expression “use of copyright” was not used in a generic
and general sense of having access to a copyrighted work, but the emphasis was
on “the use of copyright or the right to use it”. It was only if any of the
exclusive rights which the owner of the copyright had in the database was made
over to the customer/subscriber, so that he could enjoy such right, either
permanently or for a fixed duration of time and make a business out of it,
would such arrangement fall within the ambit of the phrase ‘use or right to use
the copyright’. The AAR noted that no rights of exclusive nature attached to
the ownership of copyright had been passed on to the subscriber even partially,
the licensee was not conferred with the right of reproduction and distribution
of the reproduced works to its own clientele, nor was the subscriber given the
right to adapt or alter the work for the purposes of marketing it. Therefore,
the underlying copyright behind the database could not be said to have been
conveyed to the licensee who made use of the copyrighted product.

The AAR also
rejected the argument of the Department that there was imparting of information
concerning technical, industrial, commercial or scientific knowledge,
experience or skill. According to the AAR, the information which the licensee
got to the database did not relate to the underlying experience or skills which
contributed to the end product, and the assessee did not share its experiences,
techniques or methodology employed in evolving the database with the
subscribers, nor impart any information relating to them. The information or
data transmitted to the database was published information already available in
public domain, and not something which was exclusively available to the
assessee. It did not amount to imparting of information concerning the
assessee’s own knowledge, experience or skills in commercial and financial
matters.

As regards the
Department’s argument that such payment also included equipment royalty, i.e.
for use or right to use any industrial, commercial or scientific equipment,
since the server, which maintained the database, was used by customers as a
point of interface, the AAR was of the view that the consideration was not paid
by the licensee for the use of equipment, but was for availing of the facility
of accessing the data/information collected and collated by the assessee.

The AAR was
therefore of the view that the subscription fee was not in the nature of
royalty, either under the Income-tax Act, or under the DTAA.

Wipro’s case

The issue
again came up for consideration before the Karnataka High Court in the case of CIT
vs. Wipro Ltd 355 ITR 284.

In this case,
the assessee made certain payments to a non-resident, Gartner Group,
USA/Ireland, for obtaining access to the database maintained by the group, on
which no tax was deducted u/s. 195 of the Income-tax Act. A show cause notice
was issued under section 201 to the assessee, asking it to explain the reasons
for non-deduction of tax at source.

The assessee
responded by stating that the payment was akin to making a subscription for a
journal or magazine of a foreign publisher, and though the journal contained
information concerning commercial, industrial or technical knowledge, the payee
made no attempt to impart the same to the payer. According to it, the payment
fell outside the scope of clause (ii) of explanation 2 to section 9(1)(vi).
Further, it was claimed that the payment was not contingent on productivity,
use, or disposition of the information concerning industrial, commercial or
scientific experience in order to be construed as royalty under article 12 of
the DTAA between India and USA. Further, the assessee claimed that the payment
was for the purposes of a business carried on outside India or for the purposes
of making or earning any income from any source outside India, and therefore fell within the exception (b) to section 9(1)(vi).

The assessing
officer held that the payments amounted to royalty within the meaning of
explanation 2 to section 9(1)(vi), or alternatively amounted to fees for
technical services, both of which were liable to tax in India, both under the
Act, as well as under the DTAA. The Commissioner(Appeals) upheld the order of
the assessing officer holding that the payments amounted to royalty.

The Income Tax
Appellate Tribunal allowed the assessee’s appeals, by holding that the payments
made to Gartner Group did not constitute royalty, as the same was in the nature
of subscription made to a journal or magazine, and no part of the copyright was
transferred to the assessee, and that therefore the income was not chargeable
to tax in India.

Before the
High Court, on behalf of the revenue, it was argued that the payment made by
the assessee to Gartner Group was by way of royalty, as what was granted to the
assessee was a licence to have access to the database maintained by Gartner
Group, which was a scientific and technical service. Therefore, there was
transfer of copyright to the extent of having access to the database maintained
by Gartner Group, which access, but for the license, would have been an
infringement of copyright, the copyright continuing to be with Gartner Group.
Therefore, payments made by the assessee amounted to royalty, and could not be
considered to be akin to subscription made to a journal or magazine.

On behalf of
the assessee, it was argued that the payment made by the assessee to Gartner
Group was not by way of royalty, as no part of copyright was transferred to the
assessee for having access to the database. Further, as the right conferred
upon the assessee was only to have access to the database, it was akin to
subscription to a journal or magazine, and nothing more than that, and could
not be called as royalty.

The Karnataka
High Court, after considering the arguments observed that in identical cases,
i.e. ITA No 2988/2005 and connected cases (reported as CIT vs. Samsung
Electronics Co Ltd 345 ITR 494), after considering the contentions which
were identical to the contentions raised in these appeals, the court had held
that the payment made by the assessee to a non-resident company would amount to
royalty. According to the High Court, the fact that the issue in those cases
related to shrink-wrapped or off-the-shelf software, while that in this case
related to access to a database which was granted online, would not make any
difference to the reasoning adopted by the court to hold that such a right to
access would amount to transfer of right to use the copyright, and would amount
to royalty.

The Karnataka
High Court accordingly held that the payment for online access to the database
amounted to royalty.

Observations

To appreciate
the issue, one needs to refer to the facts and the ratio of the Karnataka High
Court decision in Samsung Electronics case (supra); the reason being
that the high court, in deciding Wipro’s case, has simply followed the decision
in Samsung Electronics case. That was a case of payment of licence fees by a
distributor of software to the overseas company and the Court held that for understanding
the meaning of ‘copyright’, one had to make a reference to the Copyright Act,
in the absence of any definition of the term under the Income-tax Act.
According to the Karnataka High Court, the right to copyright work would also
constitute exclusive right of the copyright holder, and any violation of such
right would amount to infringement u/s. 51 of the Copyright Act. According to
the court, granting of licence for taking copy of the software, and to store it
in the hard disk, and to take a backup copy and the right to make a copy
itself, was a part of copyright, since in the absence of licence, it would
constitute an infringement of copyright. Therefore, what was transferred was
the right to use the software (a right to use a copy of the software for the
internal business), an exclusive right which the owner of the copyright owned.

Therefore,
according to the Karnataka High Court, in Samsung Electronics case, the right
to make a copy of the software and use it for internal business by making a copy
of the same, and storing the same in the hard disk of the designated computer,
and taking backup copy, would itself amount to copyright work u/s. 14(1) of the
Copyright Act. Licence was granted to use the software by making copies, which
work, but for the license granted, would have constituted an infringement of
copyright. The supply of a copy of the software and the grant of the right to
copy the software was also a transfer of the copyright, since, copyright was a
negative right, in the absence of which there would be an infringement of the
copyright.

According to
the Karnataka High Court, in Samsung Electronics case, software was different
from a book or a pre-recorded music CD, as books or pre-recorded music CD could
be used once they were purchased, while in the case of software, the
acquisition of the CD by itself would not confer any right to the end-user, the
purpose of the CD being only to enable the end-user to take a copy of the
software and storage in the hard disk of the designated computer. If licence
was granted in that behalf. In the absence of licence, it would amount to
infringement of copyright.

If one
examines the logic of the Karnataka High Court’s decision, it is clear that the
case of a distributor would stand on a different footing from that of an
end-user, because a distributor would have the right to reproduce the software
for further distribution to customers, and the payment of the licence fees
would be in the ratio of the number of software licenses sold by him. In the
case of an end-user, there would be no right to reproduce for resale.

Further, the
Karnataka High Court seems to have lost sight of the fact that the payment for
the license for use of the software is made at the time of purchase of the CD
itself, and the ‘online clicking’ of the terms of the license after
installation of the software on the computer is merely a formality, and does
not involve payment of any further consideration to the owner of the copyright.
Therefore, the distinction sought to be drawn by the Karnataka High Court
between copyrighted articles such as books and music CD on the one hand, and
software on the other hand, does not seem to be valid.

Besides,
access to an online database is quite different from purchase of a
shrink-wrapped software, and an exclusive reliance on the logic of a decision
in Samsung Electronics case delivered in
the context of purchase of shrink-wrapped software to a case of subscription to
an online database in Wipro’s case does not seem to be justified.

Further, even there
various other High Courts/AAR have taken a view contrary to the view taken in Samsung
Electronics case holding that payments for purchase of shrink-wrapped
software does not amount to royalty, contrary to the view of the Karnataka High
Court. Please see DIT vs. Intrasoft Ltd 220 Taxman 273 (Del), Ericsson AB
vs. DDIT 343 ITR 470 (Del), Dassault Systems K K, in re 322 ITR 125 (AAR),
.

One can also
draw an analogy from the Supreme Court decision in the case of CIT vs. Kotak
Securities Ltd 383 ITR 1, in the context of fees for technical services,
where the Supreme Court has taken the view that provision of a standard service
does not amount to provision of technical services. The services have to be
specialized, exclusive and as per individual requirement of the user or
consumer who may approach the service provider for such assistance/service, to
constitute fees for technical services. In the case of royalty as well, the
same analogy should apply.

Internationally,
also, there is a clear distinction drawn between provision of database services
using a copyright, and transfer or use of a copyright in the OECD Commentary on
“Treaty characterization issues arising from e-Commerce” wherein ,
there is a useful discussion on this aspect under the heads ‘Data retrieval’
and ‘Delivery of exclusive or other high value data’, as under:

“Category 15: Data retrieval

Definition —The provider makes a repository
of information available for customers to search and retrieve. The principal
value to customers is the ability to search and extract a specific item of data
from amongst a vast collection of widely available data.

27. Analysis and conclusions —The payment
arising from this type of transaction would fall under Article 7. Some Member
countries reach that conclusion because, given that the principal value of such
a database would be the ability to search and extract the documents, these
countries view the contract as a contract for services. Others consider that,
in this transaction, the customer pays in order to ultimately obtain the data
that he will search for. They therefore view the transaction as being similar
to those described in category 2 and will accordingly treat the payment as
business profits.

28. Another issue is whether such payment
could be considered as a payment for services “of a technical nature”
under the alternative provisions on technical fees previously referred to.
Providing a client with the use of search and retrieval software and with
access to a database does not involve the exercise of special skill or
knowledge when the software and database is delivered to the client. The fact
that the development of the necessary software and database would itself
require substantial technical skills was found to be irrelevant as the service
provided to the client was not the development of the software and database
(which may well be done by someone other than the supplier) but rather making
the completed software and database available to that client.

Category 16: Delivery of exclusive or other high-value
data

Definition —As in the previous example, the
provider makes a repository of information available to customers. In this
case, however, the data is of greater value to the customer than the means of
finding and retrieving it. The provider adds significant value in terms of
content (e.g., by adding analysis of raw data) but the resulting product is not
prepared for a specific customer and no obligation to keep its contents
confidential is imposed on customers. Examples of such products might include
special industry or investment reports. Such reports are either sent
electronically to subscribers or are made available for purchase and download
from an online catalogue or index.

29. Analysis and conclusions —These
transactions involve the same characterization issues as those described in the
previous category. Thus, the payment arising from this type of transaction
falls under Article 7 and is not a technical fee for the same reason.”

Though the
discussion is in the context of fees for technical services, the same logic
would equally apply to royalty.

Therefore, the
better view is that of the AAR, that both under the Income-tax Act as well as
under the DTAA, subscription to an online database does not amount to royalty
or the fees for technical services and does not require deduction of tax at
source on payment, nor could it be deemed to be an income accrued in India u/s.
9(1)(vi) or (vii) or DTAA..

The decisions
discussed above (except that of Intrasoft) have been rendered in the context of
the law prevailing prior to 2012. In 2012, explanations 3 to 6 to section
9(1)(vi) were inserted with retrospective effect from 1.4.1976. We need to
perhaps examine whether the amendments affect the issue under consideration?

Explanations 3
and 4 deal with computer software. An online database is not a computer
software. The mere fact that a software may be used to access the database does
not make the payment one for use of the software. The payment remains in
substance for access of the information contained in the database. These
explanations 3 and 4 therefore do not apply to subscription to online
databases.

Explanation 6
deals with use of a process. In the case of subscription to an online database,
there is in substance no payment for use of a process. Even if the method of
‘logging in’ is regarded as a process, that is merely incidental to the access
to the database. The payment cannot be regarded as having been made for use of
a process, but for access to the information contained in the database.
Explanation 6 also therefore does not apply.

Explanation 5
deals with consideration for any right, property or information, and clarifies
that it would amount to royalty, irrespective of whether the possession or
control of such right, property or information is with the payer, whether such
right, property or information is used directly by the payer, or whether the
location of such right, property or information is in India. In case of an
online database, the consideration is surely for information, which is not
within the control of the payer. However, the imparting of information under
explanation 5 by itself cannot be read in isolation, and has to be read along
with the main definition of “royalty” in explanation 2 to section 9(1)(vi).
This is evident from the fact that if one reads explanation 5 in the absence of
explanation 2, it has no meaning at all in the context of section
9(1)(vi).

Clause (ii) of
explanation 2 refers to the imparting of any information concerning the working
of, or the use of, a patent, invention, model, design, secret formula or
process or trade mark or similar property. An online database does not provide
working of any such intellectual property, but merely provides financial or
general information in an organised manner. Clause (iv) of explanation 2 refers
to the imparting of any information concerning technical, industrial,
commercial or scientific knowledge, experience or skill. In case of an online
database, as rightly pointed out by the AAR in Factset’s case, no information
regarding knowledge, experience or skill of the database provider is provided
to the subscriber. Therefore, subscription to an online database does not fall
under either of these clauses. The insertion of explanation 5, though with
retrospective effect, therefore does not change the position in law that was
prevailing prior to the amendment, in so far as subscription to an online
database is concerned.

Even after the amendments, the law therefore seems to
be the same – subscription to an online database does not amount to royalty,
either under the Income-tax Act or under the DTAA.

shailesh.kwebmaker

The Finance Act, 2017

1 Background

Shri Arun Jaitley, the Finance
Minister, presented his Fourth Budget with the Finance, Bill 2017, in the Lok
Sabha on 1^stFebruary, 2017. This was a departure from the old
practice inasmuch as that this year’s Budget was presented to the Parliament on
the first day of February instead of the last day and the Railway Budget was
now merged with the General Budget. Thus, the Railway Minister has not
presented a separate Railway Budget.

After some discussion, the Parliament
has passed the Budget with some amendments to the Finance Bill, 2017 as
presented. The President has given his assent to the Finance Act, 2017, on 31^st
March, 2017. There are in all 150 Sections in the Finance Act, 2017, which
include 89 sections which deal with amendments in the Income-tax Act, 1961, the
Finance Act, 2005 and the Finance Act, 2016.

1.1 During the Financial year 2016-17, the
Parliament passed the Constitution Amendment Act paving the way for introduction
of Goods and Services Tax (GST) legislation to replace the existing Excise
Duty, customs Duty, Service Tax, value Added Tax etc., GST council has
been constituted and it is hoped that GST will be introduced effective from 1^st
July, 2017. Another major step taken by the Government during the financial
year 2016-17 was demonetisation of high denomination bank notes with a view to
eliminate corruption, black money and fake notes in circulation.

1.2 In Financial Year 2016-17, two Income
disclosure schemes were introduced by the Government with a view to enable
persons, who had not disclosed their unaccounted income to declare the same and
get immunity from rigorous penalty and prosecution provisions under the
Income-tax Act. The first disclosure scheme was provided in the Finance Act,
2016, and was in force from 01-06-2016 to 30-09-2016. The second scheme was
provided by the Taxation (Second Amendment) Act, 2016 which was in force from
17-12-2016 to 31-03-2017.

1.3 In Para 181 of the Budget Speech, the Finance
Minister has stated that the net revenue loss due to Direct Tax proposals in
the Budget is about Rs. 20,000/- crore. There is no significant loss or gain in
any of the indirect tax proposals.

1.4 In this article, some of the important
amendments made in the Income-tax Act by the Finance Act, 2017, are discussed.
Most of the amendments have only prospective effect. Some of the amendments
have retrospective effect.

2. Rates of Taxes:

2.1 In the case of an Individual, HUF, AOP etc.,
following changes are made w.e.f. A.Y. 2018-19 (F.Y. 2017-18)

(i) The rate of tax in the first slab of Rs. 2.50
lakh to Rs. 5.00 lakh has been reduced from 10% to 5%. Similarly, in the case
of a Senior Citizen the rate of tax in the first slab of Rs. 3.00 Lakhs to
Rs. 5.00 lakh will now be 5% instead of
the existing rate of 10%. This will give some relief to assessees in the lower
income group. There is no change in the rates of tax in other two slabs or in
the rate of Education Cess which is 3% of tax

(ii) Section 87A granting rebate upto Rs. 5,000/- to
a Resident Individual if his total income does not exceed Rs. 5 lakh has been
reduced from A.Y. 2018-19 in view of the above relief in tax. It is now
provided that the maximum rebate available under this section shall not exceed
Rs. 2,500/- and that such rebate will be available only if the total income
does not exceed Rs. 3.50 lakh.

(iii) At present, the rate of Surcharge is 15% of the
tax if the total income of an Individual, HUF, AOP etc., is more than
Rs. 1 crore. In view of the reduction in the rate of tax in the first slab, as
stated above, it is now provided that a surcharge of 10% of the tax will be
chargeable if the income of such an assessee is more than Rs. 50 lakh but less
than Rs.1 crore. If the income exceeds Rs. 1 crore, the existing rate of 15%
will continue.

2.2 In the case of a domestic company, the
rates of tax for A.Y. 2018-19 (F.Y. 2017-18) will be as under:

(i) Where the total turnover or gross receipts of
a company does not exceed Rs. 50 crore, in F.Y. 2015-16, the rate of tax will
be 25%. It may be noted that in A.Y. 2017-18 (F.Y. 2016-17) where the turnover
or gross receipts of a company did not exceed Rs. 5 crore., in F.Y. 2014-15,
the rate of tax was 29%.

(ii) In case of all other companies the rate of tax
will be 30%.

(iii) There is no change in the rate of surcharge or
education cess.

2.3 In the case of a Domestic company which is
newly set up on or after 1.3.2016, engaged in the business of manufacturing or
production etc., the rate of tax will be 25% subject to the conditions
laid down in section 115 BA of the Income-tax Act. This concessional rate is
applicable at the option of the company as provided in the above section. This
section was inserted by the Finance Act, 2016.

2.4 In the case of a Firm (including LLP),
Co-operative Society, Foreign Company or Local Authority, there is no change in
the rates of Income tax, Surcharge and Education Cess. Similarly, there is no
change in the rate of tax on book profit of a Company as provided in section
115JB.

2.5 Last year, a new section 115BBDA was
inserted in the Income tax to provide for levy of tax at the rate of 10% (Plus
applicable Surcharge and Education Cess) on the Dividends in excess of Rs. 10
lakh received from Domestic companies by any resident Individual, HUF or a Firm
(including LLP). This section is now amended to provide that, w.e.f. A.Y.
2018-19, this tax of 10% will be payable by all resident assessees, excluding
domestic companies and certain funds, public trusts, institutions referred to
in section 10(23C) (iv) to (via) and public trusts registered u/s. 12AA. This
will mean that this additional tax of 10% on dividends received in excess of
Rs. 10 lakh will be payable in A.Y. 2018-19 and subsequent years by all
resident Individuals, HUF, Firms, LLPs, Private trusts, AOP, BOI, foreign
companies etc. The exemption is given to only domestic companies and
certain public recognised trusts.

3. Tax Deduction and collection at source:

3.1 TDS from Rent (New Section 194-1B) –
Increase in obligation of Individuals and HUF’s

At present, section 194-I provides
that an Individual or HUF who is liable to get his accounts audited u/s. 44AB
should deduct tax from Rent if the amount exceeds Rs.1,80,000/- per year. Now,
section 194-1B is inserted w.e.f. 1.6.2017 which provides that any Individual
or HUF who is not covered by section 194-I (Tenant) will have to deduct tax at
source at the rate of 5% from payment of rent for use of any building or land
or both if such rent exceeds Rs. 50,000/- per month or part of the month. This
tax is to be deducted at the time of credit of rent for the last month of the
Financial Year. If the premises are vacated by the tenant earlier during the
year, the tax is to be deducted from rent of the month in which the premises
are vacated. Thus, the deduction of tax is to be made only once in the last
month of the relevant year or last month of the tenancy. The tax deductor is
not required to obtain Tax Deduction Account Number (TAN). The person receiving
the rent will have to furnish his PAN to the tenant. If PAN is not provided,
the tax will have to be deducted at the rate of 20% of the rent. It may be
noted that the amount of tax required to be deducted at the rate of 20% should
not exceed the rent payable for the last month of the relevant year or the
month of vacating the premises. The obligation under this section applies to a
lessee, sub-lessee, tenant, sub-tenant etc.

3.2 TDS from consideration payable u/s.
45(5A) – New section 194-1C:

New section 194-1C is inserted w.e.f.
1.4.2017 to provide that tax at the rate of 10% shall be deducted from the
monetary consideration payable to a resident in the case of a Joint Development
Agreement (JDA) to which section 45(5A) is applicable.

3.3 TDS from fees payable to Professionals –
Section 194-J:

Section 194-J is amended w.e.f.
1.6.2017 to provide that in the case of a payment to a person engaged in the
business of operation of Call Centre, the rate of TDS shall now be 2% instead
of 10%.

3.4 TDS from payment on Compulsory
Acquisition – Section 194-LA:

This section is amended w.e.f.
1.4.2017 to provide that no tax shall be deducted at source from compensation
payable pursuant to an award or agreement made u/s. 96 of Right to Fair
Compensation and Transparency in Land Acquisition, Rehabilitation and
Resettlement Act, 2013.

3.5 TDS from Insurance Commission – Section
194D:

Under Section 194D, the rate for TDS
from Insurance Commission is 5% if such commission exceeds Rs. 15,000/-. In
order to give relief to Insurance Agents, section 197A is now amended w.e.f.
1.6.2017 to provide that an Individual or HUF can file self-declaration in Form
15G / 15H for non-deduction of tax at source in respect of Insurance Commission
referred to in section 194D. Therefore, an Insurance Agent who has no taxable
income can now take advantage of this amendment.

4. Exemptions and Deductions:

4.1 Exemption on partial withdrawal from
National Pension Scheme (NPS) New section 10(12B)

At present withdrawal from NPS is
chargeable u/s. 80CCD(3) on closure or opting out of the NPS subject to certain
conditions. Section 10(12A) provides that 40% of the amount payable on such
closure or opting out of NPS. Now, new section 10(12B) provides that if an
employee withdraws part of the amount from NPS according to the terms of the
Pension Scheme, exemption will be allowed to the extent of the Contribution
made by him. This benefit will be available from A.Y. 2018 – 19 (F.Y. 2017-18)
onwards.

4.2 Income of Political Parties – Section
13A:

At present, political parties
registered with the Election Commission of India are exempt from paying Income
tax subject to certain conditions provided in section 13A. This section is
amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide as under:

(i) No donation of Rs. 2000 or more shall be
received by a Political Party otherwise than an account Payee Cheque, bank
draft or through Electoral Bonds.

(ii) Political Party will have to compulsorily file
its return of income as provides in section 139(4B) on or before the due date.

Thus, even if a donation of Rs. 2000/-
or more is received in cash or its Income tax Return is not filed in time, the
Political Party shall lose its exemption u/s. 13A.

A new Scheme of issuing Electoral
Bonds is to be framed by RBI. Under the scheme, a person can buy such Bonds and
donate to a Political Party. Such Bonds can be enchased by the Political party
through designated Banks. It will not be necessary for the Political party to
maintain record about the name, address etc. of donors of such Bonds
consequential amendments are made in the Reserve Bank of India Act, 1934 and
the Representation of the People Act, 1951.

4.3 Deduction of Donations – Section 80G:

At present, section 80G (5D) provides
that no deduction for donation u/s. 80G will be allowed the amount of donation
exceeding Rs. 10,000/- is in cash. This limit is now reduced to Rs. 2,000/- by
amendment of the section w.e.f. A.Y. 2018-19 (F.Y. 2017-18). Therefore, if
donation of more than Rs. 2,000/- is given in cash, deduction u/s. 80G will not
now be available.

4.4 Deduction to Start-Up Companies – Section
80 -IAC:

At present, section 80-IAC provides
that eligible Start-ups-incorporated between 1.4.2016 to 31.3.2019 can claim
100% deduction of the profit earned for 3 consecutive years. This claim can be
made in any 3 years out of the first five years from the date of incorporation.
This period of 5 years has been extended to 7 years by amendment of the section
to provide relief to start-up companies. Thus, an eligible Start-up company can
claim the deduction u/s. 80-1AC in respect of profits for any 3 years out of 7
years from the date of its incorporation.

4.5 Deduction in respect of affordable Housing
Projects – Section 80 IBA:

This section was enacted last year by
the Finance Act, 2016, w.e.f. 2017-18. It provides for deduction of 100% of the
income from affordable Housing Projects approved during the period 1.6.2016 to
31.3.2019 subject to certain conditions. By amendment of this section w.e.f.
1.4.2017, some of the conditions are related as under:

(i) Under the existing section, the eligible
project should be completed within 3 years. This period is now increased to 5
Years.

(ii) The reference to “Built-up Area” in the section
is changed to “Carpet Area”. Therefore, it is now provided as under:

(a) If the project is located within cities of
Chennai, Delhi, Kolkata or Mumbai the carpet are of the residential Unit cannot
exceed 30 Sq. Mtrs.

(b) For other places (including at places located
within 25 Kilometers of the cities mentioned in (a) above) the carpet are of
the residential Unit cannot exceed 60 sq. Mtrs. It may be noted that other
conditions in existing section 80 – IBA will have to be complied with for
claiming the deduction provided in the section.

5. Charitable Trusts:

Some
of the provisions relating to the exemption granted to public Charitable
Trusts, University, Educational Institutions, Charitable Hospital etc.,
u/s. 10(23C), 11 and 12A have been amended w.e.f. A.Y. 2018 – 19 (F.Y. 2017-18)
with a view to make them more stringent. These amendments are as follows:

(i) Under the existing provisions of section 11,
the corpus donations given by one trust to another trust were considered as
application of income in the hands of donor trust. Further, the recipient trust
was able to claim the exemption in respect of such corpus donations without
applying them for charitable or religious purposes. In order to curb such a
practice, amendment of the section provides that any corpus donation out of the
income to any other trust or institution registered u/s./12AA shall not be
treated as application of income of donor trust for charitable or religious
purposes.

(ii) Similar amendment has been made in section
10(23C) in respect of corpus donations given by any fund, trust, institution,
any university, educational institution, any hospital or other medical
institution referred to in Section 10(23C)(iv) to (via) or to any other trust
or institution registered u/s./12AA.

(iii) It may be noted that the above restriction
applies to corpus donation given by a trust from its income to another trust.
This restriction does not apply to a donation given by one trust to another
trust out of the corpus of the donor trust.

(iv) At present, there is no explicit provision in
the Act which mandates the trust or institution to approach for fresh
registration in the event of adoption of new object or modifications of the
objects after the registration has been granted. Section 12A has now been
amended to provide that the trust shall be required to obtain fresh
registration by making an application to CIT within a period of thirty days
from the date of such adoption or modifications of the objects in the prescribed
Form.

(v) Further, the entities registered u/s. 12AA are
required to file return of income, if the total income without giving effect to
the provisions of sections 11 and 12 exceeds the maximum amount which is not
chargeable to income-tax. A new clause (ba) has been inserted in section 12A
(1) so as to provide for a further condition that the trust shall furnish the
return of income within the time allowed u/s. 139 of the Act. In case the
return of income is not filed by a trust in accordance with the provisions of
section 139(4A), within the time allowed, the trust or institution will lose
exemption u/s. 11 and 12.

6. Income from House Property:

6.1 At present, section 23(4) provides that if
an assessee owns two or more houses, which are not let out, he can claim
exemption for one house for self occupation. For the other houses, he has to
pay tax by determining the ALV on notional basis as provided in section 23(1)
(a). In the cases of CIT vs. Ansal Housing Construction Ltd 241 Taxman
418(Delhi) and CIT vs. Sane and Doshi Enterprises 377 ITR 165 (Bom),
it has been decided that this provision is applicable in respect of houses held
as Stock-in-trade by the assessee. In order to give relief to Real Estate
Developers, section 23 is amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18). By this
amendment, it is provided that if the assessee is holding any house property as
his stock-in-trade which is not let out for the whole or part of the year, the
Annual Value of such property will be considered as NIL for a period upto one
year from the end of the financial year in which the completion certificate is
obtained from the Competent Authority. This new provision will benefit the Real
Estate Developers. It may be noted that this relief cannot be claimed by other
assessees who do not hold the house property as their stock-in-trade.

6.2 Section 71 provides that Loss under any
head of income (Other than Capital Gains) can be set off against income from
any other head during the same year. Therefore, loss under the head “Income
from House Property” can be set off against income under any other head of
Income. Section 71 is now amended to provide that any loss under the head
income from house property which is in excess of Rs. 2 lakh in any year will be
restricted to Rs. 2 lakh. In other words, an assessee can set off loss under
the head income from house property in A.Y. 2018-19 and onwards only to the
extent of Rs. 2 lakh in the year in which loss is incurred. The balance of the
loss can be carried forward for 8 assessment years and set off against income
from house property as provided in section 71B. This amendment will adversely
affect those cases where, on account of high interest rates on housing loans,
the assesses have to suffer loss in excess of Rs. 2 lakh in any year.

7. Income from Business or profession:

7.1 Provision for Doubtful Debts – Section
36(1) (viia) – At present, specified banks are allowed deduction upto 7.5%
of the total income, computed in the specified manner, if they make provision
for doubtful debts. From the A.Y. 2018-19 (F.Y. 2017-18) this limit is
increased to 8.5% by amendment of section 36(1)(viia).

7.2 Determination of Actual Cost – Section
43(1) and 35AD(7B) – Where any asset on which benefit of section 35AD is
taken is used for any purpose not specified in that section, the deduction
granted under the section in earlier years will be deemed to the income of the
assessee. There was no provision for determination of actual cost of the asset
in such cases. In order to clarify this position, an amendment is made in
Explanation 13 of section 43(1) to provide that in such cases the actual cost
of the asset shall be the actual cost, as reduced by the depreciation which
would have been allowed to the assessee had the asset been used for the
purposes of the business since the date of its acquisition. Although this
amendment is effective from A.Y. 2018-19, since it is a clarificatory
amendment, it may be applied with retrospective effect.

7.3 Maintenance of Books – Section 44 AA
– This section requires a person carrying on Business or Profession to maintain
books of accounts in the manner specified in the section. At present such
person has to comply with this requirement if his income exceeds Rs. 1.20 lakh
or his turnover or gross receipts exceed Rs. 10 lakh in any one of the three
preceding years. In order to reduce compliance burden in the case of an
individual or HUF carrying on a business or profession, these monetary limits
are increased from A.Y. 2018-19 (F.Y. 2017-18) in respect of income from Rs. 1.20
lakh to Rs. 2.50 lakh and in respect of turnover or gross receipts from Rs. 10
lakh to Rs. 25 lakh .

7.4 Tax Audit u/s. 44 AB in Presumptive Tax
Cases – Finance Act, 2016, had raised the threshold limit for turnover in
cases of persons eligible to take advantage of section 44AD from Rs. 1 crore to
Rs. 2 crore w.e.f. A.Y 2017-18. However, the limit for turnover for tax audit
u/s. 44AB was not increased in such cases. Section 44AB has now been amended
w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to provide that in the case of a person who
opts for the benefit of section 44 AD, the threshold of total sales turnover or
gross receipts u/s. 44AB will be Rs. 2 crore. In other words, such person will
not be required to get his accounts audited u/s. 44AB for F.Y. 2016-17 and
subsequent years.

7.5 Presumptive Taxation – Section 44AD
– An assessee who is eligible to claim the benefit of presumptive taxation u/s.
44AD can offer to pay tax by estimating his income at the rate of 8% of his
sales turnover or gross receipts if such turnover / gross receipts do not
exceed Rs. 2 crore. In order to encourage digital transactions, this section is
amended w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to provide that the profit presumed
to have been earned in such cases shall be 6% (instead of 8%) of the gross
turnover or gross receipts which are received by account payee cheque, bank
draft or any other electronic media during the financial year or before the due
date for filing return of income u/s. 139(1). In respect of the balance of the
turnover / gross receipt the rate of presumptive profit will continue to be at
the rate of 8%.

7.6 Tax on Carbon Credits – Section 115BBG
– As per the Kyoto Protocol, carbon credits in the form of Certified Emission
Reduction (CER) Certificate are given to entities which reduce the emission of
Greenhouse gases. These credits can be freely traded in the market. Currently,
there are no specific provisions in the Act to deal with the taxability of the
income from carbon credits. However, the same is being treated as business
income and taxed at the rate of 30% by the Income-tax Department. There are
some conflicting decisions (Refer TS-141 (Ahd), 365 ITR 82 (AP) and 385 ITR 592
(Kar). In order to clarify the position, a new section 115BBG has been inserted
to tax the gross income from transfer of Carbon Credit at the rate of 10% plus
applicable surcharge and cess. No expenditure will be allowed from such income.
This section will come into force w.e.f. A/Y:2018-19 (F.Y:2017-18).

8. Measures to discourage Cash Transactions:

One of the themes, as stated in the
Budget Speech of the Finance Minister this year, was to encourage Digital
Economy in our country. In Para 111 of the Budget Speech he had stated that
promotion of a digital economy is an integral part of Governments strategy to
clean the system and weed out corruption and black money. To achieve this goal
some amendments are made in the various sections of the Income-tax Act which
will be effective from 1^st April, 2017. In brief these amendments
are as under:

8.1 Section 35AD – This section provides
for investment linked deduction of capital expenditure incurred for specified
business, subject to certain conditions. This section is now amended to provide
that any capital expenditure exceeding Rs. 10,000/- paid by the assessee in a
day, otherwise than by an account payee cheque, bank draft or any electronic
media will not be allowed as deduction.

8.2 Section 40A(3) and (3A) – Under this
section, any payment of expenses in excess of Rs. 20,000/-, in a day, is not
allowed as a deduction in computing income from business or profession unless
such payment has been paid by account payee cheque, bank draft or any
electronic media. This section is now amended and the limit of Rs. 20,000/-
is reduced to Rs. 10,000/-. Thus, payments in excess of Rs. 10,000/- made in
cash to any party, in a day, will be disallowed from A.Y. 2018-19
(F.Y. 2017-18).

8.3 Section 80G – At present, deduction
u/s. 80G for any eligible donation is not allowed if such donation in excess of
Rs. 10,000/- is paid in cash. This limit is reduced to Rs. 2,000/- by amendment
of section 80G. Therefore, all donations to eligible public trusts in excess of
Rs. 2,000/- will have to be made by account payee cheque, bank draft or any
electronic media.

8.4 Section 13A – As stated earlier, a
political party, claiming exemption u/s. 13A, cannot receive any donation in
excess of Rs. 2,000/- in cash.

8.5 Section 43(1) – This section deals
with determination of actual cost of a capital asset used in a business or
profession. In order to curb cash transactions, this section is amended w.e.f.
1.4.2017 to provide that capital expenditure in excess of Rs. 10,000/- paid, in
a day, otherwise than by an account payee cheque, bank draft or through
electronic media shall be ignored for calculating the cost of the asset
acquired by the assessee. Therefore, payments made for purchase of an asset,
payments to a labourer or similar payments for transport or installation of a
capital asset, if made in cash, in excess of Rs. 10,000/-, in a day, will not
form part of the cost. Thus, the assessee will not be able to claim
depreciation on such amount.

8.6 Section 44AD – As stated earlier,
with a view to encourage digital economy section 44AD (1) has been amended
w.e.f. A/Y: 2017-18 (F.Y: 2016-17). A
person carrying on business in which the Sales Turnover or Gross Receipts do
not exceed Rs. 2 crore has option to pay tax on presumptive basis by estimating
net profit @ 6% of such turnover or gross receipts if the amount received is in
the form of account payee cheque, bank draft or any electronic media. This will
encourage small traders covered by this presumptive method of taxation to make
their sales through digital mode.

8.7 Curb on Cash Transactions – Sections 269ST,
271 DA and 206C (1B)

(i) New Section 269ST: A new section
269 ST has been inserted in the Income-tax Act. This section has come into
force on 1.4.2017. The section provides that no person shall receive Rs. 2 lakh
or more, in the aggregate, from another person, in a day, or in respect of a
single transaction or in respect of transactions relating to one event or
occasion in cash. In other words, all such transactions have to be made by
account payee cheques, bank draft or any electronic media. It is, however, provided
that this section shall not apply to amount received by a Government, Bank,
Post Office, Co-operative Bank, transactions referred to in section 269 SS and
such transactions as may be notified by the Central Government. By a press note
dated 5.4.2017 the CBDT has clarified that this section will not apply to
withdrawal of Rs. 2 lakh or more from one’s Bank account. This section applies
to all persons whether he is an assessee or not.

(ii) New Section 271DA: This is a new
section inserted in the Income-tax Act w.e.f. 1.4.2017. It provides for levy of
penalty equal to the amount received by the person in contravention of the
above section 269ST. This penalty can be levied by a Joint Commissioner of
Income tax. If the person is able to prove that there was good and sufficient
reason for such receipt of money, no penalty may be levied. Readers may note
that the test “good and sufficient reason”, is a sterner test than “reasonable
cause “.

(iii) Section 206C(1D) and (1E): In view
of the introduction of the above two sections the requirement of collection of
tax at source u/s. 206C(1D) on sale consideration for sale of Jewellery in
excess of Rs. 5 lakh and other goods and services in excess of 2 lakh has been
deleted.

9. Income from Other Sources:

9.1 Section 56(2) (vii) and (viia) : The
concept of taxation of Gifts received in the form of money or property, in
excess of Rs. 50,000/-, from non-relatives has been introduced in section 56(2)
(vii) some years back. This was extended to receipt of shares of closely held
companies by a firm or a closely held company at prices below market value u/s.
56(2) (viia). These provisions operated in a restricted field. In order to
widen to scope of these sections, substantive amendments are made in the
section. Therefore, operation of the provisions of these sections are now
restricted upto A.Y. 2017-18 (F.Y. 2016-17).

9.2 New Section 56(2)(x) – Effective
from 1.4.2017, section 56(2)(x) has now been inserted. This section will
replace sections 56(2)(vii) and 56(2)(viia). The new section provides that any
receipt by a person of a sum of money or property, without consideration or for
inadequate consideration, in excess of Rs. 50,000/-, shall be taxable in the
hands of the recipient under the head “Income from Other Sources”. There are,
however, certain exceptions provided in the section. This new provision will
now cover all persons, whether he is an Individual, HUF, Firm, Company, AOP,
BOI, Trust etc, and tax will be payable by them if any money or property is
received by the person and the aggregate value of such property is in excess of
Rs. 50,000/-.

9.3 The exceptions provided in section 56(2)
(x) are more or less the same as provided in existing section 56 (2) (vii).
Therefore, any receipt (a) from a relative, (b) on the occasion of the marriage
of the Individual, (c) Under a will or by way of inheritance, (d) in
contemplation of death of the payer or donor, (e) from a Local Authority, (f)
from or by a public trust registered u/s. 12A or 12AA, or an University, educational
institution, hospital or medical institution referred to in section 10(23C),
(g) by way of a transactions not regarded as transfer u/s. 47(i), (vi), (via),
(viaa), (vib), (vic), (vica), (vicb), (vid) or (vii) and (h) from an Individual
by a trust created or established solely for the benefit of relatives of the
Individual will not be taxable u/s. 56(d)(x). It may be noted the expressions
“Relative”, “Fair Market Value”, “Jewellery”, “Property”, “Stamp Duty
Valuation” etc., in the section shall have the same meaning as in the
existing section 56(2)(vii).

9.4 The effect of this new section 56(2)(x) can
be, briefly, explained as under:

(i) Existing section 56(2)(vii) applied to only
gifts received by an Individual or HUF. New section will now apply to gifts
received by an Individual, HUF, Company, Firm, LLP, AOP, BOI, Trust (excluding
public trusts and private trust for relatives) etc.

(ii) Existing section 56(2) (viia) applied to a
closely held company, Firm, or LLP receiving shares of a closely held company
without consideration or for inadequate consideration. New section will apply
to any gift received by a company (whether closely held or listed company) Firm
or LLP in the form of shares of a closely held or a listed company, or a sum of
money, or any movable or immovable property.

(iii) New section exempts gifts from Local Authority
as defined in section 10(20). It is for consideration whether capital subsidy
received by a Company, Firm, LLP, AOP, Trust etc. from a Government will
now become taxable.

(iv) Similarly, if any movable or immovable property
is given to a company, Firm, LLP, AOP, Trust etc., by the Government, at
a concessional rate, the same may become taxable in the hands of the recipient.

(v) Gift by any Individual to a trust for his relatives
is exempt under this section. However, no exemption is provided in respect of a
gift received from a company, Firm , LLP etc., by a trust created for
the benefit of the its employees or others. Therefore, such gifts may now
become taxable under the new section.

(vi) In respect of an existing family trust, various
clauses of the trust deed giving benefits to beneficiaries will have to be
examined before making any further gift to the trust. If any benefit is given
to a non-relative, such further gift on or after 1.4.2017 will be taxable in
the hands of the Trust.

(vii)Any
Bonus Shares received by a Shareholder from a company may now be considered as
receipt without consideration. This may lead to litigation, and the CBDT should
come out with a clarification in this regard.

(viii)Any
Right shares issued to a shareholder by a company at a price below its market
value may be considered as a movable property received for inadequate
consideration.

(ix) From the wording of the Section, it is possible
that a view may be taken that in the case of transfer of capital asset (a) by a
company to its wholly owned subsidiary company, (b) by a wholly owned
subsidiary company to its holding company, (c) on conversion of a proprietary
concern or a firm into a company or (d) on conversion of a closely held company
into LLP as referred to in section 47(iv), (v), (xiii), (xiib) and (xiv) the
tax will be payable by the transferee under this new section on the difference
between the fair market value of the asset and the value at which the transfer
is made. This will be unfair as the transferor is exempt from tax and the cost
in the hands of the transferor is to be considered as cost in the hands of the
transferee under sections 47 and 49. This certainly is not the intent of
section 56(2)(x). The issue may arise because while the transaction is not a
transfer for the purposes of section 45, section 56 does not contain any
specific exclusion.

9.5 Consequential amendment is made in section
2(24) to provide that any gift which is taxable u/s. 56(2)(x) shall be deemed
to be “income” for the purposes of the Income-tax Act. Consequential amendment
is also made in section 49(4) to provide that for computing the cost of
acquisition of the asset received without consideration or for inadequate
consideration will be determined by adopting the market value adopted for levy
of tax u/s. 56(2)(x).

9.6 Section 58 – This section gives a
list of some of the payments which are not deductible while computing income
under the head “Income from Other Sources”. It is now provided that, with
effect from A.Y. 2018-19 (FY 2017-18), the provisions of section 40(a) (ia)
providing for disallowance of 30% of the amount payable to a resident if TDS is
not deducted. Similar provision exists for disallowance of expenditure for
computing income under the head income from business or profession.

10. Capital Gains:

10.1 Section 2(42A) – This section defines
the term “Short Term Capital Asset” to mean a capital asset held by the
assessee for less than 36 months preceding the date of its transfer. There are
some exceptions to this rule provided in the section. Third proviso to
this section is now amended w.e.f. A.Y 2018-19 (F.Y. 2017-18) to provide that a
Capital Asset in the form of Land, Building or both shall be considered as a
short – term capital asset if it is held for less than 24 months. In other
words, the period of holding any Land / Building for the purpose of
consideration as long term capital asset is reduced from 36 months to 24
months.

10.2 Sections
2(42A), 47 and 49 – At present, there is no specific exemption from levy of
capital gains tax on conversion of Preference Shares of a company into Equity
Shares. Section 47 has now been amended w.e.f. AY 2018-19 (F.Y. 2017-18) to provide
that such conversion shall not be treated as transfer. Consequently, section
2(42A) has also been amended to provide that the period of holding of the
equity shares shall include the period for which the preference shares were
held by the assessee. Similarly, section 49 has been amended to provide that
the cost of acquisition of equity shares shall be the cost of preference
shares.

10.3 Sections 2(42A) and 49 – Last year,
section 47 was amended to provide that transfer of Unit in a consolidating plan
of a mutual fund scheme by a unit holder against allotment of units in the
consolidated plan under that scheme shall not be regarded as taxable transfer.
However, consequential amendments were not made in sections 2(42A) and 49.
Therefore, these sections are now amended w.e.f. A.Y. 2017-18 (F.Y. 2016-17) to
provide that the period of holding of the unit shall include the period for
which the units were held in the consolidating plan of the M.F. Scheme.
Similarly, the cost of acquisition of the units allotted to the unit holder
shall be the cost of units in the consolidating plan.

10.4 Joint Development Agreement – Section
45(5A) (i) This is a new provision introduced from 1.4.2017, with a view to
bring clarity in the matter of taxation of joint development of any property
(land, building or both). Section 45(5A) provides that if an Individual or HUF
enters into a registered agreement (specified agreement) in which the owner of
the property allows another person to develop a real estate project on such property
in consideration of a share in such property, the capital gain shall be
chargeable to tax in the year in which the completion certificate is issued by
the competent authority for whole or part of the project. It may be noted that
the above consideration may be wholly by way of a share in the constructed
property or partly in such share and the balance in the form of monetary
consideration. In respect of the monetary consideration, the developer will
have to deduct tax at source @ 10% u/s 1941C. It may so happen that monetary
consideration is paid at the time of registration of the agreement whereas the
share in the constructed property may be received after 2 or 3 years. In such a
case, the assessee will be able to claim credit for TDS only in the year in
which capital gain becomes taxable when the completion certificate is received.

(ii) It is also provided in the above section that
the full value of the consideration in respect of share in the constructed
portion received by the assessee shall be determined according to the stamp
duty valuation on the date of issue of the completion certificate.
Consequently, amendment is made in section 49 to provide that the cost of the
property received by the assessee under the above agreement shall be the stamp
duty value adopted for the computation of capital gains plus the monetary
consideration, if any.

(iii) It is further provided that, in case the
assessee transfers his share in the project on or before the date of issue of
the completion certificate, the capital gain shall be chargeable in the year in
which such transfer takes place. In such a case, the stamp duty valuation on
the date of such transfer together with monetary consideration received shall
be deemed to be the full value of the consideration.

(iv) It may be noted that the above provision
applies to an Individual or HUF. Therefore, if such joint development agreement
is entered into by a Company, Firm, LLP, Trust etc. the above provision
will not apply.

10.7 Section 48 – Exemption from Capital Gains
tax is at present granted to a non-resident investor who has “Subscribed” to
Rupee Denominated Bonds issued by an Indian Company. This exemption is granted
is respect of foreign exchange gains on such Bonds. From the A. Y. 2018-19
(F.Y. 2017-18), this exemption can also be claimed by a non-resident who is
“holding” such Bond.

10.8 Shifting the base year for cost of
acquisition of a capital asset – Section 55

(i) This section provides that where the assessee
has acquired a capital asset prior to 1.4.1981, he has an option to substitute
the fair market value as on that date for the actual cost. The amendment to
this section now provides that from the A.Y. 2018 – 19 (F.Y. 2017-18) if the
assessee has acquired the asset prior to 1-4-2001, he will have option to
substitute the fair market value on that date for the actual cost.

(ii) Consequently, section 48 has also been amended
to provide that indextion benefit will now be available in such cases with
reference to the fair market value of the asset as on 1.4.2001. Consequent
amendment is also made for determining indexed cost of improvement of the
capital asset.

10.9 Long term Capital Gains Tax. Exemption –
Section 10(38) (i) At present, Long term capital gain on transfer of equity
shares of a company is exempt u/s 10(38) where Securities Transaction Tax (STT)
is paid at the time of sale. In order to prevent misuse of this exemption by
persons dealing in “Penny stocks”, this section is amended w.e.f. A.Y 2018-19
(F.Y. 2017-18) to provide that this exemption will now be granted in respect of
equity shares acquired on or after 1-10-2004 if STT is not paid at the time of
acquisition of such shares. However, it
is also provided that such exemption will be denied only to such class of cases
as may be notified by the Government. Therefore, cases in which this exemption
is not given will be liable to tax under the head long term capital gain.

(ii) It may be noted that the Government has issued
a draft of the Notification on 3-4-2017 which provides that the exemption u/s.
10(38) will not be available if equity shares are acquired by the assessee
under the following transactions on or after 1.10.2014 and no STT is paid at
the time of purchase of equity shares.

(a) Where acquisition of listed equity share in a
company, whose equity shares are not frequently traded in a recognised stock
exchange of India, is made through a preferential issue other than those
preferential issues to which the provisions of chapter VII of the Securities
and Exchange Board of India (Issue of Capital and Disclosure Requirements)
Regulations, 2009 does not apply:

(b) Where transaction for purchase of listed
equity share in a company is not entered through a recognised stock exchange;

(c) Acquisition of equity share of a company
during the period beginning from the date on which the company is delisted from
a recognised stock exchange and ending on the date on which the company is
again listed on a recognized stock exchange in accordance with the Securities
Contracts (Regulation) Act, 1956 read with Securities and Exchange Board of
India Act, 1992 and any rules made thereunder;

Considering the intention behind this
amendment, it can safely be presumed that clause (b) of the above notification
refers to purchase of equity shares of a listed company whose shares are not
frequently traded.

10.10 Full
Value of Consideration – New Section 50CA (i) This is a new section which is inserted
w.e.f. A.Y. 2018-19 (F.Y. 2017-18). It provides that where the consideration
for transfer of shares of a company, other than quoted shares, is less than the
fair market value determined in the manner prescribed by Rules, such fair
market value shall be considered as the full value of consideration for the
purpose of computing the capital gain. For this purpose the term “Quoted Share”
is defined to mean share quoted on any recognised stock exchange with
regularity from time to time, where the quotation of such share is based on
current transaction made in the ordinary course of business.

(ii) This new provision will have far reaching
implications. It may be noted that section 56(2)(x) provides that where a
person receives shares of a company (whether quoted or not) without
consideration or for inadequate consideration, he will be liable to tax on the
difference between the fair market value of the shares and the actual
consideration. This will mean that in the case of a transaction for transfer of
shares of the unquoted shares the seller will have to pay capital gains tax on
the difference between the fair market value and actual consideration u/s. 50CA
and the purchaser will have to pay tax on such difference under the head income
from other sources u/s. 56(2) (x).

(iii) It may be noted that this section can be
invoked even in cases where an assessee has transferred for inadequate
consideration unquoted shares to a relative or transferred such shares to a
trust created for his relatives although such a transaction is not covered by
section 56(2)(x).

(iv) In the case of Buy-Back of shares by a closely
held company if the consideration paid by the company to the shareholder is
below the fair market value as determined u/s 50CA, this section may be invoked
to levy capital gains tax on the shareholder on the difference between the fair
market value and the consideration actually received by him.

10.11 Section 54EC – At present investment of
long term capital gain upto `50 lakhs can be made in Bonds of National High
Authority of India or Rural Electrification Corporation Ltd., for claiming
exemption. By amendment of this section it is provided that the Government may
notify Bonds of other Institutions for the purpose of investment u/s. 54EC to
claim exemption from capital gains.

10.12 Section 112(1)(c)(iii) – In the case of a Non-resident the rate of tax
on long term capital gain on transfer of shares of unlisted companies is
provided in this section if the assessee does not claim the benefit of the
first and second proviso to section 48. This benefit was available
w.e.f. 1.4.2017 as provided in the Finance Act, 2016. By amendment of this
provision the benefit is given from 1.4.2013.

11. Minimum Alternate Tax (MAT):

11.1 Section 115JB (2) provides for the manner in
which Book Profits of a Company are to be calculated. This is to be done on the
basis of the audited accounts prepared under the provisions of the Companies
Act 1956. Since, the Companies Act, 2013 (Act), has replaced the 1956 Act,
reference to 1956 Act is now modified and reference to relevant provisions of
2013 Act are made.

11.2 Impact of Ind AS – Section 129 of the
Companies Act provides that the financial statements shall be in the form as
may be provided for different class or classes of companies as per Schedule III
to the Act. This Schedule has been amended on 6/4/2016 and Division II has been
added. Instructions for preparation of financial statements and additional
disclosure requirements for companies required to comply with Ind AS have been
given in this part of Schedule III. The form of Statement of Profit and Loss is
also given. In the light of these changes, the provisions of section 115JB have
been amended by inserting new sub-sections (2A) to (2C) which are applicable to
companies whose financial statements are drawn up in compliance with Ind AS.
Since the Ind AS are required to be adopted by certain companies from financial
year 2016-17 onwards and by other companies in 2017-18 onwards, the following
adjustments are to be made in the computation of ‘book profit’ from the
assessment year 2017-18 onwards;

(i) Section 115JB (2A) provides that any item
credited or debited to Other Comprehensive Income (OCI) being ‘items that will
not be reclassified to profit or loss’ should be added to or subtracted from
the ‘book profit’, respectively. It is also provided that for the following
items included in OCI, viz., Revaluation surplus for assets in accordance with
Ind AS 16 and Ind AS 38 and gains or losses from investment in equity
instruments designated at fair value through OCI as per Ind AS 109 the amounts
will not be added to or subtracted. However, it will be added to or subtracted
from ‘book profit’ in the year of realisation/disposal/retirement or otherwise
transfer of such assets or investments. Further, this section provides for
addition to or reduction from the book profit of any amount or aggregate of the
amounts debited or credited respectively to the Statement of Profit and Loss on
distribution of non-cash assets to shareholders in a demerger as per Appendix A
of the Ind AS 10.

(ii) Section 115JB (2B) provides that in the case
of resulting company, if the property and liabilities of the undertaking(s)
being received by it are recorded at values different from values appearing in
the books of account of the demerged company immediately before the demerger,
any change in such value shall be ignored for the purpose of computing of book
profit of the resulting company.

(iii) Section 115JB (2C) provides that the ‘book
profit’ in the year of convergence and subsequent four previous years shall be
increased or decreased by 1/5^th of transition amount. The term
‘transition amount’ is defined to mean the amount or the aggregate of the
amounts adjusted in Other Equity (excluding equity component of compound
financial instruments, capital reserve and securities premium reserve) on the
convergence date but does not include (a) Amounts included in OCI which shall
be subsequently reclassified to the profit or loss; (b) Revaluation surplus for
assets as per Ind AS 16 and Ind AS 38; (c) Gains or losses from investment in
equity instruments designated at fair value through OCI as per Ind AS 109; (d)
Adjustments relating to items of property, plant and equipment and intangible
assets recorded at fair value as deemed cost as per Paras D5 of Ind AS 101; (e)
Adjustments relating to investments in subsidiaries, joint ventures and
associates recorded at fair value as deemed cost as per para D15 of Ind AS 101:
(f) Adjustments relating to cumulative translation differences of a foreign
operation as per para D13 of Ind AS 101.

(iv) Proviso to section 115JB (2C) further
provides that the effect of the items listed at (b) ;to (e) above, shall be
given to the book profit in the year in which such asset or investment is
retired, disposed, realised or otherwise transferred. Further, the effect of
item listed at (f) shall be given to the book profit in the year in which such
foreign operation is disposed or otherwise transferred.

(v) The term ‘year of convergence’ means the
previous year within which the convergence date falls. The terms ‘convergence
date’ means the first day of the first Ind AS reporting period as per Ind AS
101.

The above amendments are applicable
with effect from AY 2017-18 (F.Y:2016-17).

11.3 Extension of period for availing of MAT
and AMT credit Section 115JAAand 115JD: Under the existing provisions of
section 115JAA, credit for Minimum Alternate Tax (MAT) paid by a company u/s.
115JB is allowable for a maximum of ten assessment years immediately succeeding
the assessment year in which the tax credit becomes allowable. Similarly, for
non-corporate assessees liable to Alternate Minimum Tax (AMT) u/s.115JC, credit
for AMT is allowable for maximum of ten assessment years as per section 115JD.
Both the sections 115JAA and 115JD are amended and the period of carry forward
of MAT/AMT Credit is increased from 10 years to 15 years.

11.4 Restriction of MAT and AMT credit with
respect to foreign tax credit (FTC) – Section 115JAA and section 115JD have
been amended to provide that if the Foreign Tax Credit (FTC) allowed under
sections 90 or 90A or 91 against MAT or AMT liability, is more than the FTC
admissible against the regular tax liability (tax liability under normal
provisions), such excess amount of FTC shall be ignored for the purpose of
calculating MAT or AMT credit to be carried forward.

12. Transfer Pricing:

12.1 Domestic Transfer Pricing – Section 92BA –
At present, payments by an assessee to certain “Specified Persons” u/s. 40A(2)
(b) were subject to transfer pricing reporting requirement u/s. 92BA. Sections
92,92C, 92D and 92E applied to such transactions if they exceeded Rs. 20 crore.
The assessee was required to obtain audit report u/s. 92E in Form 3CEB for such
transactions. This provision is now deleted from A.Y. 2017-18 (F.Y. 2016-17).
However, the provisions of section 92BA will continue to apply to transactions
referred to in sections 801A, 801A(8), 801A (10), 10AA etc., as stated
in section 92BA (ii) to (vi).

12.2 Secondary Adjustments in Income – New Section
92CE –

(i) This is a new section inserted w.e.f. AY.
2018-19 (F.Y. 2017-18). This section provides for Secondary adjustment in
certain cases. Such adjustment is to be made by the assessee where primary
adjustment to transfer price is made (a) Suomoto by the assessee in his
return of income; (b) Made by the Assessing Officer which has been accepted by
the assessee; (c) Determined by an advance pricing agreement entered into by
the assessee u/s. 92CC; (d) Made as per the safe harbor rules framed u/s. 92CB;
or (e) Arising as a result of resolution of an assessment by way of the mutual
agreement procedure under an agreement entered u/s. 90 or 90A for avoidance of
double taxation.

(ii) The terms ‘primary adjustment’ and ‘secondary
adjustment’ have been defined in section 92CE(3).

(iii) Where, as a result of the primary adjustment,
there is an increase in the total income or reduction in the loss of the
assessee, the assessee is required to repatriate the excess money available
with the associated enterprise to India, within the time as may be prescribed.
If the repatriation is not made within the prescribed time, the excess money
shall be deemed to be an advance made by the assessee to such associated
enterprise and the interest on such advance, shall be computed as the income of
the assessee, in the manner as may be prescribed.

(iv) This section shall not apply where the primary
adjustment in any year does not exceed Rs. 1 crore.

(v) This section will not apply to assessment year
2016-17 and earlier years. The wording of the section is such that the section
may apply to assessment year 2017-18.

12.3 Concept of Thin Capitalisation – New
Section 94.B – This is a new section inserted w.e.f. A.Y. 2018-19 (F.Y.
2017-18) – It provides that, where an Indian Company or permanent establishment
of a foreign company in India, being a borrower incurs any expenditure by way
of interest or of similar nature exceeding Rs. 1 crore and where such interest
is deductible in computing income chargeable under the head “Profits and Gains
from Business or Profession” in respect of debt issued by a non-resident, being
an associated enterprise of such borrower, deduction shall be limited to 30 per
cent of EBITDA (earnings before interest, taxes, depreciation and amortisation)
or interest paid, whichever is less. It is also provided that for the purpose
of determining the debt issued by the non-resident, the funds borrowed from a
non-associated lender shall also be deemed to be borrowed from an associated
enterprise if such borrowing is based on implicit or explicit guarantee of an
associated enterprise. It is, further, provided that interest which is not
deductible as aforesaid, shall be allowed to be carried forward for 8
assessment years immediately succeeding the assessment year in which the interest
was first computed, to be set-off against income of subsequent years subject to
overall deductible limit of 30 %. These provisions shall not apply to entitles
engaged in Banking or Insurance business.

13. Return of Income:

13.1 Section 139 (4C) – This Section is
amended w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide that Trusts or
Institutions which are exempt from tax u/s. 10(23AAA) Fund for welfare of
Employees, section 10(23EC) and (23 ED) Investors Protection Fund, 10(23EE)
Core Settlement Guarantee Fund, and 10 (29A) Coffee Board, Tea Board, Tobacco
Board, Coir Board, Spices Board etc., shall have to file their returns
within the time prescribed u/s. 139 if their income (Without considering the
exemption under the above sections) is more than the
taxable limit.

13.2 Revised
Return of Income – Section 139(5) – At present return of income filed u/s.
139(1) or 139 (4) can be revised u/s. 139(5) before the expiry of one year from
the end of the relevant assessment year or before the completion of the
assessment. This time limit is now reduced by one year and it is provided that
from A/Y:2018-19 (F.Y: 2017-18) return u/s. 139(5) can be revised before the
end of the relevant Assessment Year. Therefore, an assessee can revise his
return u/s. 139(5) for A.Y. 2017-18 upto 31.3.2019 whereas return for A.Y.
2018-19 can be revised on or before 31.03.2019 u/s 139(5).

13.3 Quoting of Aadhaar Number – New Section 139AA
– This is a new section which has come into force w.e.f. 1.4.2017. It provides
for quoting for Aadhaar Number for obtaining PAN and in the Return of Income.
Briefly stated, the section provides as under.

(i) Every person who is eligible to obtain
Aadhaar Number has to quote the same on or after 1.7.2017 in (a) the
application for allotment of PAN and (b) the return of income. Thus in the
return of income filed on or after 1.7.2017 for A.Y. 2017-18 or a revised
return u/s. 139(5) failed for A.Y. 2016-17 it will be mandatory to quote
Aadhaar Number.

(ii) If a person has not received Aadhaar Number,
he will have to quote the Enrolment ID of Aadhaar application issued to him.

(iii) Every person who is allotted PAN as on
1.7.2017 and who is eligible to obtain Aadhaar Number, will have to intimate
his Aadhaar Number to such authority on or before the date to be notified by
the Government in the prescribed form.

(iv) If the above intimation as stated in (iii)
above is not given, the PAN given to the person shall become invalid.

(v) The provisions of this section shall not apply
to such persons as may be notified by the Central Government.

As Non-Residents, HUF, Firms, LLP,
AOP, Companies etc. are not eligible to get Aadhaar Number this section
will not apply to them.

13.4 New Section 234F – (i) This is a new
section inserted w.e.f. A.Y. 2018-19 (F.Y. 2017-18) to provide for payment of a
fee payable by an assessee who delays filing of return of income beyond the due
date specified in section 139(1). The fee payable in such cases is as follows:

Status of return	Amount of Fee
	Total income does not exceed Rs. 5,00,000	Total income exceeds Rs. 5,00,000
If the return is furnished on or before 31^st December of the relevant assessment year.	Rs. 1,000	Rs. 5,000
In any other case i.E return is furnished after 31^st December or return is not furnished at all	Rs.1,000	Rs. 10,000

Status of return

Amount of Fee

Total income does not exceed Rs. 5,00,000

Total income exceeds Rs. 5,00,000

If the
return is furnished on or before 31^st December of the relevant
assessment year.

Rs. 1,000

Rs. 5,000

In any
other case i.E return is furnished after 31^st December or return
is not furnished at all

Rs.1,000

Rs. 10,000

(ii) The above fee is payable mandatorily
irrespective of the valid reasons for not furnishing return within the due
date. As a result of levy of fee, the penalty leviable u/s. 271F for failure to
furnish return of income will not be leviable.

(iii) The consequential amendment is also made in
section 140A to include a reference to the fee payable u/s. 234F. Therefore,
the assessee is required to pay tax, interest as well as fee before furnishing
his return. Section 143(1) has also been amended to provide that in the
computation of amount payable or refund due on account of processing of return,
the fee payable u/s. 234F shall be taken into account.

(iv) This Fee is payable in respect of return of
income for A.Y. 2018-19 and onwards. It is necessary to make a representation
to the Government that there is no justification for such a levy of Fee when
section 234A provides for payment of interest at the rate of 1% PM or part of
the month for the period of the delay in submission of the return of income.
Further, section 239(2)(c) provides that a Return claiming Refund of Tax can be
filed within one year of the end of the assessment year. Therefore, persons
filing return of income claiming refund due to excess payment of advance tax or
TDS will be penalized by this provision of mandatory payment of Fee even if
they file the return claiming refund u/s. 239(2)(c) within one year from the
end of the assessment year.

14. Assessments, Reassessments and Appeals:

14.1 Section
143(1D) : At present, it is not mandatory to process the return of income
u/s. 143(1) if notice u/s.143(2) is issued for scrutiny assessment. This
section is now amended to provide that, from the A.Y. 2017-18 onwards, the
processing of the returns and issuance of refunds u/s. 143(1) can be done even
if notice u/s. 143(2) is issued. It may, however, be noted that a new section
241A is inserted, from A.Y. 2017-18 to give power to the Assessing officer to withhold
the refund till the completion of assessment u/s. 143(2) if he is of the
opinion that granting the refund will adversely affect the revenue. For this
purpose, he has to record reasons and obtain prior approval of the Principal
CIT.

14.2 Section 153(1) – The existing time
limit for completion of assessment reassessment, re-computation etc., is
revised by amendment of section 153 (1) as under. Such time limit is with
reference to the number of months from the end of assessment year.

Particulars	Existing Time Limit From End of A.Y.	Revised Time Limit From End of A.Y.
Completion of Assessment U/s. 143 Or 144
(i) Relating to AY 2018-19	21 months	18 months (30-9-2020)
(ii) Relating to AY 2019-20 or later	21 months	12 months
Completion of assessment u/s. 147 where notice u/s. 148 is served on or after 1^stApril 2019	9 months from the end of the Financial Year.	12 months from the end of the Financial Year.
Completion of fresh assessment in pursuance to an order passed by the ITAT or revision order by CIT or order giving effect to any order of any appellate authority	9 months from the end of Financial Year.	12 months from the end of Financial Year.

Particulars

Existing
Time Limit From End of A.Y.

Revised
Time Limit From End of A.Y.

Completion
of Assessment U/s. 143 Or 144

(i) Relating to AY 2018-19

21
months

18
months (30-9-2020)

(ii)
Relating to AY 2019-20 or later

21
months

12
months

Completion
of assessment u/s. 147 where

notice
u/s. 148 is served on or after
1^stApril 2019

9
months from the end of the Financial Year.

12
months from the end of the Financial Year.

Completion
of fresh assessment in pursuance to an
order passed by the ITAT or revision order by
CIT or order giving effect to any order of any appellate authority

9
months from the end of Financial Year.

12
months from the end of Financial Year.

Where a reference is made to the TPO,
the time limits for assessment will be increased by 12 months.

Similar time limits have been
prescribed u/s. 153 A and 153B for completion of assessments in search cases.
It may be noted that the time limit of 2 years u/s. 245A (Settlement Commission
Cases) is also reduced as provided in section 153(1).

14.3 Foreign Tax Credit – Section 155(14A) A
new sub-section (14A) is inserted in section 155 w.e.f. A.Y. 2018-19 (F.Y.
2017-18) to enable an assessee to claim credit for foreign taxes paid in cases
where there is a dispute relating to such tax. Now section 155(14A) provides
that, where credit for income-tax paid in any country outside India or a
specified territory outside India referred to in sections 90, 90A or section 91
has not been given on the grounds that the payment of such tax was under
dispute, the Assessing Officer shall rectify the assessment order or an
intimation u/s. 143(1), if the assessee, within six months from the end of the
month in which the dispute is settled, furnishes evidence of settlement of
dispute and evidence of payment of such tax along with an undertaking that no
credit in respect of such amount has directly or indirectly been claimed or
shall be claimed for any other assessment year. It is also provided that the
credit of tax which was under dispute shall be allowed for the year in which
such income is offered to tax or assessed to tax in India.

14.4 Authority
for Advance Ruling (AAR) – Chapter XIX – B – With a view to promote ease of
doing business, various sections in Chapter XIXB dealing with Advance Rulings
by AAR have been amended w.e.f. 1.4.2017. By this amendment, the AAR will now
be able to give Advance Rulings relating to Income tax, Central Excise, Customs
Duty and Service Tax. It is possible that this provision will be extended to
GST also after this new tax is introduced by merging Excise, Customs, Service
Tax, VAT etc. Accordingly, consequential amendments are made in the
other sections. Further, amendments are made in the sections dealing with
appointment of Chairman, Vice-Chairman and other members of AAR.

14.5 Advance Tax Instalments – Section 211
– This section is amended w.e.f. A.Y. 2017-18 to provide that an assessee
engaged in a professional activity and opting for taxation on presumptive basis
u/s. 44ADA can pay Advance Tax in a single instalment on or before 15^th
March instead or usual 4 instalments. Thus, the benefit at present enjoyed by
the assessees covered u/s. 44AD is extended to those covered by section 44ADA.
Further, section 234C is amended to provide that in such cases interest will be
payable on shortfall of Advance tax only for one instalment due in March.

14.6 Interest on shortfall in Advance Tax –
Section 234C – At present,
difficulty is experienced in paying Advance Tax instalments on dividend income
taxable u/s. 115 BBDA as the timing of declaration of dividend is uncertain.
Therefore, the first proviso to section 234C is now amended with effect from AY
2017-18, to provide that interest shall not be chargeable in case of shortfall
on account of under-estimation or failure to estimate the taxable dividend as
long as advance tax on such dividend is paid in the remaining instalments or
before the end of the financial year, if dividend is declared after 15^th
March of that year.

14.7 Interest on Refund of TDS – Section
244(1B) – Sub-section (1B) is added w.e.f. 1.4.2017 to provide for payment
of interest by the Government on refund of TDS. It is now provided that
interest @ 0.5% per month or part of the month shall be paid for the period
beginning from the date on which the claim for refund of TDS in Form 26B is
made, or, where the refund has resulted from giving effect to an order of any
appellate authority, from the date on which the tax is paid, till the date of
grant of refund. However, no interest will be paid for any delay attributable
to the deductor.

15. Search, Survey and Seizure:

15.1 Sections 132 and 132A – Under sections
132(1) and 132(1A) if the specified authority has ‘reason to believe’ about
evasion of tax by any assessee he has power to pass order for search. Section
132(1) is now amended w.e.f. 1.4.1962 and section 132(1A) is amended w.e.f.
1.10.1975 to provide that the specified authority is not required to disclose
these reasons to the assessee or any appellate authority i.e CIT(A) or ITA
Tribunal. Similar amendment is made in section 132A(1) dealing with requisition
of books of account, documents etc., w.e.f. 1.10.1975. This provision
will deprive the right of the assessee from knowing the reasons for any search.
This amendment goes against the declared policy of the Government about
transparency in the tax administration and also against the assurance that no
amendments in tax laws will be made with retrospective effect. From the wording
of the section, it is evident that such reasons will be disclosed only to the
High Court or Supreme Court if the matter is agitated in appeal or a Writ.

15.2 Section 132(9B)(9C) and (9D) – Sub-sections
(9B) to (9D) have been inserted in section 132 w.e.f. 1.4.2017 to provide that
during the course of a search or seizure or within a period of sixty days from
the date of which the last of the authorizations for search was executed, the
authorised officer, for protecting the interest of the revenue, may attach
provisionally any property belonging to the assessee, with the prior approval
of Principal Director General or Director General or Principal Director or
Director. Such provisional attachment shall cease to have effect after the
expiry of six months from the date of order of such attachment.

It is also provided that in the case
of search, the authorised officer may, for the purpose of estimation of fair
market value of a property, make a reference to a Valuation Officer referred to
in section 142A. It is also provided that the Valuation report shall be
submitted by the Valuation Officer within sixty days of receipt of such
reference.

15.3 Section 133 – This section authorises
certain Income tax Authorities to call for information for the purpose of any
inquiry or proceeding under the Income tax Act. By amendment of this section
w.e.f. 1.4.2017 this power is now given to Joint Director, Deputy Director and
Assistant Director. It is also provided that where no proceeding is pending,
the above authorities can make an inquiry. The existing requirement of
obtaining prior approval of Principal Director, Director or Principal
Commissioner or Commissioner is now removed.

15.4 Section 133A – At present, the
specified Income tax Authority can conduct a Survey operation at the premises
where a person carries on any business or profession. By an amendment of this
section from 1.4.2017, this power to conduct survey is extended to any place at
which an activity for charitable purpose is carried on. Thus, such survey can
be conducted on charitable trusts also. However, this amendment does not
authorise survey at a place where a Religious Trust carries on its activities.

15.5 Sections 153A and 153C – Section 153A
relates to assessment in cases of search or requisition. In such cases, at
present, assessment for six preceding assessment years can be reopened. The
section is amended w.e.f. 1.4.2017 extending the period of 6 years to 10 years.
The extension of 4 years is subject to the following conditions –

(i) The Assessing Officer has, in his possession,
books of account or other documents or evidence which reveal that the income
which has escaped assessment amounts to or is likely to amount to Rs. 50 lakh
or more in the aggregate in the relevant four assessment years (falling beyond
the sixth year);

(ii) Such income escaping assessment is represented
in the form of asset which shall include immovable property being land or
building or both, shares and securities, deposits in bank account, loans and
advances;

(iii) The escaped income or part thereof relates to
such assessment year or years; and

(iv) Search u/s. 132 is initiated or requisition
u/s. 132A is made on or after the 1^st day of April, 2017.

In a case where the above conditions
are satisfied, a notice can be issued for the relevant assessment year beyond
the period of six years. Further, similar amendment has been made to section
153C relating to assessment of income of any other person to whom that section
applies.

16. Penalties:

16.1 New Section 271J – (i) This is a new
section inserted w.e.f. 1.4.2017. At present, assessees are required to obtain
reports and certificates from a qualified professional under several provisions
of the Income tax Act. The section provides that the assessing officer or
CIT(A) can levy penalty of Rs.10,000/- on a chartered Accountant, Merchant
Banker or Registered Valuer if it is found that he has furnished incorrect
information in any report or certificate furnished under any provision of the
Act or the Rules. However, section 273B is amended to provide that if the
concerned professional proves that there was a reasonable cause for any such
failure specified in section 271J, then the above penalty will not be levied in
such a case.

ii) It may be stated that such a provision to
levy penalty on a professional who is assisting the Income tax Department by
giving expert opinion in the form of a report or certificate can be considered
as a draconian provision. The power to penalise a professional is with the
Regulatory Body of which he is a member. Giving such a power to an officer of
the Department, is not at all justified. Such a penal provision can be opposed
for the following reasons.

(a) In the case of Chartered Accountants, there
are sufficient safeguards under the C.A. Act to discipline a member of ICAI if
he gives a wrong report or a wrong certificate. Therefore, there was no need
for making a provision for levy of penalty under the Income-tax Act.

(b) This section gives power to levy such penalty
to the assessing officer or CIT (A).

(c) There is no clarity as to which officer will
levy such penalty. Whether the A.O. under whose jurisdiction the professional
is practicing or the A.O. of his client to whom the report or the certificate
is given? Professionals issue such certificates to their clients situated in
various jurisdictions in the same city or in different cities. If the officers
making assessments of various clients are to levy such penalty, it will create
many practical issues and will require professionals to face litigation at
various places involving lot of time and expenses for actions of different
officers at various places.

(d) This section refers to incorrect information
in a “Report” or “Certificate”. It is well known that Report given by a
professional only contains his opinion whereas the certificate states whether
information given in the certificate is true or not. Therefore, penalty cannot
be levied for the opinion given in a ‘Report’ (e.g. Audit Report or a Valuation
Report). Further, the certificate is also given on the basis of information
given by the client and the evidence produced before the professional.
Therefore, if incorrect information is given by the client, the professional
cannot be penalised.

(e) This section comes into force w.e.f. 1/4/2017.
It is not clarified in the section whether it will apply to report or
certificate given by a professional on or after 1/4/2017. If this is not so,
the A.O. or CIT(A) can apply the penal provision under this section while
passing orders on or after 1/4/2017 in respect of report or certificate given
in earlier years. If the section is applied to reports or certificates given by
a professional prior to 1/4/2017 the provision will have retrospective effect.
This will be against the principles of natural justice. It is settled law that
no penalty can be levied for any acts or omissions committed prior to the date
of enactment of a penalty provision.

(f) If this
section is considered necessary, the CBDT should issue a circular to the effect
that (a) the section shall apply to reports or certificates issued on or after
1.4.2017, and (b) the penalty under this section can be levied only by the A.O.
or CIT (A) of the range or ward where the professional is being assessed to
tax.

16.2 The Taxation (Second Amendment) Act, 2016,
was passed in December, 2016. This Act amends some of the sections of the
Income-tax Act relating to higher rates of taxation and penalties w.e.f. A.Y.
2017-18. These provisions are discussed in the following paragraphs.

16.3 Section 115 BBE: (i) Section 115BBE of the Income-tax Act deals with
rate of tax on income referred to in sections (i) 68 – Cash Credits, (ii) 69 –
Unexplained Investments, (iii) 69A – Unexplained Money, bullion, jewellery or
other valuable articles, (iv) 69B- Amount of Investments, Jewellery etc.
not fully disclosed, (v) 69C – Unexplained Expenditure and (vi) 69D – Amount
borrowed or repaid on a hundi in cash. The section provides that the rate of
tax payable on addition made by the Assessing Officer (AO) under the above
sections, if no satisfactory explanation for the above deposits/investments/
expenditure etc., is furnished by the assessee, will be at a flat rate
of 30% plus applicable surcharge and education cess. This section is now
amended w.e.f. 1-4-2017 (A.Y. 2017-18) as under:

(a) It is now provided that in respect of income
referred to in sections 68, 69, 69A, 69B, 69C or 69D which is offered for tax
by the assessee in the Return of Income filed u/s. 139 the rate of tax on such
income will be 60% plus applicable surcharge and education cess.

(b) Further, if the income referred to in sections
68, 69, 69A, 69B, 69C or 69D is not offered for tax but is found by the AO and
added to the income of the assessee by the AO the rate of tax will be 60% plus
applicable surcharge and education cess.

(ii) Section 2(9) of the Finance Act, 2016 dealing
with surcharge on tax has also been amended w.e.f. A.Y. 2017-18. It is now
provided that the rate of surcharge will now be 25% in respect of tax payable
u/s. 115BBE irrespective of the quantum of total income for A.Y. 2017-18. This
means that any income in the nature of cash credit, unexplained investments,
unexplained expenditure etc. which is offered for taxation u/s. 139 or
which is added to declared income by the AO u/s. 68, 69,69A to 69D will now be
taxable in the case of Individual, HUF, AOP, Firm, Company etc. at the
rate of 60% (instead of 30% earlier) plus surcharge at 25% of tax (instead of
15% earlier). Besides the above, education cess at 3% of tax will also be
payable.

(iii) It may be noted that if an Individual, HUF,
AOP, Firm, Company etc. deposits old `500/1,000 notes in his Bank a/c
between 10-11-2016 and 30-12-2016 and he is not able to give satisfactory
explanation for the source, he will have to pay tax at 75% (60%+15%) plus
Education Cess even if this income is shown in the Return u/s. 139 for A/Y:
2017-18.

16.4 Penalty in Search Cases – Section 271 AAB –
(i) Section 271AAB was inserted in the
Income-tax Act by the Finance Act, 2012 w.e.f. 1-7-2012. Under this section,
penalty is leviable at the rate ranging from 10% to 90% of undisclosed income
in cases where Search is initiated u/s. 132 on or after 1-7-2012. By amendment
of this section, it is provided that the existing provisions of section 271AAB
(1) for levy of Penalty will apply only in respect of Search u/s. 132 initiated
between 1-7-2012 and 15.12.2016.

(i) New Section 271AAB(1A) provides w.e.f.
15.12.2016 for levy of penalty at 30% of
undisclosed income in cases where Search is initiated on or after 15.12.2016.

For this
purpose, the conditions are as under:

(a) The assessee admits such income u/s. 132(4)
and specfies the manner in which it was earned.

(b) The assessee substantiates the manner in
which such income was earned.

(ii) If the assessee does not comply with the
above conditions the rate of penalty is 60% of undisclosed income. It may be
noted that prior to this amendment the rates of penalty were 10% to 90% under
specified circumstances.

16.5 Section 271AAC – (i) This section is inserted w.e.f. 1-4-2017
(A.Y. 2017-18) to provide for levy of penalty in respect of income from cash
credits, Unexplained investments, unexplained expenditure etc. added by
the A.O. u/s. 68, 69, 69A to 69D. This penalty is to be computed at the rate of
10% of the tax payable u/s. 115BBE (1)(i). Since the tax payable u/s.
115BBE(1)(i) is 60% of the income added by the AO u/s. 68, 69, 69A to 69D, the
Penalty payable under this section will be 6% of the income added by the AO
under the above sections. Thus, the total tax (including penalty) in such cases
will be 83.25% (77.25% + 6%).

(ii) It may be noted that no penalty under this new
section will be payable if the assesse has declared the income referred to in
sections 68, 69, 69A to 69D in his return of income u/s. 139 and paid the tax
due u/s. 115BBE before the end of the relevant accounting year. In other words,
if any assessee wants to declare the amount of old notes deposited in the bank
during the specified period in his return of income u/s. 139 for A.Y. 2017-18,
he will have to pay the tax at 75% (including surcharge) and education
cess. In this case the above penalty
will not be levied.

(iii) It is also provided that in the above cases no
penalty u/s. 270A will be levied on the basis of under reported income. It is
also provided that the procedure u/s. 274 for levy of penalty and time limit
u/s. 275 will apply for levy of penalty u/s. 271AAC.

17. Other Important Provisions:

17.1 Section
79 – At present, a closely held company is not allowed to carry forward the
losses and set-off against income of a subsequent year if there is a change in
shareholding carrying more than 49% of the voting power in the said subsequent
year as compared to the shareholding that existed on the last day of the year
in which such loss was incurred. By amendment of this section, w.e.f. AY
2018-19 (F.Y. 2017-18), it is now provided to relax the applicability of this
provision to start-up companies referred to me section 80-IAC of the Act. This
section will enable the eligible start–up company to carry forward the losses
incurred during the period of seven years, beginning from the year in which
such company is incorporated, and set off against the income of any subsequent
previous year. However, it is provided that such benefit shall be available
only if all the shareholders of such company who held shares carrying voting
power on the last day of the year or years in which the loss was incurred
continue to hold those shares, on the last day of the previous year in which
loss is sought to be set-off. Thus, dilution of voting power of existing
shareholders would therefore not impact the carry forward of losses so long as
there is no transfer of shares by the existing shareholders. However, change in
voting power and shareholding consequent upon the death of a shareholder or on
account of transfer of shares by way of gift to any relative of shareholder
making such gift, shall not affect carry forward of losses.

17.2 Section 197(c) of Finance Act, 2016 –
This section came into force on 1-6-2016. A doubt was raised in some quarters
that under this section A.O. can issue notice for assessment or reassessment
for income escaping assessment for any number of assessment years beyond 6
preceding years. This had created some uncertainty. In order to clarify the
position this section is now deleted
w.e.f. 1.6.2016.

17.3 General Anti-Avoidance Rule (GAAR):

It may be noted that sections 95 to
102 dealing the provisions relating GAAR inserted by the Finance Act, 2013,
have come into force from 1.4.2017. CBDT has issued a Circular No.7 of 2017
dated 27.1.2017 clarifying some of the doubts about these provisions.

17.4 Place of Effective Management (POEM) –
Section 6 (3) was amended by the Finance Act, 2016, w.e.f. 1.4.2017. Under this
section, a Foreign Company will be deemed to be Resident in India if its place
of Effective Management is in India. This provision will come into force from
A.Y. 2017 – 18 (F.Y. 2016-17). By circular No. 6 dated 24/1/2017 issued by the
CBDT, it is explained as to when the
provisions of this section will apply to a Foreign Company.

17.5 Income Computation and Disclosure
Standards (ICDS) – CBDT has notified ICDS u/s 145(2) of the Income-tax Act.
They are applicable to assesses engaged in business or profession who maintain
accounts on accrual method of accounting. These standards are applicable w.e.f.
A.Y. 2017 – 18 (F.Y. 2016-17). By Circular No.10 of 2017 dated 23.03.2017, CBDT
has clarified some of the provisions of ICDS which can be followed while filing
the return of income for A.Y. 2017-18 and subsequent years.

18. To Sum Up:

18.1 During the Financial Year 2016-17 the
Government has taken some major steps such as introduction of two Income
Disclosure Schemes, one during the period 01.06.2016 to 30.09.2016 and the
other during the period 17.12.2016 to 31.03.2017, advancing the date for
presentation of Budget to first day of February, merging Railway Budget with
the General Budget, Demonetisation of high value currency notes, finalising the
structure for GST etc. All these steps are stated to be for elimination
of corruption, black money, fake notes in circulation and other administrative
reasons.

18.2 The declared policy of the Government is to
ensure that there is “Ease of Doing Business in India”. For this purpose the
administrative procedures have to be simplified and tax laws also have to be
simplified. However, if we consider the amendments made in the Income-tax Act this
year it appears that some of the provisions have complicated the law and will
work as an impediment to creating an environment where there is ease of doing
business.

18.3 The insertion of new section 56(2)(x) is one
section which will create may practical problems during the course of transfer
of assets within group companies and for business reorganisation. In case of
some transfer of assets there will be tax liability in the hands of the
transferor as well as the transferee in respect of the same transaction.

18.4 Amendment in section 10(38) levying tax on
sale of quoted shares through stock exchange if STT is not paid at the time of
purchase will raise many issues. If the Notification to be issued for exclusion
of some of the transactions from this amendment is not properly worded,
assessees will find difficulties in taking their decisions about business
reorganization.

18.5 New section 50CA is another section which
will create many practical problems. There will be litigation on the question
of valuation of unquoted shares. In some cases the seller of unquoted shares
will have to pay capital gains tax u/s. 50CA and at the same time the purchaser
will have to pay tax under the head Income from other sources u/s. 56(2)(x) on
the same transaction.

18.6 Provision in new section 234F relating to
levy of Fee for late filing of the Return of Income is also unfair as the
assessee is also required to pay interest @1% p.m. for the period of delay.
Further, persons claiming refund of tax will also be required to pay such fee
for late filing of Return of Income with Refund application.

18.7 Provisions relating to levy of penalties are
very harsh. Further, insertion of new section 271J for levy of penalty on
professionals for giving incorrect information in the report or certificate
given to the assessee is not at all justified. Many practical issues of
interpretation will arise. Strong representation is required to be made for
deletion of such type of penalty.

18.8 Amendments in the provisions relating to
search, survey and seizure will have far reaching implications. Arbitrary
powers are given to officers of the Income tax Department which are liable to
be misused. Denial of reasons for conducting search and seizure operations upto
ITAT Tribunal level can be considered to be against the principles of natural
justice. This provision is liable to be challenged in a court of law.

18.9 Taking
an overall view of the amendments made by this year’s Finance Act, one would
come to the conclusion that very wide and arbitrary powers are given to the
officers of the tax department for conducting search, survey and seizure
operations and levy of penalty. If these powers are not used in a judicious
manner, one would not be surprised if unethical practices increase in the administration
of tax laws. This will go against the declared objective of the present
Government to provide a cleaner tax administration.

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3. Book profit – Accounts prepared and certified in accordance with the provisions of the Companies Act – has to be accepted – cannot be altered – Section 115JB Explanation .

CIT – 6 vs. Century Textiles and Industries Ltd.[Income tax Appeal no. 1072 of 2014, dt : 16/01/2017 (Bombay High Court)].

[Asst CIT vs. Century Textiles and Industries Ltd,. [ITA No. 3261/MUM/2009; Bench : C ; dated 13/09/2013 ; AY 2005-06, Mum. ITAT ]

During the course of assessment proceedings, the AO noticed that the assessee had debited to its Profit and Loss Account an amount of Rs.12.41 crore being the arrears of depreciation for the earlier A.Y 2000-01 and 2001-02. The AO called upon the assessee to explain why the depreciation relating to earlier AY should not be added back to the Book Profits. The assessee pointed out that its accounts had been prepared in accordance with the provisions of the Companies Act which were duly audited. Therefore, in view of the decision of the Apex Court in CIT vs. Apollo Tyres Ltd [255 ITR 273] wherein it has been stated that the book profit as prepared and certified in accordance with the provisions of the Companies Act, has to be accepted and cannot be altered to determine book profit for purpose of section 115JB of the Act except as provided in the Explanation thereto. Notwithstanding the above, the AO did not accept the same and added arrears of depreciation for the A.Y 2000-01 and 2001- 02 to the audited book profits to determine the book profits for the purpose section 115JB of the Act.

Being aggrieved, the assessee filed an appeal to the CIT(A). The appeal was allowed by the CIT(A) following the decision of Apollo Tyres Ltd (supra) .Thus deleted the addition made by the AO.

Being aggrieved the Revenue carried the issue in appeal to the Tribunal. The Tribunal referred to the judgment of Hon’ble High Court of Bombay in case of Kinetic Motor Company Ltd. (262 ITR 330) in which the High Court referred to the judgment of Hon’ble Supreme Court in case of Apollo Tyres Ltd. (Supra) and held that the accounts prepared and certified in accordance with part 2 and part 3 of schedule VI of the companies Act could not be tinkered with and AO had no jurisdiction to go beyond the net profit shown in the such accounts. The Tribunal, therefore, deleted the addition made.

On further appeal, the High Court held that the issue stands concluded by the decision of the Apex Court in Apollo Tyres Ltd. (supra) and the decision of this Court in Kinetic Motor Co. Ltd. (supra). The above decisions have held that it is not permissible to the AO to tinker with the profit declared in the audited account maintained in terms of Schedule VI of the Companies Act. As the order of the Tribunal has merely followed decision of the Apex Court in Apollo Tyres Ltd. (supra) question as formulated does not give rise to any substantial question of law.

The other grievance of the Revenue was that the clause (iia) was inserted only in Finance Act, 2006 w.e.f. 1st April, 2007 and is not applicable for the year under consideration. However, the court observed that the grievance of the revenue does not carry the issue in the present facts any further as the Tribunal has not allowed the claim of the respondent-assessee by relying upon clause (iia) of explanation to section 115JB of the Act. Further that this issue was not urged before the authorities under the Act. Therefore, in view of the decision in CIT vs. Tata Chemicals Ltd. [256 ITR 395], it cannot be urged before this Court for the first time.

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2. Sale of shares – capital gain vs Business Income- consistency – own funds – considering the volume and frequency of purchase / sale of shares – held not a trader: Section 45

CIT – 4 , vs. Shri Upendra K. Doshi. [ Income tax Appeal no. 848 of 2011; AY 2008-09 dated : 15/11/2016 (Bombay High Court)].

[Shri Upendra K. Doshi vs. DCIT [ITA no:7854/M/2014 dated 14/08/2013 ; A Y: 2005-06 to 2008-09. Mum. ITAT ]

The assessee purchased and sold certain shares, profit from which was claimed as Short term/Long term capital gain depending upon the period of holding. The AO did not dispute the long term capital gain. However, he treated the assessee as a trader instead of investor and accordingly re-characterised the amount shown as ‘Short term capital gain’ as ‘Business income’.
The ld. CIT(A) noticed that the assessee consistently held the shares as ‘Investment’ and this treatment of profit from sale of shares as ‘capital gain’ stood accepted by the AO in earlier year as well. He, therefore, directed to treat the amount as Short term capital gain as against the ‘Business income’ held by the AO.

Being aggrieved, the Revenue filed an appeal before the Tribunal. The Tribunal observed that the treatment of Long term capital gain has been accepted by the AO. The only dispute is about the treatment of profit from sale of shares etc., other than long term capital assets, which the AO treated it as ‘Business income’. The assessee gave similar treatment to the shares by keeping it as ‘Investment’ on the lines as was done in the earlier years. For the immediately preceding assessment year i.e. 2004-05, the assessee showed Long term capital gain and Short term capital gain from the transfer of shares.

The AO accepted profit from transfer of shares as short term/long term capital gain respectively in the assessment made u/s. 143(3) of the Act for such earlier year. Similar is the position for the A.Y. 2003-04 in which the assessee again showed profit from the transfer of shares as Long term capital gain and Short term capital gain which was assessed by the AO as such in assessment made u/s. 143(3) of the Act. This shows that the assessee held and declared the shares as ‘Investment’ and this stand came to be accepted by the Revenue. Thus the ld. CIT(A) order was upheld .

Being aggrieved by the order of the Tribunal, the Revenue filed an appeal before the High Court. The Hon’ble High Court took the note of the fact that appeals for AY 2005-06 and AY 2006-07 are admitted by the High Court considering the frequent and voluminous transactions carried out with borrowed funds in shares held as “Short Term Capital Gain”. The Hon’ble court observed that in the subject assessment year, the assessee has carried out the business activity out of its own funds and the authorities have also rendered a finding of fact that the transactions are not large nor so frequent so as to hold that the assessee was a trader in shares.

The finding of fact arrived at both by the CIT(A) as well as the Tribunal for the subject assessment year that the assessee was an investor in shares out of its own funds and considering the volume and frequency of purchase / sale of shares is not a trader has not been shown to be perverse by the Revenue. In the above view, the appeal was dismissed.

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1.Reopening of assessment – No tangible material before the AO for assuming the jurisdiction u/s. 147- Reopening notice was bad in law: Section 148

CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):

The assessee-company was engaged in trading of dyes and chemicals. A search was carried out in business premises of assessee wherein documents seized showed that assessee had paid commission to sister concern for rendering services of sales agent. According to the Assessing Officer, the relationship between the parties militated against the claim being bona fide, particularly in the absence of proof of rendition of service by the sales agent. He thus rejected assessee’s claim for payment of commission. The Commissioner(Appeals) noted that sister concern had been appointed as sales agent for the sake of maintaining uniformity in sale prices and to avoid unnecessary and uneconomical competition between the sister concerns. A decision thus came to be taken by the entities that a bifurcation of duties was called for and one concern was identified to act as the selling agent for the entire group of companies. The transaction thus found favour with the Commissioner as being bona fide and genuine. The Tribunal also approved the findings of the Commissioner (Appeals) and allowed the claim.

On appeal by the Revenue, one of the questions raised was:

“Whether on the facts and in the circumstances of the case that the Income Tax Appellate Tribunal was right in holding that the price difference borne by the assessee company in respect of the transaction with M/s. United Bleachers Limited, a sister concern, could not be disallowed alternatively, u/s. 40A(2), ignoring the reasons given in support of the addition by the Assessing Officer.?”

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

“i) There is no prohibition that related parties cannot engage in business transactions. Such an interpretation would render the provisions of section 40A(2) of the Act redundant. Section 40A(2) empowers the Assessing Officer to effect a disallowance of payments that are, ‘in his opinion’ excessive or unreasonable giving regard to fair market value of the goods, services or facilities for which the payment is made or the legitimate needs of the business or profession of the assessee or the benefit derived by him or accruing to him. Such ‘opinion’ has to be based on tangible material and not assumptions and suspicions.

ii) The provisions of section 40A(2) are not automatic and can be called into play only if the Assessing Officer establishes that the expenditure incurred is, in fact, in excess of fair market value. This had not been done in the present case. The quantum of commission paid is thus at arms length. The decision to streamline business activities and establish a division of labour or hierarchy of operations is within the domain of the entities and cannot be trespassed upon by the Assessing Officer except where the officer establishes that such design or method is a ruse to circumvent legitimate payment of tax.

iii) The Supreme Court in the case of Vodafone International Holdings BV. vs. Union of India [2012] 341 ITR 1/204 Taxman 408/17 taxmann.com 202 points out the difference between ‘looking through’ a transaction and ‘looking at’ a transaction settling the position that a conclusion of colourable/sham can be arrived at by viewing the transaction in a commercially realistic and wholistic perspective, not adopting a truncated and dissecting approach. In the present case, there is a consistent finding of fact that the transaction was bona fide and acceptable. Nothing is placed on record to indicate that the findings are perverse. Thus there is no need to interfere with the concurrent findings of the authorities. In the result, revenue’s appeal is dismissed.”

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6. Settlement Commission – Application for settlement of case – Maintainability – Application offering undisclosed foreign income and assets – A. Ys. 2005-06 to 2014-15- Section 245C – Effect of Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015 – Act coming into force w.e.f. 01/07/2015 – Return filed on 21/05/2015 and notice u/s. 148 issued on 29/05/2015 – Application for settlement maintainable

Arun Mammen vs. UOI; 391ITR 23 (Mad):

Assessee had filed returns of income on 21/05/2015 disclosing foreign income and assets. On 29/05/2015, the Assessing Officer issued notices u/s. 148 of the Act. The assessee made applications before the Settlement Commission for settlement of the cases. The Settlement Commission rejected the applications holding that the Commission does not have jurisdiction to entertain these applications offering undisclosed foreign income and assets.

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

“i) Explanatory notes dated July 2, 2015 issued in Circular No. 12 of 2015 have clarified that the Black Money(Undisclosed Foreign Income and Assets) and Imposition of tax Act, 2015 comes into effect from 01/07/2015.

ii) The assessee having filed their return of income on 21/05/2015 and notice having been issued u/s. 148 by the Assessing Officer on 29/05/2015 which was before coming into effect of the provisions of the 2015 Act, the applications submitted by the assessee before the Settlement Commission were maintainable.”

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5. Refund – Interest on refund – Section 244A – A. Ys. 2007-08 and 2008-09 – Period for which interest payable – Exclusion of period of delay caused by assessee – Belated claim during assessment or revised return not a delay caused by assessee – Claim of assessee accepted in appeal by Commissioner (Appeals) – Time taken for appeal proceedings cannot be excluded

Ajanta Manufacturing Ltd. vs. Dy. CIT; 391 ITR 33(Guj):

For the A. Ys. 2007-08 and 2008-09, the assessee had claimed refund with interest in respect of relief given by Commissioner (Appeals). Refund was granted but the Commissioner held that the assessee would not be entitled to interest up to the period of giving effect to the order of the Commissioner(Appeals).

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

“i) In cases covered under sub-section (1) of section 244A of the Income-tax Act, 1961, the assessee would be entitled to interest on refund at specified rate. Under sub-section (2) of section 244A, however, such interest would not be payable to the assessee if the proceedings which resulted in refund are delayed by reasons attributable to the assessee, whether wholly or in part. In such a case the period of delay so attributable to the assessee would be excluded from the period for which interest is payable.

ii) The act of revising the return or revising a claim during the course of assessment proceedings could not be said to be a reason for delaying the proceedings which could be attributable to the assessee. The fact that the assessee had filed an appeal which ultimately came to be allowed by the Commissioner, could not be a reason for delaying the proceedings which could be attributed to the assessee.
iii) The Department did not contend that the assessee had needlessly or frivolously delayed the assessment proceedings at the original or appellate stage. In the absence of any such foundation, the mere fact that the assessee made a claim during the course of the assessment proceedings which was allowed at the appellate stage would not ipso facto imply that the assessee was responsible for causing the delay in the proceedings resulting in refund. Under the circumstances, the order passed by the Commissioner was not valid.”

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4.Recovery of tax – Stay of demand during pendency of appeal before CIT(A) – Circular/Instruction No. 1914 dated 02/02/1993 and Circular dated 29/02/2016 modifying Instruction No. 1914 – Circular No. 1914 deals with collection and recovery of income tax, however it does not standardise the quantum of lumpsum payment required to be made by asssessee as a pre-condition of stay of disputed demand before CIT(A). Circular dated 29-2-2016 being a partial modification of Circular No. 1914 merely prescribes the percentage of the disputed demand that needs to be deposited by assessee. Thus, although process for granting stay was streamlined, and standardised by Circular dated 29-2-2016 but it could not mean that Instruction No. 2-B(iii) contained in Circular No. 1914 dealing with situation of unreasonably high pitched or dealing with situation of genuine hardship caused to assessee was erased by Circular dated 29-2-2016, therefore, both these factors should have been considered by both, Assessi

Flipkart India (P.) Ltd. vs. ACIT; [2017] 79 taxmann.com 159 (Karn):

For the A. Ys. 2014-15 and 2015-16, the assessee had filed appeals before the CIT(A) against the assessment orders. The assessee also filed applications for stay of the disputed demand during the pendency of appeals. Relying on the CBDT Circular dated 29/02/2016, the assessee was directed to pay 15% of the disputed demand for grant of stay of the balance.

The assessee filed writ petitions challenging the said orders. The Karnataka High Court allowed the writ petition and held as under:
“i) Undoubtedly, the present case raises the issue of balancing the interest of the Revenue, and the interest of an assessee. Needless to say, the Revenue does have the right to realise the assessed income tax amount from the assessee. However, while trying to realise the said amount, the Revenue cannot be permitted, and has not been permitted by the Circulars mentioned above, to act like a Shylock. It is precisely to balance the conflicting interests that certain guidelines have been prescribed by Circular No.1914, and Circular dated 29.2.2016. The Circular dated 29.2.2016 clearly states that the circular is “in partial modification of Instruction No.1914”. Therefore, the Circular dated 29.2.2016 does not supersede the Circular No.1914 in toto, but merely “partially modifies” the instructions contained in Circular No.1914.

ii) According to Instruction No.4(A) of Circular dated 29.2.2016, it is a general rule, that 15% of the disputed demand should be asked to be deposited. But, according to Instruction No.4(B)(a) of the Circular dated 29.2.2016, the demand can be increased to more than 15%; according to Instruction No.4(B)(b) of the Circular dated 29.2.2016, the percentage can be lower than 15%, provided the permission of the Prl. CIT is sought by the Assessing Officer. However, in case the Assessing Officer does not seek the permission from the Prl.CIT, and in case the assessee is aggrieved by the demand of 15% to be deposited, the assessee is free to independently approach the Prl. CIT. The assessee would be free to request the Prl. CIT to make the percentage of disputed demand amount to be less than 15%.

iii) It is true that Instruction No.4 (B)(b) of the Circular dated 29.2.2016, gives two instances where less than 15% can be asked to be deposited. However, it is equally true that the factors, which were directed to be kept in mind both by the Assessing Officer, and by the higher superior authority, contained in Instruction No.2-B(iii) of Circular No.1914, still continue to exist. For, as noted above, the said part of Circular No.1914 has been left untouched by the Circular dated 29.2.2016. Therefore, while dealing with an application filed by an assessee, both the Assessing Officer, and the Prl. CIT, are required to see if the assessee’s case would fall under Instruction No.2-B(iii) of Circular No.1914, or not? Both the Assessing Officer, and the Prl. CIT, are required to examine whether the assessment is “unreasonably highpitched”, or whether the demand for depositing 15% of the disputed demand amount “would lead to a genuine hardship being caused to the assessee” or not?

iv) A bare perusal of the two orders, both dated 23.11.2016, clearly reveal that the Assessing Officer has relied upon Instruction No.4(B)(b) of the Circular dated 29.2.2016, and has concluded that since the petitioner’s case does not fall within the two illustrations given therein, therefore, it is not entitled to seek the relief that less than 15% should be demanded to be deposited by it. Moreover, the Assessing Officer has jumped to the conclusion that the petitioner’s finances do not indicate any hardship in this case. However, the Assessing Officer has not given a single reason for drawing the said conclusion. Since the petitioner has been constantly claiming that it has suffered loss from the very inception of its business, from 2011 to 2016, the least that the Assessing Officer was required to do was to elaborately discuss as to whether “genuine hardship” would be caused to the petitioner in case the petitioner were directed to pay 15% of the disputed demand amount or not? Yet the Assessing Officer has failed to do so. Therefore, this part of the order, naturally, suffers from being a non-speaking order. Hence, the said orders are legally unsustainable.

v) A bare perusal of the order dated 25.1.2017 also reveals that the Prl. CIT has failed to appreciate the co-relation between Circular No.1914, and Circular dated 29.2.2016. The Prl. CIT has failed to notice the fact that the latter Circular has only “partially modified” the former Circular, and has not totally superceded it. The Prl. CIT has also ignored the fact that Instruction No.2-B(iii) contained in Circular No.1914 continues to exist independently of and in spite of the Circular dated 29.2.2016. Therefore, it has failed to consider the issue whether the assessment orders suffers from being “unreasonably highpitched”, or whether “any genuine hardship would be caused to the assessee” in case the assessee were required to deposit 15% of the disputed demand amount or not? Thus, the Prl. CIT has failed to apply the two important factors mentioned in Circular No.1914.

vi) For the reasons stated above, this Writ Petition is, hereby, allowed. The twin orders dated 23.11.2016, and the order dated 25.1.2017, are set aside. The case is remanded back to the Prl. CIT to again decide the Review Petitions filed by the petitioner. The Prl. CIT is further directed to decide the Review Petition within a period of two weeks from the date of receipt of the certified copy of this order.”

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3.Offences and prosecution – Compounding of offences – Sections 276B and 279(2) – Failure by assessee to deposit amount deducted as tax at source – Rejection of application for compounding on basis of guidelines by CBDT – Assessee’s failure to deposit amount collected beyond its control – Chief Commissioner should consider objective facts on merits before exercising jurisdiction – order rejecting application for compounding not sustainable

Sports Infratech P. Ltd. vs. Dy CIT; 391 ITR 98 (Del):

The assessee failed to deposit the amounts deducted as tax from the sums payable under various contracts. A complaint u/s. 276B of the Act, 1961 was filed against the assessee. The assessee sought for compounding of the offence u/s. 279(2) of the Act. The Chief Commissioner rejected the application on the ground that the compounding was not permissible in view of the guidelines issued by the CBDT imposed especially in view of para 8(v) thereof which stated that the offences having a bearing in a case under investigation by any other Central or State agency such as the CBI, were not to be compounded.

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

“i) The rejection of the assessee’s application was entirely routed on the Chief Commissioner’s understanding of the conditions of ineligibility in para 8(v). The view was based upon an erroneous understanding of law. While exercising jurisdiction, the Chief Commissioner should consider the objective facts before it.

ii) The assessee’s failure to deposit the amounts collected was beyond its control and was on account of seizure of books of account and documents. But for such seizure, the assessee would quite reasonably be expected to deposit the amount within the time prescribed or at least within the reasonable time. Instead of considering these factors on their merits and examining whether indeed they were true or not, the Chief Commissioner felt compelled by the text of para 8(v). The material on record in the form of a letter by the Superintendent of CBI also showed that a closure report was in fact filed before the competent court.

iii) Therefore, the refusal to consider and accept the assessee’s application u/s. 279(2) of the Act could not be sustained. The impugned order is hereby set aside. The Chief Commissioner is hereby directed to consider the relevant facts and pass necessary orders in accordance with law within six weeks after granting a fair opportunity to the petitioner.”

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2.Charitable purpose – Sections 10(23C)(vi), 12AA and 80G – Trust registered u/s. 12A and income exempt u/s. 10(23C) – Surplus income utilised for charitable purposes – Trust entitled to approval for purpose of section 80G

CIT vs. Gulabdevi Memorial Hospital; 391 ITR 73 (P&H):

The assessee, a charitable trust was registered u/s. 12A of the Income-tax Act (hereinafter for the sake of brevity referred to as the “Act”), 1961 since 1977 and was also granted approval for section 80G and the same were renewed from time to time till the A. Y. 2009-10. On 23/03/2009, the assessee filed application for approval u/s. 80G for the period 2010-11 to 2014-15. The Commissioner rejected the application. The Commissioner found that the assessee was generating substantial surplus and was spending only a small percentage for charitable purposes. The Commissioner was of the view that the assessee had disentitled itself for the grant of renewal of exemption u/s. 80G of the Act as according to him, the assessee had deviated from its charitable objects. The Tribunal held that the assessee was entitled to approval for the purposes of section 80G.

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

“i) It was admitted that the assessee was registered u/s. 12AA and that it has been held entitled to exemption u/s. 10(23C)(vi). The assessee was granted exemption u/s. 80G of the Act from the year 1997 till the passing of the order. Further, the finding of the Tribunal, that the assessee had never misutilised its funds, had not been assailed.

ii) The generated surplus having been ploughed back for expansion purposes also remained undisputed by the Revenue. The charges for its services were also considered by the Tribunal and were found to be extremely reasonable. The assessee was entitled to approval for purposes of section 80G.”

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1. Business expenditure – Disallowance u/s. 40A(2) – A. Y. 1997-98 – Disallowance is not automatic and can be called into play only if AO establishes that expenditure incurred is, in fact, in excess of fair market value

CIT vs. Smt. L. Parameswari; [2017] 79 taxmann.com 119 (Mad):

On appeal by the Revenue, one of the questions raised was:

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

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Loan or Advance to Huf by Closely Held Company – Whether Deemed Dividend U/S. 2 (22)(E) – Part I

Introduction

1.1 Section 2(22) of the Income-tax Act,1961 (the Act) provides inclusive definition of the term “dividend”. Sub-clauses (a) to (e) create a deeming fiction to treat certain distributions/ payments by certain companies to their shareholders as dividend subject to certain conditions and exclusions provided in section 2(22) ( popularly known as ‘deemed dividend’). Such distribution/ payments can be treated as ‘deemed dividend’ only to the extent to which the company possesses ‘accumulated profits’. The expression “accumulated profits” is also defined in inclusive manner in Explanations 1 & 2 to section 2 (22).

1.2 Prior to the amendment by Finance Act, 1987, section 2(22)(e) broadly provided that dividend includes any payment by a company, not being a company in which public are substantially interested (‘closely held company’) of any sum (whether as representing a part of the assets of the company or otherwise ) by way of advance or loan to a shareholder, being a person who has a substantial interest in the company(Old Provisions). Section 2(32) 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.

1.2.1 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 by a company of any sum (whether as representing a part of the assets of the company or otherwise) made after 31/5/1987 by way of advance or loan 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. For the sake of brevity, in this write-up `advance’ or loan both are referred to as loan. 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 company, the person having substantial interest will be decided 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). In this write-up, we are only concerned with loans given to HUF and therefore, reference to other categories of ‘concern’ such as Firm, AOP, Company etc. are ignored for convenience. As such, the reference to the expression ‘concern’ in this write-up should be construed as referring to HUF or, at best, in the context, to other non-corporate entities such as Firm, AOP etc.

1.2.2 Section 2(22)(e) also covers any payments by a ‘closely held company’ on behalf, or for the individual benefit, of any such shareholder with which we are not concerned in this write-up and therefore, the reference to the same is excluded. The requirement of possessing ‘accumulated profits’ continues in all the above provisions. It may also be noted that there are some issues with regard to the scope of the expression ‘accumulated profits’ inclusively defined in the Explanations 1 and 2 of section 2(22) with which also we are not concerned in this write-up.

1.2.3 For the purpose of considering the applicability of section 2(22)(e), the courts/various benches of Tribunal have also considered the object of these provisions and have understood that, the purpose is to bring within the tax net accumulated profits distributed by closely held companies to their shareholders, in the form of loans to avoid payment of tax on dividend. The purpose being that the persons who manage such closely held companies should not arrange their affairs in a manner that they assist the shareholders in avoiding payment of tax on dividend by having their companies pay or distribute money in the form of loan [Ref:-Alagusundaram Chettiar – (2001) 252 ITR 893 – SC, Mukundray Shah – [2007] 290 ITR 433 (SC), Subrata Roy – (2015) 375 ITR 207 (Del) –SLP dismissed (2016) 236 Taxman 396 (SC) -, Bagmane Construction (P). Ltd – (2015) 331 Taxman 260 (Kar), Amrik Sing – (2015) 231 Taxman 731 ( P & H) – SLP dismissed – (2016) 234 Taxman 769 (SC)-, Chandrashekar Maruti – (2016) 159 ITD 822 (Mum), etc.]

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 share holder cannot be regarded as loan advanced to a ‘share holder’ of the company within the mischief of section 2(6A)(e). As such, the HUF cannot be considered as a shareholder within the meaning of section2 (22) (e), when shares are registered in the name of its Karta and therefore, loan given to the HUF could not be considered as deemed dividend.

1.3.1 In the above case, the Court also observed as follows:

“……It is well settled that an HUF cannot be a shareholder of a company. The shareholder of a company is the individual who is registered as the shareholder in the books of the company. The HUF, the assessee in this case, was not registered as a shareholder in the books of the company nor could it have been so registered. Hence there is no gain-saying the fact that the HUF was not the shareholder of the company.”

The above judgment was also followed by the Apex Court in the case of Rameshwarlal Sanwarmal (122 ITR 1) under the 1922 Act. 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.

1.3.2 For the sake of clarity, it may be noted that section 6A(e) of the 1922 Act, as well as the Old Provisions did not apply to loan given to any specified ‘concern’. Such cases are covered only under the New Provisions referred to in para 1.2.1.

1.3.3 Principle laid down by the Apex Court referred in para 1.3, has been applied, even in the context of the Act. As such, the expression ‘shareholder’ appearing in section 2(22) (e) has been understood by the courts as referring to a registered shareholder [i.e. the person whose name is recorded as shareholder in the register maintained by the company] and this proposition, directly or indirectly, found acceptance in large number of rulings. [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).

1.4.1 In the context of loan given to shareholder, under the first limb of the New Provisions, the reference is to a shareholder, being a person who is the beneficial owner of shares and as such, two conditions are required to be fulfilled i.e. the person to whom the loan is given should be a registered shareholder as well as he should also be beneficial owner of the shares. In addition, he should hold shares carrying at least 10 % voting power. As such, as explained by the special bench of the Tribunal in Bhaumik Colour’s case (supra), 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.

1.4.2 In respect of loan given to a ‘concern’ (second category of person), under the second limb of the New Provisions, such shareholder (referred to in the first limb) should be a member or partner thereof and he should have a substantial interest in the ‘concern’ as defined in Explanation 3 (b) to section 2(22). Accordingly, to invoke this second limb of the provisions in respect of a loan given to a ‘concern’, as explained by the special bench of the Tribunal in Bhaumik Colour’s case (supra), the concerned shareholder must be both registered as well as beneficial shareholder holding shares carrying at least 10 % voting power in the lending company and such shareholder should be beneficially entitled to not less than 20% of income of such ‘concern’ at any time during the previous year.

1.4.2.1 Even in cases where the condition for invoking the second limb of the New Provisions are satisfied (i.e. the 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 dated 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, shows 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 1.3.3, Ankitech (P) Ltd. – (2012) 340 ITR 14 (Del), 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. (in last three cases SLP is granted by the Apex Court- Ref:- 237 Taxman 246, 243 Taxman 140 and 243 Taxman 139 respectively)].

1.4.3 For the purpose of invoking the New Provisions, the positions in law referred to in paras 1.4.1 and 1.4.2 have largely held the field in subsequent rulings.

1.5 In the context of loan given to an HUF by a closely held company in which karta of the HUF 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.

1.6 Recently, the issue referred to in para 1.5 came up for consideration before the Apex Court in the case of Gopal & Sons (HUF) and the issue, based on the facts of that case, is decided by the Court. Considering the importance of this and its possible far reaching impacts, it is thought fit to consider this in this column.

CIT vs. Gopal and Sons HUF – ITA No. 73 of 2014 (Calcutta High Court)

2.1 The relevant facts in the above case were: the case relates to Asst. Year. 2006-07. The assessee [i.e. Gopal and Sons (HUF)] seems to have made some investment in shares during the previous year and the source thereof was out of funds received from G. S. Fertilizers Pvt. Ltd. (GSF) in which, according to the Assessing Officer (AO), the assessee HUF had requisite shareholding. The AO also noticed that the opening balance in the advance account of the assessee HUF with GSF in the Financial Year 2005-06 was Rs. 60,25,000/- and the closing balance was Rs. 2,61,33,000/-. As such, the AO found that the assessee HUF had received advances from GSF during the year. From the Audit Report, Annual Return, etc. filed by the GSF with the Registrar of Companies (ROC) for the relevant period, the AO found that the Gopal and Sons (HUF) (i.e. assessee) was a registered shareholder (as per the annual return of GSF), holding 3,92,500 shares of GSF which comes to 37.12 % shares of the said company. Accordingly, the holding of the assessee HUF was more than 10 % of the voting power in the GSF. Therefore, the AO concluded that Gopal and Sons (HUF) (i.e. assessee) was both, the registered share holder holding shares of the company and also beneficial owner of the shares carrying more than 10 % of voting power in the company. From the company’s audited accounts, the AO found that there was a balance of Rs. 1,20,10,988/- as “Reserve & Surplus” as on 31/3/2006. It seems that the AO treated this as “accumulated profits” of GSF and this fact does not seem to have been disputed by the assessee HUF. Accordingly, applying the new Provisions of section 2(22)(e) of the Act, the AO treated the advances received from the GSF as deemed dividend in the assessment of assessee HUF to the extent of Rs. 1,20,10,988/- (i.e. limited to the amount of ‘accumulated profits’).

2.1.1 The Commissioner of Income-Tax- Appeals [CIT-(A)] confirmed the action of the AO, by observing in para 8.5 and 8.6 as under:

“8.5. However, I do not find any force in the submission of the appellant. As per record, there is no dispute that the appellant HUF is beneficial owner of the shares. On examination of Annual Returns filed by the company with ROC for the relevant year, it was observed by the AO that though, the shares might have been issued by the company in the name of Shri Gopal Kumar Sanei, Karta of HUF, but the company has recorded name of the appellant HUF as shareholder of the company. In the annual return filed with ROC, Gopal & (HUF) has been recorded as shareholder having 37.12% share holding. The annual return filed by the company is replica of shareholder register maintained by the Company. According to the Companies Act, a shareholder is a person whose name is recorded in the register of share holders maintained by the company. The company, M/s. G.S. Fertilizers Pvt. Ltd. has recorded the name of Gopal & Sons (HUF) as a shareholder. Thus, the appellant is not only the beneficial holder of the shares but also the registered shareholder. Further, as per the provisions of section 2(22)(e) as amended w.e.f. 1.4.1998*, the only requirement to attract provisions of section 2(22)(e) is that the shareholder be beneficial shareholder. The decision of Hon’ble Apex Court relied upon by the appellant pertains to 1922 I.T. Act and the decision of the Apex Court was with reference to provisions of section 2(6A)(e) of the I.T. Act, 1922. In fact, in the same case as in the case reported in 122 ITR 1, the Hon’ble Supreme Court in the case reported in 82 ITR 628 (SC) has held as under:

“Shares held by Karta, when shares were acquired from the funds of the HUF, could be considered to be shares held by the HUF and then loan made to the family could fall within the definition of “dividend” in section 2(22)(e).”

The Hon’ble Supreme Court in the case of Kishanchand Lunidasing Bajaj vs. CIT reported in 60 ITR 500 (SC) has held:

“Shares were acquired with the funds of a HUF and were held in the name of Karta. HUF could be assessed to tax on the dividend from those shares.”

The Hon’ble Kerala High Court in the case of Gordhandas Khimji (HUF) vs. CIT reported in 186 ITR 365 (Ker.) has held:

“Advances to HUF shareholder by the company to the extent of its accumulated profits will be assessable as deemed dividend in the hands of HUF and not in the hands of Karta.”

Recently, ITAT, Mumbai Special Bench in the case of ACIT vs. Bhaumik Colour (P) Ltd. reported in 118 ITD 1 has held that for the purpose of taxing the deemed dividend, the shareholder must be both beneficial and registered shareholder. Though, as mentioned above, as per the amended provisions of section 2(22)(e) of the Act, the share holder should be beneficial owner of the shares holding not less than ten per cent of the voting power, even if the ratio of the decision of the Special Bench (Supra) is considered in the case of appellant, the appellant is both beneficial as well as registered share holder of the company as mentioned above.

(8.6) In view of above facts, discussion and legal position, I am of the opinìon that the AO was justified in making the addition of Rs. 1,20,10,988/- by provisions of section 2(22)(e) of the Act. The case of the appellant is covered under the provision of section 2(22)(e) from all the angles Therefore, the addition of Rs.1,20,10,988/- is hereby confirmed. The ground no. 2 is dismissed.”

* This should be 1.4.1988

2.1.2 The above referred issue came-up for consideration before the Kolkata bench of the Tribunal (ITA No. 2156/K/2009) at the instance of the assessee (alongwith other issues with which we are not concerned in this write-up) for the Asst. Year. 2006-07. On behalf of the assessee, it was contended that the issue is covered in favour of the assessee by the decision of the tribunal in the case Binal Sevantilal Koradia (HUF) [ITA No. 2900/MUM/2011) rendered on 10/10/2012 for the Asst. Year. 2007-08 and in that case, the Tribunal has followed the decision of the special bench of the Tribunal in Bhaumik Color’s case as well as the judgment of the Rajasthan High Court in case of Hotel Hill Top (supra). In that case, the Tribunal has also noted that the same view has been taken by the Bombay High Court in the case of Universal Medicare (P) Ltd. (supra).

2.1.2.1 After referring to the findings of the CIT (A) referred to in para 2.1.1 above and the decision relied on by the counsel of the assessee, the Tribunal decided the issue in favour of assessee (vide order dtd. 27/1/2013) by observing as under:

“In the aforesaid judgment of Mumbai Tribunal in the case of Binal Sevantilal Karodia (HUF), supra, the Tribunal was followed the decision in the case of ACIT vs. Bhaumik Colour Pvt. Ltd. 313 ITR 146(AT). The Ld. Sr. DR has not controverted that this issue is covered. We find that this issue is covered by the order of Mumbai Tribunal in the case of Binal Sevantilal Karodia (HUF), supra. Hence, taking it as covered matter, we allow this issue of assessee’s appeal.”

2.2 At the instance of the Revenue, the above issue relating to taxability of deemed dividend in the hands of the assessee HUF(along with other issues with which we are not concerned in this write-up) came-up before the Calcutta High Court for which following two questions were raised:

“i) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in deleting the addition of Rs.1,2010,988/- as deemed dividend under section 2(22)(e) of the Income-tax Act by relying on a decision of Mumbai Tribunal in the case of Bimal Sevantilal Karodia HUF where the assessee was neither a shareholder nor a beneficial shareholder without considering that in the present case the assessee HUF is a beneficial as well as registered share holder having 37.12% share holding of the company and for this the order passed by the learned Tribunal is perverse and deserved to be set aside ?

ii) Whether on the facts and in the circumstances of the case the learned Tribunal erred in law in placing reliance on a decision of Mumbai Tribunal in the case of Bimal Sevantilal Karodia HUF without considering that the facts of the said case is squarely different from that of the present assessee ?”

2.3 The Court decided the issue (vide order dtd. 13/2/2015) in favour of the Revenue by observing as under:

“In so far as question Nos.1 and 2 are concerned, Mr. Bharadwaj, learned Advocate appearing for the assessee did not dispute that the Karta is a member of the HUF which has taken the loan from the Company and, therefore, the case is squarely within the provisions of section 2(22)(e) of the Income Tax Act, which reads as follows:

“any payment by a company, not being a company in which the public are substantially interested, of any sum (whether as representing a part of the assets of the company or otherwise) made after the 31st day of May, 1987, by way of advance or loan to a shareholder, being a person 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, or to any concern in which such shareholder is a member or a partner and in which he has a substantial interest (hereinafter in this clause referred to as the said concern) or any payment by any such company on behalf, or for the individual benefit, of any such shareholder, to the extent to which the company in either case possesses accumulated profits;”

Therefore, question No.1 is answered in the affirmative.

Question No.2 need not be answered. The appeal is thus disposed of.”
2.4 From the above factual position leading to the decision of the High Court, it may be relevant to note that neither the Tribunal nor the High Court has analysed in detail the relevant positions of law for invoking and applying the new Provisions relating to deemed dividend and its application to the facts of the case of the assessee HUF. The Tribunal has merely followed the decision of its co-ordinate bench referred to in para 2.1.2 and the High Court merely stated that the Karta is a member of HUF which has taken a loan from the company and therefore, the case is covered within the new Provisions.

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24. Income – Accrual – Mercantile system of accounting- Section 145(1) – A. Ys. 2007-08 and 2009-10 – Nonconvertible unsecured debentures issued by group company – Group company in financial difficulties – Resolution passed by board of directors of assessee to waive interest on debentures for six years – The Tribunal holding that even though assessee following mercantile system of accounting interest did not accrue – Neither perverse nor arbitrary – Notional interest cannot be brought to tax

CIT vs. Neon Solutions Pvt. Ltd; 387 ITR
667 (Bom):

The assessee
subscribed 2 % non-convertible unsecured debentures issued by one of its group
companies in 2003. As the company which issued the debentures was in financial
difficulties, waiver of interest on the debentures till March 31, 2010 was
approved at a meeting of the debenture holders in 2004. A resolution was passed
by the board of directors of the assessee to this effect.

The Assessing
Officer brought to tax the notional interest at the rate of 2 % on the debentures for the A. Ys. 2007-08 and
2009-10 on the ground that the waiver of interest was unbelievable. The
Tribunal deleted the addition and held that even in the mercantile system of
accounting, income could be regarded as accrued only if there was certainty of
receiving it and not when it was waived.

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

“i) The
order of the Tribunal was based on the facts and its findings were not found to
be perverse or arbitrary. It found that the various resolutions passed by the
company and the communications exchanged between the parties established the
fact that the interest on the debentures was waived for six years and that
there was no reason to disbelieve the resolution waiving the interest.

ii) Amalgamation of the
issuing company with the also establishes the fact that it was in financial
difficulties. Moreover, for the A. Ys. prior to 2007-08 no additions were made
by the Department on account of notional interest.

iii) No question of law
arose.”

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23. Business expenditure – Gratuity – Sections 36(1)(v), 40A(9) – A. Ys. 2007-08 to 2009-10 – Application by assessee for approval of scheme neither approved nor rejected by Competent Authority – Finding that assessee complied with conditions stipulated for approval – Assessee entitled to allowance

CIT vs. Jaipur Thar Gramin Bank; 388 ITR
228 (Raj):

The assessee is a co-operative society doing
banking business. For the A. Ys. 2007-08 to 2009-10, it claimed deduction u/s.
36(1)(v), of the sum paid on account of employer’s contribution to the gratuity
scheme created by it exclusively for the benefit of its employees under an
irrevocable trust. It claimed that it had filed an application to the competent
authority for approving the gratuity scheme. The Assessing Officer disallowed the expenditure
on the ground that formal order had been passed by the competent authority. The
Commissioner (Appeals) and the Tribunal allowed the claim for deduction.

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

“i) The assessee could not be
made to suffer for the inaction of the authorities and the Assessing Officer
ought not to have disallowed the claims of contribution to gratuity scheme
merely because the Commissioner had not granted approval to the gratuity
scheme.

ii) The assessee was sponsored
by the UCO bank, a Government of India undertaking and held duly complied with
the conditions laid down for approval u/s. 36(1)(a) of the Act.

iii) Both the appellate
authorities had found the expenses allowable based on material and evidence on
record. The assessee had fulfilled the condition laid down for approval having
created a trust with the Life Insurance Corporation of India and had deposited
the amount.

iv) The Tribunal was justified
in holding that the claims were proper and allowable. No question of law
arose.”

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6. Reassessment – Full and true disclosure – Giving value of land in a certificate of registered architect and engineer supplied in response to a query would not amount full and true disclosure of the actual asset of plot – Reopening was valid

M/s. Girilal and Co. vs. ITO and Ors.(2016) 387 ITR 122
(SC)

The appellant, a partnership firm, was engaged in the
business of construction of building and development of real estate. In the
year 2000, the appellant/firm was engaged in developing two housing projects on
a plot bearing CTS No. 329 B(Part) of village Kondiwita in Andheri (East)
Mumbai (hereinafter referred to as “the said plot”). The said plot was acquired
by the appellant originally as a capital asset but portion thereof was
converted at different point of time into stock-in-trade. The appellant on
October 29, 2001 filed its return of income for the assessment year 2001-02. On
May 1, 2003, an assessment order was passed u/s. 143(3) of the Act determining
the total income at Rs. 12,36,393 after allowing deduction u/s. 80-1B (10) of
the Act. After scrutiny of the said return of income, a notice dated March 15,
2007, was served on the appellant u/s. 148 of the Income-tax Act, 1961
(hereinafter referred to as “the Act” ) inter alia alleging that the
appellant’s income chargeable to tax for the assessment year 2001-02 has
escaped assessment within the meaning of section 147 of the Act. Vide
communication dated April 11, 2007, the appellant sought the reason recorded
for reopening the assessment which were made available to the appellant on
April 12, 2007. It was found that the appellant had not correctly disclosed the
actual *assets of the said plot and hence, the appellant was not entitled for
deduction u/s. 80(1B)(10) of the Act. It was noted that the information
regarding the actual size of the plot used for the construction was only
available in the valuation report and hence, the case was covered under
Explanation 2(c)(iv) of section 147 of the Act. The appellant objected to the
assumption of jurisdiction u/s. 148 for the reason that the appellant had
disclosed all the facts fully and truly and respondent No. 1 was fully aware of
the floor space index. Respondent No.2 rejected the objections. Being
aggrieved, the appellant preferred a writ petition before the High Court
challenging the notice dated March 15, 2007 issued u/s. 147 of the Act. The
High Court vide impugned judgment dated December 12, 2007 dismissed the
writ petition. The High Court was of the opinion that as there was no true
disclosure of the exact size of the plot when the new construction commenced it
prima facie could not be said that there were no reasons to believe. The
information was in the annexures and consequently Explanation 2(c)(iv) of
section 147 of the was applicable.
Accordingly, to the High Court, the question was whether the petitioners
considering the size of the plot and part of it having already been developed
could claim the benefit u/s. 80-1B (10) of the Income-tax Act. The issue as to
whether the size of the plot of land to be considered at the time the new
construction is being put up or whether the building already constructed
including various deduction like R. G. Area, set back had to be considered in
computing the size of the plot was an issue which it did not wish to answer at
the stage in the exercise of their extraordinary jurisdiction.

Before the Supreme Court, the Learned Senior Counsel
appearing on behalf of the appellant/firm submitted that there was no reason to
reopen the assessment when in the return filed by the appellant full disclosure
of all the relevant facts was made. On this basis, it was further argued that
it was merely a case of change of opinion which was not a valid ground for
reopening of the assessment. He drew the attention of the Supreme Court to the
communication dated February 10, 2003 addressed by the appellant to the
Assessing Officer. In para 11 thereof, there was a mention about the land in
question. The Supreme Court rejected the aforesaid submissions of the learned
senior counsel for the appellant as according to the Supreme Court, in para 11,
only the value of the land was stated and in support, a certificate from the
registered architect and engineer was filed. The Supreme Court held that it was
clear from the above that this information was supplied as there was some query
about the value of the land. Obviously, while going to this document the
Assessing Officer would examine the value of the land. However, the reason for
issuing notice u/s. 148 of the Income-tax Act was that the appellant had not
correctly disclosed the actual *assets of the plot and hence, it was not
entitled for deduction u/s. 80-IB (10) of the Act. The income-tax authority
itself had mentioned in the notice u/s.148 of the Act that such information was
available only in the valuation report. Giving the information in this manner
was of no help to the appellant as the Assessing Officer was not expected to go
through the said information available in the valuation report for the purpose
of ascertaining the actual *construction of the plot.

On the facts of this case, therefore, the Supreme Court found
that the Revenue was right in reopening the assessment and the High Court had
rightly dismissed the writ petition of the appellant challenging the validity
of the notice u/s. 148 of the Act.

*
Note: This should be the size of the plot. _

shailesh.kwebmaker

22. Business expenditure – A. Y. 1999-00 – Same business or different business – tests – Expenditure incurred in setting up new line of same business is deductible

CIT vs. Max India Ltd. (No.1); 388 ITR 74
(P&H):

For the A. Y. 1999-00, the Assessing Officer
made disallowance of Rs. 6,70,78,483/- on account of expenses for setting up
new business. The Commissioner (Appeals) and the Tribunal allowed the
deduction.

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

“i) While determining whether
two or more lines of businesses of the assessee are the same “business” or
“different businesses” regard must be had to the common management of the main
business and other lines of businesses, unity of trading organization, common
employees, common administration, a common fund and a common place of business.
For evaluating the “same business”, the test of unity of control and the nature
of business is to be applied.

ii) The Commissioner (Appeals)
after appreciating the evidence produced on record had observed that various
businesses carried on by the assessee including health care constituted the
same business of the assessee. The Appellate Tribunal was right in law in
allowing the expenses in setting up new business of Rs. 6,70,78,483 treating it
as revenue in nature.”

shailesh.kwebmaker

RATE OF TAX APPLICABLE TO CAPITAL GAINS ON LOSS OF EXEMPTION BY A CHARITABLE OR RELIGIOUS TRUST

Issue for Consideration

A charitable or religious trust is entitled to exemption
under sections 11 and 12 of the Income-tax Act, 1961, provided that it is
registered u/s. 12AA and fulfils other requirements of sections 11 to 13. Under
sections 13(1)(c) and 13(1)(d), if a benefit is provided to a specified person
or the specified investment pattern is not adhered to, the benefit of the
exemption is lost and the income of the trust so losing the exemption is
taxable at the maximum marginal rate by virtue of the provisions of section
164(2).

Normally, for all assessees, long term capital gains is
chargeable to tax under the provisions of section 112 at the rate of 20%, while
certain types of short term capital gains arising on sale of equity shares on a
recognised stock exchange is chargeable to tax at the concessional rate of 15%
under the provisions of section 111A.

The issue has arisen before the tribunal as to what should be
the rate of taxation in respect of income in the nature of a long term capital
gains, in the case of a charitable or religious trust, losing exemption on
account of violation of section13. While the Mumbai bench of the tribunal has
taken the view that such gain is taxable at the rate of 20% u/s. 112, the
Chennai bench of the tribunal has taken a contrary view, holding that such gain
is taxable at the maximum marginal rate as per section 164(2) of the Act.

Jamsetji Tata Trust’s case

The issue first came up for consideration before the Mumbai
bench of the Tribunal in the case of Jamsetji Tata Trust vs. Jt.DIT(E), 148
ITD 388 (Mum).

In this case, the assessee trust sold certain shares of Tata
Consultancy Services Ltd, and acquired preference shares of Tata Sons Ltd. It
earned long-term capital gains on sale of the shares of TCS, which was exempt
u/s. 10(38), dividends, which were exempt u/s. 10(34), and other interest and short
term capital gains. It claimed exemption u/s. 11 in respect of the interest and
short term capital gains, besides the exemptions under sections 10(34) and
10(38) in respect of the dividends and the long term capital gains.

The assessing officer denied the benefit of the exemption
u/s. 11, by invoking the provisions of section 13(1)(d), on the ground, that by
holding equity shares of TCS and Tata Sons, the assessee had violated the
investment pattern specified in section 11(5). The assessing officer taxed the
entire income of the trust, including the dividends, the long-term capital
gains, the short term capital gains as well as the interest income at the
maximum marginal rate, by applying the provisions of section 164(2).
The Commissioner(Appeals) upheld the order of the assessing officer.

Before the Tribunal, on behalf of the assessee, it was argued
that the denial of exemption u/s. 11 was not justified, that the assessee was
entitled to the exemptions u/s. 10, and that only the income from the investments
attracting the provisions of section 13(1)(d) was taxable at the maximum
marginal rate. It was further argued that the rate of tax on the short term
capital gains arising from sale of shares should have been the rate prescribed
u/s. 111A, and not the maximum marginal rate.

On behalf of the revenue, it was argued that the denial of
exemption u/s. 11 was justified. As regards the rate of tax, it was argued that
since the provisions of section 164(2) were applicable, the maximum marginal
rate was to be applied to the entire taxable income of the assessee, and not
separate rates on income of separate nature.

The Tribunal, after considering the arguments of the assessee
and the revenue and after analysing the provisions of the Income-tax Act, held
that only the income arising from the prohibited investments was ineligible for
the benefit of the exemption u/s. 11, and attracted tax at the maximum marginal
rate, and not the entire income. The Tribunal further held that the income
which was exempt u/s. 10 (dividends and long term capital gains) could not be
brought to tax under sections 11 and 13, since those sections did not have
overriding effect over section 10. Once the conditions of section 10 were
satisfied, no other condition could be fastened for denying the claim u/s. 10.

Addressing the issue of whether the rate u/s. 111A of 15% or
the maximum marginal rate u/s. 164(2) was to be applied to the short term
capital gains, the Tribunal noted that section 164(2) did not prescribe the
rate of tax, but mandated the maximum marginal rate as prescribed under the
provisions of the Act. It observed that section 111A was a special provision
legislated for providing for rate of tax chargeable on short term capital gains
on sale of equity shares or units of an equity oriented fund, which was
subjected to securities transaction tax (STT) and as such the maximum marginal rate for income from
specified short term gains should be the rate prescribed therein.

According to the Tribunal, when the short term capital gains
arising from the sale of shares subjected to STT was chargeable to tax at 15%,
then the maximum marginal rate, referred to in section 164(2), on such income
could not exceed the maximum rate of tax provided u/s. 111A of the Act. It
accordingly held that the short term capital gains on sale of shares already
subjected to STT was chargeable to tax at the maximum marginal rate, which
could not exceed the rate provided u/s. 111A of the Income-tax Act.

India Cements Educational Society’s case

The issue again came up before the Chennai bench of the
tribunal in the case of DDIT vs. India Cements Educational Society 157 ITD
1008.

In this case, the assessee was a Society registered u/s.
12AA. It sold a plot of land and advanced the sale proceeds of the land to a
company in which the president of the Society and his wife were directors. It
claimed exemption in respect of capital gains arising on such sale on the
ground that the sale proceeds were reinvested in a specified capital asset.

The assessing officer denied exemption u/s. 11 to the Society
on the ground that the amount advanced to the company was not an approved
investment u/s. 11(5). He therefore taxed the income of the Society and the
maximum marginal rate under the provisions of section 164(2).

The Commissioner (Appeals) allowed the assessee’s appeal,
holding that the assessing officer had not proved what benefit accrued to the
specified person from the advancement of the amount to the company, and that
mere making of an advance to third parties could not be treated as utilisation
for investment in capital asset within the meaning of section 11(5). He
therefore held that while the benefit of exemption u/s. 11 was available, the
making of the advance out of the sale proceeds was not an investment in a new
capital asset. In the context of the issue under consideration, the
Commissioner(Appeals) held that the capital gains to be assessed as per section
48, was to be taxed at the rate prescribed u/s. 112 of the Act, and not at the
‘maximum marginal rate’ adopted by the assessing officer.

Before the tribunal, on behalf of the assessee, it was argued
that the entire income of the Society, other than the capital gains, continued
to be exempt u/s. 11 of the Act and that the capital gains alone was to be
taxed in terms of section 164(2) on account of the alleged violation of the
conditions of section 13 of the Act by applying the maximum marginal rate
Reliance was placed on the decision of the Bombay High Court in the case of DIT(E)
vs. Sheth Mafatlal Gagalbhai Foundation Trust 249 ITR 533, and the decision of
the Karnataka High Court in the case of CIT vs. Fr Mullers Charitable
Institutions 363 ITR 230, for the proposition that whenever there was a
violation u/s. 11(5), then only income from such investment or deposit which
was made in violation of section 11(5) was liable to be taxed, and violation
u/s. 13(1)(d) did not result in denial of exemption u/s.11 for the entire total
income of the assessee. Reliance was also placed on the CBDT circular number
387 dated 6.4.1984 152 ITR 1 (St.), where it was stated in paragraph 28.6 that
where a trust contravened the provisions of section 13(1)(c) or 13(1)(d), the
maximum marginal rate of income tax would apply only to that part of the income
which had forfeited exemption under those provisions.

In the context of the issue under consideration, It was
further argued by the assessee that, in view of the decision of the Karnataka
High Court in the case of Fr Muller’s Charitable Institutions (supra),
the rate of tax applicable for taxing the capital gains was the rate prescribed
u/s. 112. Reliance was also placed on the decision of the Mumbai bench of the
tribunal in the case of Jamsetji Tata Trust (supra), which had held, in
the case of short term capital gains on sale of shares subject to STT, that the
maximum marginal rate on capital gains could not exceed the rate provided u/s.
111A. This decision had been followed by the Mumbai bench in the case of Mahindra
and Mahindra Employees Stock Option Trust vs. DCIT 155 ITD 1046, where the
tribunal had held that capital gain was to be assessed by applying the
provisions of section 112, even if the income was assessed as per section 164.

The tribunal examined the provisions of sections 11 and 13.
It noted that in the case before it, there was a violation of section 13(1)(c),
as the Society had invested funds in a limited company, where the trustee was
the managing director and his wife was a director. Following the decision of
the Supreme Court in the case of CIT vs. Rattan Trust 227 ITR 356 and the
decision of the Madras High Court in the case of CIT vs. Nagarathu Vaisiyargal
Sangam 246 ITR 164, the tribunal held that the assessing officer was
justified in applying the provisions of section 13(1)(c), and denying exemption
u/s. 11 to the Society.

Analysing the provisions of section 164(2), the Tribunal,
observed that the income of a charitable or religious trust, which was not
exempt u/s. 11 or 12 was charged to tax as if such exempt income was the income
of an AOP. The proviso to that section provided that where the non-exempt
portion of the relevant income arose as a consequence of the contravention of
the provisions of section 13(1)(c) or (d), such income would be subjected to
tax at the maximum marginal rate.

Considering both the decisions of the Mumbai bench of the
Tribunal, cited before it, the Chennai bench of the tribunal, in the context of
the issue under consideration, found that the Mumbai bench had not considered
the meaning of the term ‘maximum marginal rate’ as defined in section 2(29C),
whereunder the term was defined to mean the rate of income tax (including
surcharge on income tax, if any) applicable in relation to the highest slab of
income in the case of an individual, association of persons or, as the case may
be, body of individuals as specified in the Finance Act of the relevant year.
The Chennai bench of the tribunal observed that on account of section 2(29C),
the two decisions of the Mumbai bench could not be said to have laid down the
correct proposition of law.

The Chennai bench of the Tribunal therefore held that the
benefit of section 112 to assess the gain from the transfer of the capital
asset could not be given to the Society, and that the long-term capital gains
was chargeable at the maximum marginal rate u/s. 164(2) r.w.s. 2(29C) of the Act.

Observations

A similar question has arisen in the case of private trusts,
where the individual share of beneficiaries is unknown, known as discretionary
trusts. Under the provisions of section 164(1), the income of such trusts is
also taxable at the maximum marginal rate. The issue has been decided by Delhi
and Gujarat High Courts, in the cases of CIT vs. SAE Head Office Monthly
Paid Employees Welfare Trust (2004) 271 ITR 159 (Del) and Niti Trust vs.
CIT (1996) 221 ITR 435 (Guj), that the long term capital gains earned by a
discretionary trust is not taxable at the maximum marginal rate u/s. 164(1),
but at the concessional rate of tax u/s. 112. These decisions have not been
considered by the Chennai bench of the Tribunal. The language of both sections
164(1) and 164(2) being similar, the ratio of these decisions would apply
squarely to section 164(2) as well.

Section 2(29C) while defining the term ‘maximum marginal
rate’ provides for adoption of the highest slab rate prescribed for an
individual, etc. This rate, in
certain cases, varies w.r.t . the nature of income and head of income and in
such cases the rate specially provided for becomes the maximum marginal rate
for taxing such income. In cases where the rate is specifically provided for in
a particular provision of the Act, it is that rate that should then be taken to
represent the maximum marginal rate. The decisions above referred to support
such a view.

Alternatively, it can be contested that both the provisions
are independent and operate accordingly. he language of neither section
111A/112 nor section 164(2) indicates that one has a specific overriding effect
over the other. None of these provisions could be said to be general. The
principle generalia specialibus non derogant providing that a specific
provision prevailing over a general provision also cannot be readily applied.
While section 111A/112 is a provision applicable to specific types of income of
all assessees, section 164(2) applies to all incomes of specific types of
assessees. In any case, if a view is to be taken then the better view is to
treat section 112 as a special provision.

It needs to be kept in mind that section 112 provides for a
rate of tax for long term capital gains, irrespective of the type of assessee
who earns the capital gains. This rate applies not only to individuals and
HUFs, but also to partnership firms, associations of persons, domestic
companies, as well as foreign companies. While an individual is liable to tax
at slab rates of tax, partnership firms and domestic companies are liable to a
flat rate of tax of 30%, and foreign companies are liable to tax at a flat rate
of 40%. Yet, for all these different types of entities liable to different
rates of tax, the rate of tax u/s. 111A or section 112 is the same, i.e. 15%
and 20% respectively. This indicates that the rate applicable to such types of
capital gains should not differ, irrespective of the rate of tax applicable to
the other income of the entity.

On the other hand, the provisions of section 164(2) are
intended to ensure that the trust losing exemption on account of the violation
of the provisions of sections 13(1)(c) or 13(1)(d) does not benefit by paying a
lower rate of tax by taxing such incomes at the maximum marginal rate. However,
till assessment year 2014-15, a trust would claim exemption under the
provisions of section 10 in respect of income such as dividends, long term
capital gains on sale of equity shares on which STT was paid, etc.,
irrespective of whether the remainder of its income was exempt u/s. 11 or not.
The question of payment of tax at the maximum marginal rate did not arise in
the case of such income which was exempt. That being the case, where certain
incomes, such as long term capital gains or short term capital gains is liable
to tax at lower rates of tax than normal income, the question of taxation at
the maximum marginal rate should equally not apply. The maximum marginal rate
should therefore apply to income which is otherwise not taxable at a
concessional rate of tax.

If one also examines the format of the income tax returns for
charitable and religious trusts in Form No 7, as well as the forms applicable
to discretionary trusts in Form No 5, there is a specific reference in schedule
SI – Income Chargeable to tax at special rates, to specific rates of 15% under
section 111A for specified types of short term capital gains and of 20% u/s.
112 for long term capital gains. This clearly indicates that such gains are not
intended to be taxed at the maximum marginal rates.

The view that is beneficial to the assessee should be adopted
in a case where two views are possible. Besides, whenever there is a difference
of opinion between two benches of the Tribunal, such a difference is required
to be referred to a Special Bench of the Tribunal for consideration. The
Chennai bench of the tribunal chose to not to follow the decisions of the Mumbai
bench of the Tribunal, though cited before it, on the ground that the Mumbai
bench had overlooked a certain provision of the Act, rather than referring the
issue to a Special Bench.

The better view therefore is that of the Mumbai
bench of the Tribunal, that even if a charitable or religious trust loses
exemption u/s. 11 by virtue of the provisions of sections 13(1)(c) or 13(1)(d),
the short term capital gains covered by section 111A or long term capital gains
covered by section 112, is chargeable to tax at the rates specified in those
sections, and not at the maximum marginal rate specified in section 164(2). _

shailesh.kwebmaker

ANALYSIS OF “EQUALISATION LEVY” AND SOME ISSUES

1. Background

The Finance Act,
2016 (FA) in the chapter VIII (comprising clauses 163 to 180)
has introduced a new tax i.e “equalisation levy” on consideration received or
receivable for any specified services.

The article deals with
some of the important provisions of the chapter and the issues arising there
from.

The Government of India
constituted a committee on taxation of E- commerce. The said committee made
proposal for equalisation levy on specified transactions. The Committee took
cognisance of the Report on Action 1 of Base Erosion & Profit Shifting
(BEPS) Project, wherein very significant work has been undertaken for identifying
the tax challenges arising from digital economy, the possible options to
address them and constraints likely to be faced. The Committee also noted that
this report has been accepted by G-20 countries, including India and OECD,
thereby providing a broad consensus view on these issues. The committee
submitted its report in February, 2016 and accepting the proposal contained in
the report, the Government has introduced this chapter.

The committee stated in
its report that “The significant difference, between an ‘Equalisation Levy’
that is proposed to be imposed on gross amount of payments, and the withholding
tax under the Income-tax Act, 1961 would be that under the latter, withholding
tax is only a mechanism of collecting tax, whereas an ‘Equalisation Levy’ on
gross payments would be a final tax.”

As far as
constitutionality of the provision is concerned, the committee expressed the
view that “Equalisation levy on gross amounts of transactions or payments made
for digital services appears to be in accordance with the entries at Serial
Number 92C70 and 9771 of the First List in the Seventh Schedule of the
Constitution of India. The existing precedent in the form of the Service Tax
appears to remove any ambiguities and doubts in this regard. Thus this
committee is of the view that Equalisation Levy as a tax on gross amounts of
transactions, imposed by the Union through a statute made by the
Parliament, would satisfy the test of constitutional validity.”

It is noteworthy to look
at the memorandum explaining the provisions of the Finance bill so as to
understand the rationale for imposition of the levy.

“……..The Organization
for Economic Cooperation and Development (OECD) has recommended, in Base
Erosion and Profit Shifting (BEPS) project under Action Plan 1, to impose a
final withholding tax on certain payments for digital goods or services
provided by a foreign e-commerce provider or imposition of a equalisation
levy on consideration for certain digital transactions received by a
non-resident from a resident or from a non-resident having permanent
establishment in other contracting state.

Considering the
potential of new digital economy and the rapidly evolving nature of business
operations it is found essential to address the challenges in terms of taxation
of such digital transactions as mentioned above. In order to address these
challenges, it is proposed to insert a new Chapter titled “Equalisation
Levy” in the Finance Bill, to provide for an equalisation levy of 6 % of
the amount of consideration for specified services received or receivable by a
non-resident not having permanent establishment (‘PE’) in India, from a
resident in India who carries out business or profession, or from a
non-resident having permanent establishment in India.”

The objective of the
Government is to impose tax on the consideration received by the non-resident.
The rationale is, on the one hand the consideration paid is tax deductible
while computing the income of the payer, the same escapes the source country
taxation, because payee does not have a permanent establishment in India or
otherwise. The equalisation levy is quantified with reference to the
consideration received by the non resident. The equalisation levy is charged at
the rate of 6% on the amount of consideration received or receivable by the non
resident.

2. Scope
of the levy

2.1. Section163
provides that the provisions of the chapter extends to the whole of India,
except Jammu and Kashmir and the same will come into force from the date of its
applicability notified by the Central Government i.e appointed date. The
Government has appointed 1^stday of June,2016 as the date on which
Chapter VIII would come into force.

2.2. The
provisions will apply to the consideration received or receivable for specified
services provided on or after the appointed date. By implication, any
consideration received after the appointed date for the services provided
before the appointed date shall be outside the provisions of this chapter. The
provisions of the chapter will not apply to the consideration received or
receivable for the services provided outside the territorial jurisdiction. This
obviously would require determining the place of provision of the services. For
determining the place of provision of services, one may have to look at the
provisions of the service tax act and the rules framed thereunder. Generally,
place of provision of service is the location of the service receiver.

3. Important
Definitions

Section 164 defines
various terms used in the chapter. It also provides that any words and
expressions which is used in the chapter but not defined in the chapter will
have the same meanings as it has under the Income tax act (ITA) or the rules
there under if the same have been defined there under. Some of the important
terms defined in the chapter are:

i) “equalisation
levy” means the tax leviable on consideration received or receivable for any
specified service under the provisions of this Chapter; It may be noted that though the word levy is
used in the nomenclature, it is clearly a tax.

ii) “specified
service” means online advertisement, any provision for digital advertising
space or any other facility or service for the purpose of online advertisement
and includes any other service as may be notified by the Central Government in
this behalf. The committee on E-commerce has recommended more services to be
subject to equalisation levy and the Government has accordingly retained the
power to notify more services as specified services.

iii) “online”
means a facility or service or right or benefit or access that is obtained
through the internet or any other form of digital or telecommunication network;

iv) “permanent
establishment” includes a fixed place of business through which the business of
the enterprise is wholly or partly carried on. The definition is an inclusive
definition and is on the same line as is in section 92F(iiia) of the ITA.

4. Charge
of levy

4.1. Section
165 deals with the charge of the equalization levy. It provides that the
equalisation levy @6% be charged on the amount of consideration received or
receivable for providing specified services. The other conditions are:

a) The
service provider has to be non-resident and

b) It
should receive consideration for the services from

i) a
person resident in India who is carrying on business or profession or

ii) a non resident having a permanent
establishment (PE) in India (hereinafter referred to as ‘specified persons’ or
‘assessee’).

4.2. It
also provides for the cases when the equalisation levy will not be charged.
They are:

i) when
the non resident who is providing the specified services has a permanent
establishment in India and such services are effectively connected to the said
permanent establishment i.e when the non-resident offers the income from the
specified services as a part of its PE profit.

ii) when
the aggregate amount of consideration received or receivable for the specified
services from each of the specified persons in a previous year is INR one lakh
or less.

iii) when
the specified persons makes the payment towards specified services not for the
purposes of carrying on its business or profession. In such a case even if the
payment exceeds INR one lakh, the same will not be subject to equalisation levy
since the same is not claimed as deduction for the purposes of computing the
taxable income of the specified persons.

It is pertinent to note
that as per the Article 7 of any double taxation avoidance agreement (DTAA),
non residents are taxable in their country of residence as far as the taxation
of the business profits is concerned. They can be taxed in the source country
only if they carry on business in the source country through a permanent
establishment and in such case also only
to the extent of the income attributable to the permanent establishment. Equalisation
levy is sought to be imposed on the business income of the non resident when
the non resident has no PE in India. Hence, to that extent the tax is not
consistent with the provisions of the DTAA. However, it may be noted that the
scope of the DTAA is confined only to the taxes covered under Article 2. Since
this is a new tax, none of the existing DTAA would have covered the same.
However, a question may arise that whether equalisation levy be regarded as an
identical or similar tax to the existing taxes covered by the Article 2? Most DTAA
provides to include similar taxes imposed subsequently to be included within
the scope of Article 2 subject to certain conditions. Hence, if the answer to
the question is yes, then imposition of equalisation levy on the business
profits of the non resident when it has no PE in India may not be regarded as
compatible with Article 7 of the DTAA. The current imposition presupposes that
it is not.. The stand of the Government appears to be that it is not a tax on
the income (and hence, it it has been kept outside the ITA and imposed by the
Finance Act) and therefore there is no inconsistency between the treaty
provisions and the imposition of equalisation levy.

5. Collection
and Recovery

5.1. Section
166 provides for the collection and recovery of the equalisation levy. It
designates the specified persons as assessee and cast an obligation on them to
deduct the amount of equalisation levy from the amount of consideration paid or
payable to the non resident towards the provision of the specified services.

5.2. There
is no obligation to deduct the levy from the consideration if the aggregate
amount payable to a non resident in a previous year is INR one lakh or less.
The wording seems to suggest that the limit of one lakh rupees is qua
each non resident. The assessee has to pay levy so deducted during a month to
the credit of the Central Government by the 7^th of the next calendar
month. Delay in the payment would be visited with the simple interest @ 1% per
month or part thereof. In addition to the interest, the assessee would be
liable to a penalty of INR 1000 per day of delay. However, it is provided that
such penalty should not exceed the amount of the levy.

5.3. The
liability to pay the levy would be there irrespective of the fact whether the
assessee has deducted the same from the payment made to the non resident. When
the assessee fails to deduct the levy, in addition to the interest, penalty
equivalent to the amount of levy is imposable on the assessee. In such a case a
question would arise as to whether the levy so paid will increase the cost of
the services availed or it will appear as a separate item in the books of
accounts. In both the cases, in my view the amount should be deductible while
computing the income of the assessee.

5.4. The
possible three scenarios which can arise in view of the above provision is
illustrated by the respective accounting entries:

a. Assessee
makes payment of Rs. 100 towards specified services to X and deduct tax there
from:

Specified Services A/c. Dr. 100

To X 100

X A/c Dr.
100

To Bank 94

To Equalisation Levy 06

Equalisation Levy
Dr. 6

To Bank 6

b. Assessee has as a
part of agreement agreed to bear the equalisation levy

Specified Services A/c. Dr. 106.38

To X 106.38

X A/c Dr.
106.38

To
Bank 100

To
Equalisation Levy 06.38

Equalisation Levy
Dr. 6.38

To Bank 6.38

(In both the above cases, the payment of
Equalisation levy by the assessee would be regarded as deducted from the
payment made to X)

c. Assessee
fails to deduct but makes the payment of the levy as envisaged u/s. 166(3)

Specified Services A/c. Dr. 100

To X 100

X A/c Dr.
100

To
Bank 100

Equalisation Levy
Dr. 6

To Bank 6

Would the 3rd scenario survive? The act has
envisaged the same. In this case the assessee may save the tax of 0.38 but he
will be exposed to the penalty equivalent to the amount of equalisation levy
u/s. 171. However, it may be noted that penalty is discretionary and may not be
levied in appropriate cases.

5.5. As
noted above, the levy is not chargeable when the non resident providing the
service has a PE in India and the specified service is effectively connected to
such PE. The assessee is either a person resident in India or a PE of a non
resident in India. The assessee before deducting the levy will have to ensure
that the non resident providing the service has no PE in India and even if it
has a PE in India, the said service is not effectively connected to the said
PE. They may have to possibly depend on the declaration from the non -resident
in this respect.

5.6. Whether
a non-resident has a PE in the source country or not is generally a contentious
issue and it is very rare that the taxpayer and the tax authorities would agree
at the initial stage. If it is ultimately found or held that the levy was not
chargeable, can the refund be granted to the assessee? There are provisions in
the chapter for grant of the refund to the assesse on processing the statement
furnished by the assessee. Such a case may not be covered by the said refund
provision and also because there are limitations of the time to grant refund
under such cases. Can the refund be claimed on the ground that the levy is
without any authority of law and hence the limitation should not apply?

6. Procedure
and Penalties

6.1. Section
167 imposes an obligation on every assessee to furnish a statement in the
prescribed format in respect of all specified services during the financial
year. The government has notified Equalisation Levy Rules, 2016 and prescribed
Form No. 1 as the prescribed form of the statement. The rules provide that the
said form should be furnished annually on or before 30^th June in
respect of the preceding financial year. The form should give information in
respect of all the specified services chargeable to equalisation levy during
the financial year.

6.2. The
assessee would be entitled to revise the statement if he notices any errors or
omissions at any time within two years from the end of the financial year in
which the specified service was provided. He may also furnish the statement in
the aforesaid period if he has not furnished the statement within the
prescribed time.

6.3. The
Assessing officer may serve a notice on any assessee to furnish the statement
if he has not furnished the same within thirty days from the date of service of
the notice. However, the section does not provide any time limit within which
the AO may serve the said notice. On a harmonious reading of the provisions,
one may take a view that the said notice has to be served within the aforesaid
period of two years. What is the basis on which the AO can issue such notice
has not been provided. What are the rights available to the assesse when he
receives the notice, can he challenge the issue of the notice by the AO? Section 172 provides that an assessee who
fails to furnish the statement within the time prescribed under the rules or
the time prescribed by the AO in his notice, would be liable to pay a penalty
of INR 100 for each day of failure.

6.4. The AO, before imposing any penalty under the
chapter has to give the assessee an opportunity to advance his case as to why
the penalty should not be imposed. If the assessee proves that that there was a
reasonable cause for the failure and the AO is satisfied about the same, AO
should not impose any penalty. The order imposing the penalty has been made
appealable to CIT(A) and the order of CIT(A)
has been made appealable to the Tribunal. Provision of section 249 to 251 and section
253 to 255 of the ITA has been made applicable to such appeals. Section 178 of
the FA, 2016 list down various other sections of the ITA which would apply in
relation to equalisation levy as they apply in relation to income tax.

6.5. Section
168 provides for the processing of the statement and issue of intimation to the
assessee after carrying out adjustment in respect of arithmetical accuracy and
computation of interest. The intimation is required to be sent within one year
from the end of the financial year in which the prescribed statement under
clause 167 is furnished.

6.6. Section
169 empowers the AO to rectify the intimation for any mistake apparent from
record and provides that the intimation be amended within one year from the end
of the financial year in which the same was issued. The AO may rectify the
mistake on his own or on the same being brought to his notice by the assessee.
Any rectification which has the effect of increasing the liability of the
assessee or reducing the refund entitlement to the assessee, be made only by
making an order and after giving the assessee a show cause to that effect and a
reasonable opportunity of being heard. If in consequence of any order, any
amount is payable by the assessee, the rules provides the AO to serve a notice
of demand in form no.2 specifying the amount payable by the assessee. The
chapter is silent about the appellability of this order. Under the rules, it is
provided that the intimation u/s. 168 is deemed to be notice of demand. If the
intimation is deemed as notice of demand under the ITA and the same is in
consequence of an order, then the appeal provisions under the ITA should also
follow.

7. Consideration
to be exempt from tax in the hands of non resident

7.1. A new
clause (50) has been introduced in section 10 of the Income-tax act, whereby
any income arising from specified services which is chargeable to equalisation
levy under chapter VIII of the FA 2016 is exempt from the charge to the income
tax. The said clause is reproduced hereunder for ready reference:

‘(50) any
income arising from any specified service provided on or after the date on
which the provisions of Chapter VIII of the Finance Act, 2016 comes into force
and chargeable to equalisation levy under that Chapter.

Explanation.—For the purposes of this clause,
“specified service” shall have the meaning assigned to it in clause (i) of
section 164 of Chapter VIII of the Finance Act, 2016.’

7.2. In
other words income of the non resident from provision of the specified services
to the assessee under chapter VIII of the Finance Act, 2016 is exempt from
income tax in the hands of the non resident if the same is chargeable to
equalisation levy. However, it does not mean that the income of the non
resident from the specified services would be charged to income tax if the same
is not chargeable to equalisation levy for any reason. The charge to income tax
has to be independently established under the ITA.

8. Disallowance
of payment in the hands of payer

8.1. A new
clause (ib) has been introduced in section 40 of the Income-tax act with effect
from 1^stJune,2016. Section 40 provides for the cases when the
amount is not permitted to be deducted from computing the income under the head
“profits and gains of business or profession” or permitted to be deducted
subject to certain conditions. The said clause is reproduced hereunder for
ready reference:

“(ib)
any consideration paid or payable to a non-resident for a specified service on
which equalisation levy is deductible under the provisions of Chapter VIII of
the Finance Act, 2016, and such levy has not been deducted or after deduction,
has not been paid on or before the due date specified in sub-section (1) of
section 139:

Provided
that where in respect of any such consideration, the equalisation levy has been
deducted in any subsequent year or has been deducted during the previous year
but paid after the due date specified in sub-section (1) of section 139, such
sum shall be allowed as a deduction in computing the income of the previous
year in which such levy has been paid;”.

8.2. In
this respect, the following may be noted:

a) Chapter
VIII of the FA 2016 provides for due dates of payment of the equalisation levy
and consequence of the delayed payment. For the purpose of section 40(ib) of
the ITA, the same is irrelevant. The relevant date for the same will be the due
date of furnishing the return of income u/s. 139 of the ITA.

b) Section
166(3) of the Finance Act envisages a situation when the assessee fails to
deduct the levy from the amount paid or payable to a non resident. As per the
said section, the assesse e is liable to pay the levy even if he has not
deducted the same from the payment. Section 40(ib) of the ITA envisages
situation of deduction of the levy and payment thereof thereafter. Can a view
be taken that cases u/s. 166(3) of the FA are not covered by section 40(ib) of
the ITA? Whether in such a case, provision of section 43B of the ITA would be
applicable and the compliance thereof would be necessary?.

c) What will
be the impact of non discrimination article of the relevant double tax
avoidance agreement (DTAA) on section 40(ib) of the ITA? Relevant extract of
article 24(4) of the OECD and UN model convention (both are identical) is
reproduced hereunder for ready reference:

24(4) Except where the provisions of paragraph 1
of Article 9, paragraph 6 of Article 11 or paragraph 4 of Article 12, apply,
interest, royalties and other disbursements paid by an enterprise of a
Contracting State to a resident of the other Contracting State shall, for the
purpose of determining the taxable profits of such enterprise, be deductible
under the same conditions as if they had been paid to a resident of the
first-mentioned State…..

Section 40(ib) disallowance is applicable in
respect of consideration paid or payable to non-resident for specified services
and not to the resident. Hence, prima facie, the assessee can invoke the
said article of the relevant DTAA. Article 24(6) provides that the provisions
of non discrimination article will not be restricted to the taxes covered under
article 2 and the same extends its applicability to taxes of every kind and
description. In view of this, equalisation levy would be covered by the
non-discrimination article notwithstanding what is the scope of article 2. The
question that may still survive is whether payment towards specified services
would be covered within the words “other disbursements” appearing in article 24(4)?

It may be noted that any consideration received
or receivable by a resident from the provision of the specified services to the
assessee is not subject to equalisation levy and hence, there is no question of
any deduction from the payment and consequential disallowance. In fact, to this
extent there is discrimination. However, the existing provision of Article 24
does not specifically recognise such discrimination. Can revenue argue that the
payment to resident is not subject any equalisation levy at all and hence,
there is no discrimination within the meaning of Article 24(4)?

9. Challenges

9.1. A
question that arises is whether it is a tax on the income of the non resident?
According to the Government, it is not a tax on the income of the non resident.
In fact the income of the non resident which is subject to the levy is
specifically made exempt from income tax. By exempting the income under the ITA
which is subject to equalisation levy, whether the Government has weaken its
case that it is not a tax on income or a tax akin to tax on income?

9.2. Who is
the person chargeable to tax? Under the FA, the assessee is the person making
payment towards the specified services and claiming the said payment as
expenditure while computing its taxable income. Whether he is charged to tax or
it is the non resident?

9.3. In tax
jurisprudence, it is well settled that following four factors are essential
ingredients to a taxing statute:-

a. subject
of tax;

b. person
liable to pay the tax;

c. rate at
which tax is to be paid, and

d. measure
or value on which the rate is to be applied.

9.4. From
the analysis of the provisions of the chapter, it is clear that the subject of
tax is the specified services. From the harmonious reading of the section 165
and 166, it appears that the person liable to pay tax is non resident, but the
collection and the recovery is made from the persons paying the considerations
towards the specified services by way of deduction and they are being regarded
as assessee. It is interesting to note that the non resident receiving the
consideration has no obligation whatsoever under the chapter. What is the
difference between a person charged to tax and a person liable to pay tax? Can
a person who is charged to tax be not liable to tax? Can not the person who is
liable to tax and who is also regarded as assessee, should be considered as the
person charged to tax? Is it that in the scheme of equalisation levy, these questions
does not matter? These questions pose a significant challenge to the new tax. _

shailesh.kwebmaker

Section 35DDA and Payments under Voluntary Retirement Scheme

ISSUE FOR CONSIDERATION

Section 35DDA provides for a deduction, of one-fifth of the amount of an expenditure, on payment of any sum to an employee, in connection with his voluntary retirement in accordance with the scheme for such retirement. The balance expenditure is allowed to be deducted, in equal instalments, for each of the four succeeding previous years. The section also contains a disabling provision, that provides that no deduction shall be allowed for an expenditure on voluntary retirement referred to in section 35DDA. It however does not prescribe any condition that requires to be incorporated in the scheme, nor does it require the scheme to be approved by any authority.

Section10(10C) confers an exemption from income tax for a receipt , in the hands of an employee, on his retirement, up to Rs. 5 lakh under a voluntary retirement scheme that is framed as per the guidelines prescribed in Rule 2BA.

An interesting issue has arisen about the application of section 35DDA to a payment of an expenditure under a scheme of voluntary retirement which is not framed as per the guidelines prescribed under Rule 2BA. In such circumstances, whether the deduction for expenditure would be restricted to one-fifth or not is an issue over which conflicting views are available. The issue that arises, in the alternative, is about the deduction in full of the amount of expenditure u/s. 37 of the Act.

While the Delhi bench of the Income tax Appellate Tribunal has held that for a valid application of section 35DDA, it was necessary that the scheme was framed as per the guidelines prescribed under Rule 2 BA, the Mumbai bench held that the provisions of section 35DDA applied once the payment was made under a scheme, even where the scheme did not meet the requirements of rule 2BA. When asked to address the issue of full deductibility, the Delhi bench held that the deduction was possible provided the expenditure was of revenue nature. The Mumbai bench however held that the expenditure was to be amortised for deduction in five equal annual instalments.

WARNER LAMBERT’S CASE
The issue arose in the case of DCIT vs. Warner Lambert (India) (P) Ltd., 33 taxmann.com 686(Mum.) for A.Y. 2003-04. The assessee company in that case was engaged, inter alia, in the business of trading, importing, marketing, manufacturing and sale of ayurvedic medicines, breath fresheners, chewing gums and drugs. It had claimed 100% deduction for payment made to an employee of an amount of Rs. 17 lakh who had opted to retire on account of restructuring of the business of the company . It explained that the said expenditure was not in accordance with the scheme of voluntary retirement to which provisions of section 35DDA applied and, accordingly, the said amount had been claimed in full. The AO observed that the said expenditure was incurred clearly under the voluntary retirement scheme and was to be allowed, as per section 35DDA, at one-fifth of the claim spread over a period of five years. The assessee pointed out that the claim was allowable u/s. 37(1) of the Act. The AO however, applied the provisions of section 35DDA by holding that the said provisions included payment of an expenditure under schemes of any nature for granting voluntary retirement to employees prior to its actual retirement date. According to the A.O, it was not material that the schem was framed under the prescribed guidelines of rule 2BA.

In appeal, the CIT(A) observed that the AO had not brought any material on record to show that the assessee had paid any compensation under the existing scheme. He further held that since the assessee had himself contended that payment was not under any scheme of voluntary retirement, the applicability of provisions u/s. 35DDA merely on presumption was not justified.

In appeal to the Tribunal by the Income tax Department, it was submitted by the Revenue that a specific bar had been imposed for not allowing deduction under any other provisions of the Act vide section 35DDA sub-section (6), for an expenditure covered by sub-section (1) of section 35DDA and as such the assessee could not have resorted to section 37(1) of the Act for claiming the deduction. It was pointed out that w.r.e.f 1st April, 2004 on substitution of the words ‘in connection with’ for ‘at the time of”, the amount that has been paid ‘in connection with’ voluntary retirement scheme was covered by the provisions of section 35DDA and only one-fifth of the amount paid could be allowed as a deduction. It was further submitted that no approval of any competent authority was required for the voluntary retirement scheme adopted by the assessee.

In reply, the assessee submitted that no formal scheme had been adopted by the company and only an option was given to those employees who were not absorbed, on reorganisation, to opt for VRS which was to be considered in the overall context. It was further explained that the scheme contemplated u/s. 35DDA was the same as in section 10(10C) and, therefore, for invoking section 35DDA, it was necessary that the scheme adopted by the company confirmed with the requirements set out in R. 2BA and as no such scheme was framed, the provisions of section 35 DDA were not applicable.

The honourable Tribunal was not inclined to accept the plea of the Income tax Department to the effect that the provisions of section 35DDA were applicable because the payment had been made in pursuance to a scheme of voluntary retirement and that it was not necessary that the said scheme should have also complied with the guidelines prescribed under Rule 2 BA r.w.s. 10 (10C) of the Act. It stated that on a bare perusal of the section, it was revealed that the provisions of the section were attracted only when the payment had been made to an employee in connection with his voluntary retirement, in accordance with any scheme of voluntary retirement. It observed that the legislature inserted the section in order to allow only one-fifth of the total expenditure since the payment reduced the burden on the assessee relatable to subsequent years.

In order to resolve the dispute, the honourable Tribunal held that the principles of harmonious construction of statute were to be applied which required that a statute be received as a whole and one provision of the Act should be in conformity of the other provisions in the same Act so as to ensure uniformity in interpretation of the whole statute. It further observed that the provisions relating to voluntary retirement scheme were contained in section 10(10C) and all the conditions laid down therein had to be fulfilled before an exemption could be availed by an employee under the said section; that the income and expenditure go together in the scheme of the Act; that it was difficult to appreciate that a claim for an expenditure could be held to be covered by section 35DDA whereas while allowing exemption of the same expenditure in the hands of the payee, only those claims were entertained which confirmed to the guidelines laid down under r. 2BA; that the language in sections 35DDA and 10(10C), clearly referred to a scheme or schemes of voluntary retirement; though it was true that section 35DDA did not specifically refer to section 10(10C) but principles of harmonious construction required that the conditions as laid down under Rule 2BA had to be met before a deduction u/s. 35DDA could be allowed.

The Tribunal noted that the scheme adopted by the assessee did not confirm to the guidelines laid down under Rule 2BA and therefore, it could not be held that the provisions of section 35DDA were applicable in the company’s case. The claim made by the company for deduction u/s. 37 was accordingly upheld by the tribunal.

SONY INDIA’S CASE
The issue arose again in the case of Sony India (P) Ltd., 21 taxmann.com 224 (Delhi) for assessment year 2005-06.

In that case the assessee company, on closure of one of its units, had floated a VRS scheme for employees of said closed unit and one-fifth of the payments made there under was claimed u/s. 35DDA. The A.O however, observed that for claiming deduction under s.35DDA provisions of rule 2BA were to be satisfied; as the assessee’s VRS scheme was not framed in accordance with Rule 2B, VRS expenditure claimed by assessee were liable to be disallowed. The assessee had claimed one-fifth of the amount of expenditure incurred on payment under the voluntary retirement scheme of the company to its employees and claimed that such an expenditure was to be allowed as per section 35DDA of the Act. The expenditure so claimed was disallowed by the A.O in assessment. Amongst the different reasons, one of the reasons of the AO, for disallowance of the claim of one-fifth of the expenditure on payments to employees under the voluntary retirement scheme, was that the scheme was not framed as per the guidelines prescribed under Rule 2BA.

The assessee, in the alternative, pleaded that the expenditure was otherwise deductible u/s. 37(1) but the A.O rejected the said plea by holding that the expenditure was incurred for achieving a benefit of enduring nature and as such it was capital in nature; the expenditure on VRS was to reduce the staff strength with a view to achieve viability and profitability of business, benefit of which was to endure over a number of years. the said expenditure could not be allowed u/s. 37(1) but was allowable only u/s. 35DDA.

On appeal by the assessee, the Commissioner (Appeals) came to the conclusion that the said expenditure was not in respect of retrenchment of employees of closed unit but the said expenditure was incurred in terms of the VRS. However, the VRS was not in accordance with rule 2BA. Therefore, the Commissioner (Appeals) held that the expenditure had been incurred to sustain the business for a longer period of time resulting in a benefit of enduring nature and thus, was capital in nature. Accordingly, the appeal of the assessee was dismissed on that ground.

On further appeal, amongst the other grounds, the assessee placed the following grounds before the Tribunal; Whether the Commissioner (Appeals) was unjustified in reading the conditions of Rule 2BA in section 35DDA? Whether VRS expenditure was otherwise allowable as deduction u/s. 37(1)?

The Tribunal noted that in the Bill, leading to enactment of section 35DDA, a provision was made regarding the application of Rule 2BA which portion was deleted when the Bill was passed and, thus, the conditionalities of the rule had not been incorporated intentionally in the section; the deletion of conditionalities originally incorporated in the Bill showed that legislative intendment was not to incorporate all the conditions of section 10(10C) in section 35DDA; the legislature left the scheme of voluntary retirement open-ended and did not place any restriction on the scheme; the plain language of the provision supported the case of the assessee; that it was not simply the case of taking guidance from a definition section but required modification of the provisions of section 35DDA by incorporating a part of section 10(10C) in it which incorporation did not find support from any rule of construction. The Tribunal held that there was no compelling reason to read section 35DDA as suggested by the revenue and therefore, the scheme of the assessee was held to be a VRS, to which the provisions of section 35DDA was applicable.

Dealing with the claim for the deduction u/s. 37(1) of the Act, the Tribunal noted the observations made by the Kerala High Court in the case of CIT vs. O E N India Ltd., 8 taxman.com 246 and in particular the following observations while allowing the deduction in full following the various court decisions. “It is mentioned that the test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature depends upon the finding as to whether the assessee has created any fixed asset or not. If an asset has been created, the expenditure will certainly be capital in nature. Where the expenditure does not lead to creation of a fixed asset, the expenditure is generally revenue in nature. However, creation of an asset is not a mandatory requirement. The expenditure incurred for achieving a benefit of enduring nature is also capital in nature. When this test is applied, it is felt that the purpose of introduction of VRS is to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment will give long-term benefit to the assessee. The VRS floated with a view to encourage massive retirement is primarily to streamline the business by restructuring the work force with a view to increase profitability and to make the business viable. Therefore, the benefit will endure over a number of years to come. Accordingly, the payment under the VRS for retirement of a number of employees is nothing but a capital expenditure which could be claimed as a deduction in a phased manner over several years. It is for the assessee to provide rational basis to ascertain the number of years over which the benefit endures and accordingly write off the amount of expenditure by amortizing it over those number of years. Section 35DDA is a virtual declaration of the fact that the expenditure should not be allowed in one year and it has to be amortized over a few years. Therefore, even prior to introduction of section 35DDA, the assessee was entitled to claim deduction of expenditure in a phased manner over a number of years which have to be rationally fixed by the assessee.” The Tribunal noted that the having stated so, the court abundantly made it clear that the aforesaid had been stated only with a view to express the opinion of the court and it was not intended to disturb the settled position through various high courts’ decisions, which had not been contested before the Supreme Court. The court held that the entire amount paid under the VRS had to be held to be revenue in nature to bring in line its decision with the decisions of various high courts.

The Tribunal however held that the assessee was entitled to deduction of one-fifth of the expenditure u/s. 35DDA as claimed for the reason that it had failed to establish that the expenditure was not capital in nature. According to the Tribunal, the facts suggested that the payment was made on closure of an unit and such payment was to be held to be on capital account unless it was established by the assessee that the business of the unit closed was closely interlaced and interlinked with the business continued by the assessee.

OBSERVATIONS
Section 35DDA (1) of the Act reads as under; “Where an assessee incurs any expenditure in any previous year by way of payment of any sum to an employee at the time of( in connection with) his voluntary retirement, in accordance with any scheme or schemes of voluntary retirement, 1/5th of the amount so paid shall be deducted in computing the profits and gains of the business for that previous year, and the balance shall be deducted in equal instalments for each of the four immediately succeeding previous years.”

The relevant part of section 10(10C) reads as under :” any amount received or receivable by an employee of- (i)………. (ii) any other company; or ….. on his voluntary retirement or termination of his service, in accordance with any scheme or schemes of voluntary retirement or ……, to the extent such amount does not exceed five lakh rupees. Provided that the schemes of the said companies or ……….., governing the payment of such amount are framed in accordance with such guidelines including inter alia criteria of economic viability as may be prescribed (rule 2BA) .”

On an apparent reading of section 35DDA, what one gathers is that for a valid application of section 35DDA, the payment of expenditure to an employee should have been made in connection with his voluntary retirement under a scheme of such retirement. On fulfilment of these conditions, one-fifth of the expenditure would fall for allowance in the year of payment and the balance will be allowed in four equal annual instalments.

The section by itself does not prescribe that the scheme should have been framed as per guidelines prescribed rule 2BA. As long as the payment (not revenue in nature) is made under a scheme for voluntary retirement, the case for deduction should be governed by the provisions of section 35DDA and if so no deduction shall be allowed under any other provisions of the Income Tax Act. For the purposes of claiming an exemption u/s. 10(10C), in the hands of an employee, it is however essential that the receipt is under a scheme i.e. framed as per the guidelines prescribed under Rule 2BA.

It is the above noted distinction between the two provisions of the Act, one dealing with the payment and the other dealing with the receipt that prompted the tribunal in the Warner Lambert’s case to recommend a harmonious reading of section 35DDA & 10(10C) so as to include only such payments within the ambit of section 35DDA which are made under a scheme that meets the guidelines of Rule 2BA , and that the deduction is not to be restricted to one-fifth of the amount of expenditure but may qualify for a full deduction provided of course it is otherwise allowable. With utmost respect there is nothing in section 35DDA that stipulates reading in the manner that requires that the scheme referred to in section 35DDA should be so framed so as to meet the conditions of rule 2BA. Likewise there is nothing in section 10(10 C) that provides that the receipt by an employee should be from an employer whose case is covered by section 35 DDA . In our respectful opinion, the provision of these sections are independent of each other and operate in different fields even through both of them deal with the common subject of voluntary retirement. Accordingly the Tribunal in Sony India’s case was right in holding that scheme referred to in section 35DDA need not have been framed as per the guidelines prescribed under Rule 2BA.

The Finance Bill, leading to enactment of section 35DDA, contained a provision that required that the scheme referred to in section 35DDA is framed as per Rule 2BA however, the said requirement was omitted when the Bill was enacted and with this the condition for application of the rule was not retained intentionally in the section. The deletion of the condition originally incorporated in the Bill showed that legislative intent was not to incorporate all the conditions of section 10(10C) in section 35DDA. The legislature has consciously left the scheme of voluntary retirement, referred to in section 35DDA, open-ended and has not place any restriction on the scheme. The plain language of the provision supports the case of literal interpretation and that it is not simply the case of taking guidance from another provision of the Act for its understanding but requires a modification of the provisions of section 35DDA by incorporating a part of section 10(10C) in it which incorporation amount to doing violence to the language of section 35DDA and does not find support in any rule of construction. There is no compelling reason to read section 35DDA as being suggested by a few.

The disabling provisions of section 35DDA(6) can not help the case of mandatory application of section 35DDA in all cases of payment on voluntary retirement so as to restrict the deduction to one-fifth of the expenditure even where the expenditure is otherwise allowable in full. In our opinion, the provision of s/s. (6) has a limited application to only such cases which are otherwise covered by the provisions of s/s.(1). In other words, the expenditure of revenue nature should be deductible in full u/s. 37 of the Act and only those which do not so qualify for full deduction will be governed by section 35DDA. It is this larger issue, about the eligibility of an expenditure on payment of compensation towards voluntary retirement for deduction in full, u/s. 37, on being established that it is an expenditure wholly and exclusively incurred for the purposes of business, has remained to be directly addressed. It is possible that a payment of the nature being discussed would qualify for a full deduction once it is established to be of a revenue nature. The scope of section 35DDA should be restricted only to such expenditure that are otherwise not allowable under the provisions of section 37 of the Income-tax Act.

The test applied to determine whether the expenditure incurred by the assessee is revenue or capital in nature. Applying the test depends upon the finding as to whether the expenditure incurred has the effect of achieving a benefit of enduring nature and if yes, it is capital in nature.

When that test was applied, it was felt that the purpose of introduction of VRS was to reduce the staff strength with a view to achieve viability and profitability of the business in general and the retrenchment would give long-term benefit to the assessee. It is for the assessee to provide a rational basis to ascertain whether the benefit is of enduring nature and even if not so, it is otherwise allowable in the year in which it is incurred. Section 35DDA is not a virtual declaration of the fact that the expenditure should not be allowed in one year and it has to be amortised over a few years.

shailesh.kwebmaker

22. [2017] 78 taxmann.com 123 (Mumbai – Trib.) Goldberg Finance (P.) Ltd. vs. ACIT ITA No. : 7496 (Mum) of 2013 A.Y.: 2009-10 Date of Order: 19th January, 2017

Section 115JB – Clause (iic) inserted in Explanation 1 to
section 115JB by the Finance Act, 2015 is remedial and curative in nature and
is to be reckoned as retrospective. It was never the purpose of the Act to tax
any income or receipts which is otherwise not taxable under the Act.

FACTS

During the previous year relevant to AY 2009-10 the assessee
company was a member of two AOPs viz. Cosmos Estate and Cosmos Properties. The
assessee received share of income amounting to Rs. 54,58,717 from Cosmos
Properties. This amount was credited to Profit & Loss Account. Since the
amount was credited to P & L Account, the Assessing Officer (AO) charged it
to tax u/s. 115JB of the Act.

Aggrieved, the assessee preferred an appeal to CIT(A) who
confirmed the action of the AO by relying on the order of the Tribunal, for
earlier year, in case of the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal
where it contended that Clause (iic) inserted by the Finance Act, 2015 w.e.f.
1.4.2016 provides that the amount of income being share of the assessee in the
income of the AOP on which no income tax is payable in accordance with the
provisions of section 85 and any such amount is credited to P&L account,
then same shall be reduced while computing the book profit is curative in
nature and should be applied retrospectively. It was also contended that this
amendment is subsequent to the decision of the Tribunal, in the case of
assessee, for earlier year.

HELD

The intention of the legislature which can be gauged by the
Explanatory notes to the amending Act, was to provide similar remedy which was
applicable to the partners whose share income from the profit of the firm was
not liable to MAT. If an amendment in law has been brought by the legislature
in the statute which is curative in nature, to avoid unintended consequences
and to provide similar benefit to other class of assessee, then it has to be
treated as retrospective in nature even though it has not been stated
specifically by the amending Act. Clause (iic) inserted in Explanation 1 to
section 115JB by the Finance Act, 2015 is remedial and curative in nature as it
was brought in the statute to provide similar benefit to the member of the AOP
which was earlier applicable to the partner of the firm, therefore, it is to be
reckoned as retrospective.

The legislature by this amendment has thus removed this
imparity between two classes of assessees so that mischief or prejudice caused
to other class of assessees should be removed. The mischief which has been
sought to be remedied is that the share income of the member of the AOP which
was not taxable in terms of section 86 was getting taxed under MAT while
computing the book profit. This was also never the purpose of section 115JB to
tax any income or receipts which is otherwise not taxable under the Act. Any
remedy brought by an amendment to remove the disparity and curb the mischief
has to be reckoned as curative in nature and hence, is to be held
retrospectively.

This ground of appeal
filed by the assessee was allowed by the Tribunal.

shailesh.kwebmaker

21. [2017] 78 taxmann.com 152 (Kolkata – Trib.) Twenty First Century Securities Ltd. vs. ITO ITA Nos. 464 & 465 (Kol) of 2014 A.Ys.: 2008-09 & 2009-10Date of Order: 3rd February, 2017

Sections 197, 201(1A) – Certificate u/s. 197 is with
reference to the person to whom the income is paid and is not with reference to
any sum as may be specified in the certificate. Levy of interest u/s. 201(1A)
cannot be sustained on the amount of tax not deducted on difference between the
amount paid to the assessee and the amount stated in the certificate.

FACTS

The assessee company paid interest to two persons who had
obtained certificate u/s.197 of the Act authorizing the assessee to deduct tax
at lower rate. The amount of interest paid by the assessee to these two persons
exceeded the amount mentioned in the certificate issued u/s. 197. The assessee,
however, deducted tax at a lower rate on the entire amount paid. The Assessing
Officer (AO) held that the assessee ought to have deducted tax at normal rate
on the amount of interest in excess of what was stated in the certificate
issued u/s. 197. The AO levied interest u/s. 201(1A) on amount of tax short
deducted.

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 after going through the provisions of section
197, section 201(1) & 201(1A) and Rule 28AA held that the statutory
provision of deduction of tax at source at lower rate is “person specific” and
cannot be extended to the amounts specified by the recipient of the payment
while making an application for grant of certificate u/s. 197 of the Act in
Form No. 13. The Tribunal observed that the AO has annexed the details in
Schedule II of Form No. 13 to the certificate issued u/s. 197 of the Act. It
held that by doing so, the AO cannot treat the assessee as a person who has not
deducted tax at source to the extent of payments made by the assessee over and
above the sum specified in the certificate u/s. 197 of the Act. It concurred
with the arguments on behalf of the assessee that the certificate u/s. 197 of
the Act is with reference to the person to whom the income is paid and not with
reference to any sum as may be specified in the certificate. It held that,
therefore, the assessee cannot be treated as a person who has not deducted tax
at source on the difference between the amounts specified in the certificate
issued under s.197 of the Act and the amounts actually paid by the assessee.
Consequently, the levy of interest u/s. 201(1A) of the Act was held to be
unsustainable and directed to be deleted.

The appeals filed by
the assessee were allowed.

shailesh.kwebmaker

18. Transfer Pricing – Once comparable companies have been found functionally non comparable – then the same should be excluded – the same cannot be include merely on the basis of assessee’s inclusion in the transfer pricing study report – There cannot be estoppel against correct procedure of law and principles solely on account of acquiescence or mistake of the assessee

Commissioner of Income Tax vs. M/s. Tata Power Solar
Systems Ltd. [ Income tax Appeal no 1120 of 2014 dt : 16/12/2016 (Bombay High
Court)].

[M/s. Tata Power Solar Systems Ltd v Dy. CIT. [ ITA NO.
6657/MUM/2012; Bench : K ; dated
15/01/2014 ; A Y: 2008-09. Mum. ITAT ]

The Assessee is engaged in design, development and
manufacture and sale of Solar Modules and Systems. During the year, the
Assessee had reported International Transaction with its Associated Enterprises
(AE). In the Transfer Pricing Study submitted by the Assessee to the Revenue,
it had included M/s. Indowind Energy Ltd. and B. F. Utilities Ltd. in the list
of two comparables for the purpose of arriving at Arms Length price (ALP) in
respect of its transactions entered into with its AE. However, before the Transfer
Pricing Officer (TPO) itself, the Assessee sought to withdraw the two companies
from the list of comparables. This, inter alia on the ground of
functional differences. However, the same was not permitted by the TPO and was
taken into consideration while determining the ALP. This resulted in a draft
Assessment Order based on ALP arrived at on a comparability study inclusive
of the two companies. The Draft Resolution Panel (DRP) on an
application made to it by the Assessee did not disturb the said inclusion among the list of comparables to determine
the ALP as reflected in the draft Assessment Order. This was essentially on the
ground that the Assessee had itself relied upon the two companies as
comparables. Therefore, it was not permissible for the Assessee now to withdraw
the two companies from comparability analysis.

The Tribunal allowed the Assessee’s appeal. The Tribunal
found that the ultimate aim of the transfer pricing provisions is to determine
the appropriate ALP, which can be done only by bench marking with the proper
comparables based on FAR analysis and under the prescribed methods. If in the
course of the proceedings, it is found that certain comparables do not stand
the test of functional analysis or for some reason, then the same should be
excluded and they should not continue to
be included simply because the assessee had included the same initially. If the
cogent reasons have been given by the assessee for excluding the same, the same
should be considered. The initial onus or duty is cast upon the assessee to
carry out the selection of proper comparables based on FAR analysis and by
adopting suitable transfer pricing method and then analyse its transaction to
show the correct arm’s length result. Thereafter, it is axiomatic that the
taxing authorities / TPO, should scrutinise the assessee’s report on arm’s
length result and the entire process of arriving at the ALP, whether they are
based on transfer pricing principles and statutory provisions or not. If he
himself finds some irregularity or mistake in any of the process or the steps
undertaken, then he is bound to correct in accordance with the settled
principles and law.

If the assessee points out some mistake or any irregularity
in the arm’s length result, then it is incumbent upon the TPO to examine and
consider the same and if the assessee’s contentions are found to be correct or
tenable, then he has to accept the same. There cannot be estoppel against
correct procedure of law and principles solely on account of acquiescence or mistake
of the assessee. The TPO is required under law to analyze every comparableand
then only determine the correct ALP based on proper comparability analysis.
Thus, there is no merit in the
contention of the Revenue that simply because the assessee has included these
two companies then the assessee is debarred from objecting to the same, if
there are strong and cogent reasons.

It was observed that
the two companies Indo Wind Energy Ltd.
and B.F. Utilities Ltd. are engaged in the business of generation of Wind
Energy Ltd., whereas the assessee is Tata Power Solar Systems Ltd. engaged in
the business of manufacture and sale of solar cells, photo voltaic modules and
systems which are used for solar energy. The assessee is not into generation of
energy. These two functions are
different. The assessee before the TPO / DRP has placed the key
difference between the functions carried out by the assessee and the functions
required for generation of wind energy. These have not been rebutted either by
the TPO or by the DRP but have been rejected mainly on the ground that the
assessee has included the same initially in its transfer pricing study report.
It is also seen from the record that in the subsequent year, the TPO has
specifically issued a show cause notice for inclusion of these two companies,
however, on the assessee’s objection based on functional difference, the TPO
has excluded these two companies.

Thus, accordingly, Indo Wind Energy Ltd. and B.F. Utilities
Ltd., were to be excluded from the list of final comparables.

Being aggrieved, the Revenue carried the issue in appeal to
the High Court. The High Court observed that the Transfer Pricing Mechanism
requires comparability analysis to be done between like companies and
controlled and uncontrolled transactions.

This comparison has to be done between like
companies and requires carrying out of FAR analysis to find the same. Moreover,
the Assessee’s submission in arriving at the ALP is not final. It is for the
TPO to examine and find out the companies listed as comparables which are, in
fact comparable. The impugned order has on FAR analysis found that the two
companies are not comparable. They are in a different area i.e. wind energy
while the Assessee is in the field of solar energy. The issue raised herein is
concluded against the Revenue and in favour of the Assessee by the decision of
this Court in CIT vs. Tara Jewellers Pvt. Ltd., 381 ITR 404. In
view of the above, Appeal of the revenue was
dismissed.

shailesh.kwebmaker

17. TDS – The liability to deduct tax at source arose – when the amount payable stood credited in the books of Assessee – Even in respect of services received earlier : There can be no estoppel against the statute

Commissioner of Income Tax vs. Underwater Services Company
(Dissolved). [ Income tax Appeal no 1240 of 2014, dt : 20/12/2016 (Bombay High
Court)].

[Underwater Services Company (Dissolved). vs. Assistance
Commissioner of Income Tax,. [ITA No.
5828/MUM/2012; Bench : F ; dated
30/07/2012 ; Mum. ITAT ]

The Assessee was engaged in providing underwater services,
such as diving, towing, salvaging, underwater marine repair and maintenance.
For the aforesaid purpose, it chartered two vessels belonging to M/s.Samsung
Maritime Ltd. (a sister concern) and claimed charter hire expenses for the year
at Rs.441.37 lakh. The same was liable for deduction of tax at source u/s.
194-I of the Act. The recipient/payee of the hire charges i.e. M/s. Samsung
Maritime Ltd. had applied to the department for waiver of tax deducted at
source u/s. 197 of the Act. The Income Tax Officer (TDS) by a communication
dated 7^th May, 2008 granted a certificate u/s. 197(1) of the Act and
directed the Assessee that charter hire paid or credited to M/s.Samsung
Maritime Ltd. would be after deduction of tax at the rate of 2.02% (net) instead of 10%.

During the assessment proceedings, the assessee urgedthat the amounts on account of charter
hire charges were paid and also credited to the account of M/s.Samsung Maritime
Ltd. after 7^thMay, 2008. Thus the deduction of tax was at the
concessional rate of 2.02%. Without prejudice it was pointed that the amount
which could be disallowed at the highest was Rs.86.40 lakh on account of
services received prior to 7^thMay, 2008. The AO passed the order
and disallowed the amount of Rs.86.40 lakh which according to him was an amount
payable prior to date of certificate dated 7^thMay, 2008. This on
the ground that the certificate was operative only from the date of issue i.e.
7^th May, 2008 and coupled with his undertaking that the assessee has
itself offered the disallowance of Rs.86.40 lakh.

Being aggrieved, the Assessee had filed an appeal before the
CIT (A). The CIT (A) dismissed the assessee’s appeal. It upheld the
disallowance of Rs.86.46 lakhs for non deduction of tax at the rate of 10% as
done by the AO.

Being aggrieved, the Assessee carried the issue in appeal to
the Tribunal. The Tribunal held that amount payable for month of April 2008 in
respect of two vessels taken on hire from M/s. Samsung Maritime Ltd. stood
credited in the books of Assessee only after 7^th May, 2008 and
admittedly paid thereafter. In the above view the Tribunal held that the liability to deduct tax at
source only arose post 7^th May, 2008 even in respect of services
received earlier. Consequently, the tax deducted on such credit/payment would
be on lower rate of 2.02% (net) as allowed by the certificate u/s. 197(1) of
the Act. The Tribunal also relied upon its earlier order for the Assessment
Year 2007-08 which accepted the Assessee’s contention, that is, as date of
credit and date of payment were as in the present facts both after the issuance
of certificate u/s. 197(1) of the Act the tax will be deducted at lower rate.

The grievance of the Revenue before High Court is two fold,
one that the Assessee has itself accepted the liability to deduct tax at the
rate of 10% prior to 7^th May, 2008 and offered to disallow
expenditure of Rs.86.40 lakh. Therefore, it is not now open to the Assessee to
urge before the Appellate Authorities that the amount of Rs.86.40 lakh cannot
be disallowed as now contended. Secondly, it is submitted that entries are made
in the books by the Assessee only to circumvent the provisions of Act coupled
with the fact that the payee M/s. Samsung Maritime Ltd. and Assessee belong to
same group. Therefore, the Assessee’s claim made before and allowed by the
Tribunal is incorrect.

The High Court noted that the Tribunal on examination of the ledger account of the
Assessee noted that the date of credit for the charter hire charges payable to
its sister company M/s.Samsung Maritime Ltd. was credited only after 7^th
May, 2008. The payment was also made by the Assessee after crediting of the
amount in its books of account. Moreover, the ledger account was produced
before the Tribunal as the same was produced even before the AO. Moreover,
there can be no estoppel against the statute. Therefore, even if it is
assumed that the Assessee had suggested that Rs.86.40 lakh be disallowed for
not deducting tax at 10% then the same would be contrary to the deduction of
tax to be done u/s. 197 of the Act. The Authorities under the Act were obliged
to apply the law to the facts existing and grant relief to the Assessee
wherever available. In view of above, the view taken by the Tribunal in the
impugned order on the available facts is a possible view. Appeal of revenue was
dismissed.

shailesh.kwebmaker

16. Business set up – when the business is established and is ready to commence the business – there may be an interval between the setting up of the business and the commencement – Section 3 of the Act

CIT vs. M/s. Conde Nast (India) Pvt. Ltd. [ Income tax
Appeal no 1083 of 2014, dt : 16/12/2016 (Bombay High Court)].

[M/s. Conde Nast (India) Pvt. Ltd. vs. DCIT. [ITA
No.1819/MUM/2013; Bench: SMC; dated: 04/09/2013; A Y: 2007- 2008. MUM. ITAT ]

The assessee was engaged in the business of printing,
publishing, circulating, marketing and distributing publications. During the
assessment proceeding, the AO noticed that the assessee had claimed that its
business had been set up w.e.f. 20-11-2006 and expenditure incurred after
20-11-2006 had been claimed as revenue expenditure at Rs.3,56,33,431/-.The
assessee was asked to substantiate its claim with necessary evidence. After
considering various details, the AO found that the business of the assessee has
not been set up as the assessee has appointed only executives along with
editors. No issue of the magazine is published during the year. The AO found
that the magazines have been published in FY: 2007-08 relating to AY: 2008-09.
Accordingly, he held that the business was not set up in the year under
consideration. Hence, he disallowed the claim of expenditure.

The assessee preferred appeal before the CIT(A). It was
submitted that the editor, who is at the helm of affairs in the editorial
department in publishing organisation, decides what shall and what shall not go
into his publication on the basis of what he conceives to be the publications
mission and philosophy. Thereafter the functions of the editorial as well as
the activities taken by the assessee during the year under consideration were
filed and explained before him. The Ld
CIT(A) noted that the first issue of the magazine, namely, VOGUE, published by
the assessee, came on October, 2007 and accordingly the business was set up
only on October, 2007 and not during the year under consideration. Accordingly,
the CIT(A) confirmed the order of the
AO.

The Tribunal observed that there is a well-marked distinction
between a business being set up and the commencement of the business. It is the
setting up of the business that has to be considered and not the commencement.
It is only when the business is set up that the previous year for that business
commences and expenses incurred prior to the setting up are not a permissible
deduction. It has further observed that
when the business is established and is ready to commence the business, then it
can be said that the business is set up. Before the assessee is ready to
commence business, the business is not set up. There may be an interval between
the setting up of the business and the commencement thereof and all expenses
incurred during the interval would be permissible deductions.

The Tribunal after going through the chart and various details along with supporting
evidence, observed that it is amply
proved that major activity has started during the year under consideration.
Some orders have been placed, photographer is engaged, some technical staff
were also employed, business premises has been taken from where all these
activities are conducted. Even trial production was also started. From all
these facts, it is seen that the assessee has started its activity for
publishing its magazines. The question is not generating of revenue, the
question comes for consideration as to whether any activity has been started or
not. The Tribunal relied on the decision
of HSBC Securities India Holdings Pvt. Ltd. dated 20^th
November, 2001 (ITA No.3181/M/1999). The Tribunal held that the business of the assessee was set up,
therefore, the expenditure incurred by the assessee are allowable. However,
since the nature of expenditure was not examined therefore, to this limited
purpose the matter was remanded back to the file of the AO to examine the
genuineness of the expenditure and then allow them as per provision of law. In the
result, appeal of the assessee was allowed.

On appeal by the revenue before the High Court
it was observed that the impugned order of the Tribunal had relied on an order
of its Coordinate Bench in HSBC Securities India Holdings Pvt. Ltd.,
decided on 20^thNovember, 2001 (ITA No.3181/M/1999). The impugned
order finds that the test laid down by the Tribunal in HSBC Securities (India)
Holdings (P) Ltd., to determine whether or not the Assessee’s business has been
set up, were satisfied on the present facts. It was found from the record of the High Court that the
order of the Tribunal in HSBC Securities India Holdings Pvt. Ltd., (supra)
has been accepted by the Revenue as the memo of appeal does not indicate any
challenge by the Revenue to the above order. It is also not disputed in the
memo of appeal that the order in HSBC Securities (India) Holdings (P) Ltd., (supra)
applies to the present facts. Thus, no grievance is made in respect of the
impugned order following the order of the Coordinate Bench in HSBC Securities
(India) Holdings (P) Ltd., (supra). Thus the Court held that the
question as framed did not give rise to any substantial question of law.
Accordingly, Appeal of revenue was dismissed.

shailesh.kwebmaker

Section 28, 41(1) – In a case where assessee has filed confirmation from creditors along with PAN number, amounts payable to creditors cannot be added to income merely on the ground that the assessee could not produce creditors

11. ITO vs. Mahesh N. Manani
ITAT Mumbai `B’ Bench
Before Shailendra Kumar Yadav (JM) and Rajesh Kumar (AM)
ITA No.: 389/Mum/2014
A.Y.: 2010-11. Date of Order: 4th August, 2016.
Counsel for revenue / assessee: Shivaji Ghode / None

FACTS
During the course of assessment proceedings, the AO noticed that sundry liabilities at the end of the year were shown at Rs. 90,00,563 as against the previous years amount of Rs. 19,69,537. He issued notice u/s. 133(6) of the Act, which were not returned back but there was no response received. Therefore, assessee was asked to produce the creditors with their relevant income-tax records for verification. However, the creditors did not come before the AO. The AO added this sum of Rs.90,00,563 to the total income of the assessee.

Aggrieved, the assessee filed an appeal to the CIT(A) where elaborate reasoning was given for assessee not being able to produce creditors. The assessee also filed confirmatory letters from all the 8 creditors which contained complete names, addresses and even income tax particulars of the creditors. The CIT(A) remanded the matter to the AO with a direction to make enquiries/ investigation as he thinks fit to ascertain the facts of the matter.

In the remand proceedings, the AO instead of making any enquiries asked the assessee to produce the creditors which the assessee could not do for the very reasons mentioned in the submissions filed before CIT(A). The CIT(A) observed that through the letter calling for remand report specifically directed the AO to make an enquiry, investigation as was necessary and thereafter submit a factual report, the AO did not do any enquiry at his end. The CIT(A) allowed the appeal and held that that the assessee on his part has primarily discharged his onus cast upon him to establish the credits in his books whereas AO except harping on the point that the assessee has failed to produce them along with records has not brought any material to establish that the liabilities were fictitious.

Aggrieved, the revenue preferred an appeal to the Tribunal.

HELD
The AO was not justified in rejecting the claim of the assessee mainly on the ground that assessee could not produce creditors. It is not in dispute that the assessee has filed confirmation from creditors along with PAN number. This view is fortified by the decision of Hon’ble Apex Court in the case CIT vs. Orissa Corporation (P.) Ltd. [159 ITR 78 (SC)]. In view of this, CIT(A) was justified in deleting the addition.

The Tribunal dismissed the appeal filed by the revenue.

shailesh.kwebmaker

54. Search and seizure- Block assessment- Sections 132 and 158BC – B P. 1990-91 to 2000-01 – Undisclosed income-corroborative evidence needed in case of statement- Finding that additions were not sustainable – Justified

CIT vs. Smt. S Jayalaxmi Ammal; 390 ITR 189 (Mad):

The assessee was a jeweler. On 29/12/1999, a search u/s. 132
of the Act, was conducted in the residential and business premises of the
assessee. Based on the materials collected during search, a notice u/s. 158BC
of the Act was issued. The assessee filed a Nil return. The Assessing Officer
completed the block assessment making the following additions (i) Rs. 31,00,000
being the value of immovable properties purchased in the name of daughter in
law of the assessee; (ii) Rs 80,000 towards excess stock of 215 gms. of gold
jewellery found in the business premises; (iii) Rs. 2,90,000 towards excess
stock of 39 kgs of silver articles; (iv) difference in cost of construction of
Rs. 83,700; (v) Rs. 3,00,000 towards inadequate drawings, and (vi) Surcharge of
Rs. 2,10,360 The Commissioner (A) substituted a figure of Rs. 5,00,000 in the
place of Rs. 31,00,000 and reduced the addition of Rs. 3,00,000 to Rs. 2,00,000
He deleted the additions of Rs 80,000 and Rs. 83,700 and confirmed the other additions.
The Tribunal held that in the absence of any material found during the course
of search operation the addition of Rs. 5,00,000 cannot be sustained as
undisclosed income. The Tribunal also upheld the deletion of Rs. 80,000 and Rs.
86,700 by the Commissioner (Appeals).

The Madras High Court dismissed the appeal filed by the
Revenue and held as under:

“i) In case of a block assessment for deciding
any issue against the assessee, the authorities under the Income-tax Act, 1961
have to consider, whether there is any corroborative material evidence. If
there is no corroborating documentary evidence, then the statement recorded
u/s. 132(4) of the Income-tax Act, 1961 alone should not be the basis for
arriving at any adverse decision against the assessee.

ii) On the facts and circumstances of the case, a
mere statement without any corroborative evidence, should not be treated as
conclusive evidence against the maker of the statement. The deletions of
additions by the Tribunal were justified.”

shailesh.kwebmaker

21. Business expenditure – Section 37 – A. Y. 2005-06- Capital or revenue expenditure – Assessee engaged in oil exploration – Expenses on dry dockings of rigs and vessels – is expenditure on maintenance of assets – deductible

CIT
vs. ONGC Ltd; 387 ITR 710 (Uttarakhand):

The assessee was engaged in oil exploration.
For the A. Y. 2005-06, the Assessing Officer disallowed expenditure on dry
docking of its rigs and vessels treating the same as capital expenditure. The
Tribunal allowed the assessee’s claim for deduction. The Tribunal found that
under the Merchant Shipping Act, every floating rig and vessel has to undergo a
compulsory survey at specified intervals in order to determine whether it is
seaworthy and can withstand the safety standards laid out. Under such survey,
the structural and mechanical fitness of a floating installation is tested. The
expenses on dry docking were on account of removing the old paint and
repainting the rigs and vessels, overhauling the propellers, thrusters, gears
and electric motors, repair and replacement/upgrading of the obsolete
equipment. Such expenses were, therefore, only for maintaining and preserving
the existing assets. It was deductible.

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

“The expenditure on dry docking is revenue expenditure and hence
deductible.”

shailesh.kwebmaker

16. [2016] 161 ITD 527 (Pune Trib.) Knox Investments (P.) Ltd. vs. ITO A.Y.: 2007 – 08 Date of order: 26th August, 2016

Section
37(1) – Where assessee, a financial intermediary agent, enters into an
assignment agreement whereby liability of assignor is acquired by assessee at
its NPV, then difference between NPV of the said liability as at end of
relevant financial year and as at end of preceding financial year, till the
repayment of the liability commences, is allowed as finance charges.

FACTS

The assessee-company was engaged in business
of financial intermediary agents and earned income by way of commission and
professional fees and followed mercantile system of accounting.

During the assessment proceedings, the AO
inquired about the nature of payment of Rs.44,71,126/-that the assessee had
debited as finance charges in its profit and loss account.

In response to the same, the assessee
submitted that Indian Seamless Steels and Alloys Ltd. (ISSAL) had availed
interest free sales-tax deferral Certificate of Entitlement from the Government
of Maharashtra under the Package scheme of Incentives,1988. As per the said
scheme, sales-tax liability of each year was required to be paid by ISSAL to
the Sales-Tax Department of Government of Maharashtra in five equal annual
instalments upon expiry of ten years from the date of availment i.e. to say the
sales tax collected for the financial year 1994-95 was required to be repaid in
five equal annual instalments beginning with financial year 2005-06 and so on.

As a part of financing activity, the
assessee vide agreement dated 9^th April 2001, took over
liability of the ISSAL for repayment of sales-tax deferral amounting to Rs.
835.98 lakh (collected by ISAAL for the period 1^st April 2000 to 31^st
March 2001) for a consideration of Rs.
268.79 lakh arrived at @10% NPV based on the repayment schedule. The said loan
was repayable by the assessee to Government in five equal instalments starting from
F.Y. 2011-12 and ending on F.Y.2015-16.

This NPV of liability amounting to Rs.
268.79 lakh as on 31.03.2001, got enhanced to 288.63 lakh as on 31.03.2002 and
the same was shown under the head ‘unsecured loans’ for the first time in the
balance sheet of the assessee as on 31.03.2002. The NPV of liability thus got
increased every year till the repayment would commence in the F.Y. 2011-12 and
the difference in NPV at the end of a particular financial year and the
immediately preceding year was claimed as expenditure under the head ‘finance
charges’ in the P&L account of that year.

Following the same method in this year, the
difference in NPV as on 31.03.2007 and as on 31.03.2006 amounting to Rs.
44,71,126/- was debited to the P&L account for the year under consideration
as expenditure under the head ‘finance charges’ and as it was not actually
paid, the said amount was also added to the existing outstanding liability and
shown under the head ‘unsecured loans’.

The AO was of the view that the amount so
debited was not a revenue expenditure as liability did not exist in praesenti
but was a contingent liability. He thus disallowed the claim of finance
charges.

The Commissioner (Appeals), endorsed the
action of the Assessing Officer.

On appeal before the Tribunal:

HELD

The judicial opinion of the various courts
is that a liability depending upon a contingency is not a debt in praesenti
or in futuro till the contingency happens. But if it is debt, the fact
that the amount has to be ascertained does not make it any less a debt if the
liability is certain and what remains is only a quantification of the amount.
The word ‘contingent’ in contrast, refers to possibility of an obligation or
liability to arise on occurrence or non-occurrence of one or more uncertain
future events.

An accrued
liability is an allowable deduction whereas a contingent liability is not an
allowable deduction for the purposes of determination of taxable income.
Therefore the pertinent question that arises for adjudication is whether,
difference in NPV of the liability at the end of a particular financial year
and the immediately preceding year claimed as expenditure under the head
‘finance charges’ in the P&L account of that year (i.e. Rs. 44,71,126/-
debited to P&L for relevant assessment year under consideration), is an
accrued liability or a contingent liability.

In terms of section 145 of the Income-tax
Act, 1961 read with section 211 of the Companies Act, 1956 – a company has to
mandatorily prepare its account on ‘accrual’ basis. The term ‘Accrual’ has been
defined by the Accounting Standard-1 and by section 145 of the Income-tax Act,
1961 as follows -.

‘Accrual’ refers to the assumptions that
revenues and costs are accrued, that is, recognized as they are earned or
incurred (and not as money is received or paid) and recorded in the final
statements of the periods to which they relate.

The Accounting Standard-1 further provides
that as a matter of prudent accounting policy, provisions should be made for
all known liabilities and losses even though the amount cannot be determined
with certainty and represents only the best estimate in the light of available
information. Under the Mercantile System of Accounting, the expenditure items
for which legal liability has been incurred are immediately debited even before
the amount in question is actually distributed.

In terms of section 28 read with section 145
of the Income Tax Act,1961 income chargeable under the head ‘profit and gains
of business or profession’ cannot be determined unless and until the expenses
or obligations which have been incurred are set-off against the receipts.
Therefore, in order to determine the true profits arising from business, the
expenditure actually incurred or liability in respect thereof accrued even
though it may have to be discharged at some future date has to be necessarily
accounted for.

In the present case, the assessee by virtue
of assignment agreement received certain amount which was to be replenished and
repaid by higher sum computed by applying Net Present Value method at a
discounting factor of 10%. The corresponding finance costs debited to profit
& loss account during the year represents incremental increase in the
liability with the efflux of time where the liability gets accrued as it inches
towards maturity. Thus, it was manifest that the incremental liability had
accrued to the assessee in praesenti with the efflux of time notwithstanding
the fact that increase in the liability was required to be actually discharged
on a future date. The gradual increase in liability is dependent on the time
horizon that has elapsed and therefore not an uncertain event by any stretch of
imagination. The liability has definitely accrued in praesenti against
future outflow of resources and the said liability can be determined with great
reliability.

In result, the appeal of the assessee is
allowed.

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Income Tax Officer vs. Kondal Reddy Mandal Reddy ITAT ‘B’ Bench, Hyderabad Before P. Madhavi Devi (JM) and B. Ramakotaiah (AM) ITA No. 848/Hyd/2015 A.Y.: 2010-11. Date of Order: 13th May, 2016 Counsel for Revenue / Assessee: B.R. Ramesh / K.C. Devdas

Section 50C and 54F – For the purpose of exemption u/s. 54F the consideration determined as per section 50C is to be adopted – For exemption entire investment in new house to be considered irrespective of source of funds
Facts

The issue before the Tribunal was whether the actual sale consideration mentioned in the sale deed or the deemed sale consideration u/s. 50C is to be adopted for allowing the deduction u/s. 54F.

During the assessment proceedings under section 143(3) of the Act, the A.O. observed that the assessee had sold a plot of land for a consideration of Rs.20 lakh as per sale deed while vendees had paid the stamp duty, registration charges etc., on the value of Rs.89.6 lakh. Therefore, he invoked the provisions of section 50C and brought the difference of Rs.69.6 lakh to tax as the capital gains. Against the same, the assessee claimed deduction u/s. 54F qua the investment of Rs.1.37 crore made by him for construction of a residential house. The A.O. however, held that the sale consideration of Rs.20 lakh mentioned in the sale deed alone was eligible for exemption under section 54F and not deemed consideration arrived at by invoking the provisions of section 50C. On appeal, the CIT(A) agreed with the assessee.

Being aggrieved, the revenue appealed before the Tribunal and placed reliance upon two court decisions in support of its contention that the “full value of the sale consideration” as mentioned in Section 54F refers to the “consideration” actually received by the assessee and not the deemed consideration received under section 50C. The cases relied upon were as under
• CIT vs. George Henderson & Co. Ltd. 66 ITR 622 (SC);
• CIT vs. Smt. Nilofer L Singh 309 ITR 233 (Del.)

Held

The Tribunal relied on the decision of the Mumbai tribunal in the case of Raj Babbar vs. ITO (56 SOT 1) and of the Karnataka High Court in the case of Gouli Mahadevappa vs. ITO (356 ITR 90). As held in the said decisions, the Tribunal observed that when the capital gain is assessed on notional basis, the entire amount invested, should get benefit of deduction irrespective of the fact that the funds from other sources were utilised for new residential house. Thus, in the case of the assessee, the sum of Rs. 1.37 crore invested was eligible for benefit u/s 54F and not the sum of Rs. 20 lakh as contended by the revenue. According to the Tribunal, the decision relied upon by the revenue in the case of George Henderson & Co. Ltd. and Nilofer L Singh were distinguishable on facts. Accordingly, the appeal filed by the revenue was dismissed and the order of the CIT(A) was upheld.

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Baberwad Shiksha Samiti vs. CIT (Exemption) ITAT Jaipur Bench Before T. R. Meena (AM) and Laliet Kumar (JM) ITA No. 487/JP/2015 A.Y.: 2010-11. Date of Order: 12th February, 2016 Counsel for Assessee / Revenue: Mahendra Gargieya / D. S. Kothari & Ajay Malik

Section 263 – Where the AO has accepted the claims by the assessee after making proper inquiry, the CIT cannot proceed to revise the order by holding another possible view.
Facts

The assessee, running educational institutes, had filed its return of income on 25.01.2011 declaring nil income. It had claimed exemption under section 10(23) (iiiad) and section 11. The assessment was completed under section 143(3) by the AO at the returned income. According to the CIT (Exemption) the order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons:

a) The assessee had applied for registration u/s 12A on 04.02.2011 and it was not registered u/s 12AA before completion of assessment;

b) The assessee had not included in its gross receipt the sum of Rs. 51.05 lakh received from the State Government on account of students’ scholarship. If the said amount is added to the total receipts declared by the assessee, the gross receipts were more than Rs. 1 crore and thus, the assessee won’t be eligible to claim exemption u/s 10(23)(iiiad);

c) The assessee was not entitled to depreciation of Rs. 7.62 lakh as the capital expenditure incurred by the assessee was already allowed in the year of purchase of assets as application of income;

The assessee claimed that the order passed by the AO was not erroneous and prejudicial to the interest of the revenue for the following reasons:

a) Proviso to section 12A(2) inserted w.e.f. 01.10.2014 provides that where registration has been granted to the trust u/s 12AA, then the provision of section 11 and 12 shall apply in respect of any income derived from the property held under trust of any assessment years for which assessment proceedings are pending before the AO as on the date of such registration. The assessee claimed, since it is a beneficial proviso which is to remove the un-intended hardship, the proviso has a retrospective effect;

b) Scholarship amount was received for disbursement to the students whose names were given by the Government. The assessee cannot retain any part of the scholarship for its benefit and any amount remaining unclaimed has to be returned back to the Government. The assessee was merely acting as a conduit. After examination of this issue the AO had allowed exemption u/s 10(23)(iiiad);

c) The assessee had not claimed any capital expenditure as application of income in as much as in all earlier years, the assessee had claimed exemption u/s 10(23) (iiiad). Even otherwise also, the assessee claimed that u/s 11, both, depreciation as well as capital expenditure are allowable citing several decisions;

However, the CIT(Exemption) did not agree with the assessee and restored the matter back to the AO for making proper enquiry. According to him the benefit under proviso to section 12A(2) inserted w.e.f. 01.10.2014 cannot be given to the assessee who has filed application for registration on 04.02.2011. As regards scholarship – according to him since the assessee had not fully disbursed the scholarship amount by the year end, the said receipt was includible in the gross receipts of the assessee. Thus, according to him, the assessee was not entitled to claim exemption u/s 10(23)(iiiad) as its gross receipt exceeded Rs. 1 crore. As regards depreciation, the CIT(Exemption) relied on the Supreme Court decisions in the cases of Escorts Ltd. vs. Union of India (199 ITR 43) and Lissie Medical Institutions vs. CIT (348 ITR 43) and held that it was a double deduction on the same assets.

Held

The Tribunal noted that before assessing the income of the assessee u/s 143(3 )a detailed questionnaire was issued by the AO and the assessee had furnished requisite details / information / accounts, etc. Thus, according to the Tribunal, the AO had concluded the matter after making detailed inquiry. Further, the Tribunal noted that on the issues raised by the CIT, there are decisions by the courts as well as the ITAT which have decided the matter in favour of the assessee. Thus, according to the Tribunal, the AO had formed one of the views while the CIT (Exemption) had formed another view on same facts and circumstances and therefore, change of opinion was not permissible under the law. Hence, the Tribunal set aside the order of the CIT(Exemption) and allowed the appeal of the assessee.

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[2016] 157 ITD 626 (Delhi Trib.) Chander Shekhar Aggarwal vs. Asst. CIT A.Y. 2011-12. Date of Order:11th January, 2016

Section 199, read with Section 198 and rule 37BA of the Income-tax Rules, 1962 – Clause (ii) of Rule 37BA(3) has no applicability where assessee follows cash system of accounting. Consequently the said assessee, following cash basis, is entitled to credit of entire amount of TDS being offered as income even though the amount in respect of which tax is deducted is not received and therefore not offered as income.

Facts

The assessee was following cash method of accounting. The assessee had declared income of about Rs. 9 crore in the return filed for the relevant assessment year. The assessee had claimed credit of tax deducted at source (TDS) of Rs. 80 lakh.

The AO allowed the credit of TDS of Rs. 71 lakh only and disallowed the credit of balance TDS even though the balance TDS was offered as income by the assessee.

The CIT-(A) upheld the order of the AO. She held that the credit of TDS was to be allowed in terms of rule 37BA(2) and as such, the credit would be allowable on pro rata basis in the year in which the certificate was issued and also in future where balance of such income was found to be assessable as per the mandate of section 199. Any amount which had not been assessed in any year but referred in the TDS certificate could not be claimed u/s. 199.

On second appeal before the Tribunal, the following was held

Held

Sub-section (1) of section 199 provides that any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income tax deduction was made. Also, section 198 provides that all sums deducted in accordance with Chapter XVII-B shall, for the purposes of computing the income of an assessee, be deemed to be income received. The admitted facts of the instant case are that the TDS has been offered as income by the assessee in his return of income.

The tax deducted by the deductor on behalf of the assessee and offered as income by the assessee in his return of income is to be allowed as credit in the year of deduction of tax. Rule 37BA provides that credit for TDS should be allowed in the year in which income is assessable. Further clause (ii) of rule 37BA(3) provides that where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax. This rule is only applicable where entire compensation is received in advance, but the same is not assessable to tax in that year and is assessable in a number of years. However, such rule has no applicability, where assessee follows cash system of accounting.

This can be supported from the illustration that suppose an assessee, who is following cash system of accounting, raises an invoice of Rs. 100 in respect of which deductor deducts tax of Rs. 10 and deposits to the account of the Central Government. Accordingly the assessee would offer an income of Rs. 100 and claim TDS of Rs. 10. However, in the opinion of the revenue, the assessee would not be entitled to credit of the entire TDS of Rs. 10 but would be entitled to proportionate credit only. Now assume that Rs. 90 is never paid to the assessee by the deductor. In such circumstances, Rs. 9 which was deducted as TDS by the deductor would never be available for credit to the assessee though the said sum stands duly deposited to the account of the Central Government.

Rule 37BA(3) cannot be interpreted so as to say that tax deducted by the deductor and deposited to the account of the Central Government is though income of the assessee but is not eligible for credit of TDS in the year when such TDS was offered as income. This view is otherwise also not in accordance with the provisions contained in sections 198 and 199. The proposition as laid out by the Commissioner (Appeals), therefore, cannot be countenanced.

In view of the aforesaid, the assessee would be entitled to credit of the entire TDS offered as income by him in his return of income.

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(2016) 134 DTR 113 (Mum) Sunil Gavaskar vs. ITO A.Ys.: 2001-02 & 2002-03 Date of Order: 16th March, 2016

Section 80RR : Income earned as a cricket commentator by the assessee is income earned from the exercise of profession of sportsman.
Facts

The assessee had received income in the form of foreign remittances, on which deduction was claimed u/s 80RR, in pursuance to an agreement, dated 10th May, 1999 with M/s ESPN Star Sports for rendering services on an exclusive basis as a presenter, reporter and commentator and various other allied services described in the said agreement. The CIT(A) rejected the claim of the assessee on the ground that this deduction is available to a person who is sportsman or a person belonging to any one of the categories as mentioned in the said section and the income must be derived as a result of carrying out that very activity only. But in the case of assessee, since assessee was no more a sportsman or a cricketer and in any case since the impugned income was not earned as a result of playing cricket, and therefore, the assessee was not eligible to claim the deduction u/s 80RR.

Held

Since, the term sportsman has not been defined in the Act and the impugned provisions are beneficial provisions intending to provide the benefits to the public at large, therefore, it would be appropriate to analyse the expression sportsman as is used commonly by the society in generic sense. The Tribunal referred to the meaning of the term sportsman in Wikipedia and from that definition, it noted that the term sportsman may also be used to describe a former player who continues to remain associated and engaged, for the promotion of the related sport activities. The facts of the case are that the assessee has been undoubtedly a cricketer of international stature. It has been shown before the Tribunal that the assessee has been playing cricket matches in India and abroad, even after he had stopped playing tournaments of international and national levels.

Thus, the term sportsman includes not only persons who actively played in the field in the impugned year but also a person who had been actively playing in the field in earlier years and thereafter, he continued to remain associated with the related sport and promoted the same sport, but from outside the field. The Tribunal relied on the fact that in section 80RR, it has been no where mentioned that the sportsman should be the person who is currently playing in the field or the person earning income directly from playing in the field only. Thus, the broader objective of section 80RR is met if the term sportsman is defined in a wider sense, as seems to have been intended by the legislature also. In this backdrop, it can certainly be said that the assessee was a sportsman during the year for the purpose of section 80RR.

Any income derived by the sportsman during the course of his profession which arise out of core activity (i.e. activity of playing in the field), and also other subsidiary & allied activities which are linked to and have nexus with the core activity of the sports, should also be included in the scope of the income eligible for deduction u/s 80RR. The Tribunal proceeded to clarify that any type of income which has remote or no connection with or which is independent of the core activity would not be covered in this section. Further, those activities which go beyond the parameters of profession and take the shape of business activities shall also not fall in the scope of income derived during the course of profession in the context of section 80RR. The

Tribunal concluded that the impugned income had been derived by the assessee in the exercise of his profession as a ‘sportsman’ and allowed the claim of the assessee

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[2016] 69 taxmann.com 122 (Kolkata – Trib.) New Alignment vs. ITO ITA No. 504/Kol/2014 A.Y.: 2010-11 Date of Order: 6th April, 2016

Section 40(a)(ia) – Second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is declaratory and curative in nature, and therefore, should be given retrospective effect from the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act, 2004.

Facts

The assessee firm, engaged in business as civil contractor, paid labour charges amounting to Rs. 1,27,44,615 without deducting tax at source u/s. 194C of the Act. Since the income-tax was not deducted at source, the Assessing Officer (AO) invoked the provisions of section 40(a)(ia) of the Act and disallowed the sum of Rs. 1,27,44,615.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that in view of the amendment to the provisions of section 40(a)(ia) of the Act by insertion of the second proviso, the AO be directed to verify if the payees have declared the receipt from the assessee in their return of income and if they have so declared then the addition u/s. 40(a)(ia) of the Act be deleted by the AO.

Held

The Tribunal having noted the provisions of section 201, second proviso inserted to the section 40(a)(ia) and the justification of the amendment of section 40(a)(ia) as given by the Explanatory Memorandum while introducing the Finance Bill, 2012 observed that the provisions of section 40(a)(ia) of the Act are meant to ensure that the assessees perform their obligation to deduct tax at source in accordance with the provisions of the Act. Such compliance will ensure revenue collection without much hassle. When the object sought to be achieved by those provisions are found to be achieved, it would be unjust to disallow legitimate business expenses of an assessee. Despite collection of taxes due, if disallowance of genuine business expenses is made then that would be unjust enrichment on the part of the Government as the payee would have also paid the taxes on such income. In order to remove this anomaly, this amendment has been introduced. The Tribunal noted that the disallowance is not to be made subject to satisfaction of the conditions mentioned in the second proviso.

Keeping in view the purpose behind the introduction of the second proviso, the Tribunal held that the second proviso can be said to be declaratory and curative in nature and therefore, should be given retrospective effect from 1st April, 2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004. The Tribunal also observed that the Delhi High Court has in the case of CIT vs. Ansal Land Mark Township (P.) Ltd. [2015] 61 taxmann.com 45 has taken a view that the insertion of the second proviso to section 40(a)(ia) of the Act is retrospective and will apply from 1.4.2005.

The alternative prayer made on behalf of the assessee to remain the issue to the AO for verification as to whether payees have included the receipts from the assessee in their returns of income in terms of the decision referred to above was accepted.

This ground of the appeal filed by the assessee was allowed.

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[2016] 69 taxmann.com 244 (Pune – Trib.) Cooper Corporation (P.) Ltd. vs. DCIT A.Y.: 2008-09 Date of order: 29th April, 2016

Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view to save interest costs, is an allowable revenue expenditure.to save interest costs, is an allowable revenue expenditure.

Facts

The assessee company was engaged in foundry business, manufacturing cylinder liners/heads, flywheels and other automobile components, etc. The assessee had in earlier years taken loans from Corporation Bank, IDBI Bank and Bank of Maharashtra in Indian currency for the purposes of acquisition of fixed assets and windmills, etc. which were purchased in India. These loans were bearing interest @ 12% to 14% p.a. In order to save on interest costs, these term loans were converted over a period of years into foreign exchange loans where interest rate was chargeable from 6% to 7% p.a.

In the return of income the assessee had claimed a deduction of Rs. 1,39,98,945 on account of devaluation of Indian currency qua foreign currency on outstanding foreign currency loans u/s. 37(1) of the Act. The Assessing Officer (AO) disallowed this sum of Rs. 1,39,98,945 on the ground that it was merely a notional loss and not an actual loss incurred by the assessee. The AO further observed that even presuming that increased liability for repayment of foreign currency loans have been saddled on the assessee, still the same will be capital in nature since the impugned loans were obtained for acquiring capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who granted partial relief of Rs. 37,92,087 on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items like bill discounting, debtors, etc. Foreign exchange fluctuation loss in respect of loan taken for purpose of acquiring capital assets was not allowed as a deduction.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that – (i) the assessee entered into the agreement with lenders to convert the loan in foreign currency to gain advantage of savings in interest; (ii) there is no dispute that the acquisition of capital assets / expansion of projects, etc from the term loans taken are already complete and the assets so acquired have been put to use; (iii) there is no adverse finding from the Revenue about the correctness of accounts or the assessee on the touchstone of section 145 of the Act – in other words, the profits / gains from the business have admittedly been computed in accordance with the generally accepted accounting practices and guidelines notified; (iv) loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. The Tribunal observed that the assessee had applied Accounting Standard-11 which it was mandatorily required to follow. It also noted that the provisions of section 43A would not apply since the assets were not acquired from out of India.

The Tribunal held that in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the assessee in accordance with the generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. In the light of the fact that conversion in foreign currency loans which led to impugned loss, were dictated by revenue consideration towards saving interest costs, etc., the Tribunal stated that it had no hesitation in coming to the conclusion that loss being on revenue account was an allowable expenditure u/s. 37(1) of the Act.

This ground of appeal filed by the assessee was allowed.

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The Commissioner of Income Tax I, Pune vs. Gera Developments Private Limited, Pune. [INCOME TAX APPEAL NO. 2171 OF 2013 dt 29/2/2016 Bombay High court.]

[Gera Developments Private Limited, Pune vs. CIT -I, Pune . ITA No. 33/PN/2012 ; Bench : A ; dated 08/03/2013 ; A Y: 2007- 2008. Pune ITAT ]

Revision – Erroneous and Prejudicial to the Revenue – Application of mind is important – No discussion in asst order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind : Section 263

The assessee filed its return of income declaring total income of Rs.19.97 crore. Amongst the issues which arose for consideration during the assessment proceedings were:

i) whether the consideration of Rs.41 Crore received on transfer of development right is to be taxed in the subject assessment year or not;

ii) whether an amount of Rs.68.24 lakh should be allowed as warranty expenses.

The Assessing Officer on issue of transfer of development right held that the amount of Rs. 41 crore received by the assessee was subject to performance of certain obligation relating to environmental clearance and in the absence of performing the obligation, the amounts had to be returned. On consideration of facts, the Assessing Officer held that an amount of Rs. 5.86 crore could alone be taxed in the subject assessment year and the balance amount of Rs. 35.14 crore were considered as deposit. So far as the warranty expenses are concerned, the Assessing Officer called for various details and justification for claiming warranty expenses. The assessee to this by filing a reply and on satisfaction, the Assessing Officer allowed the warranty expenses as claimed in the assessment order.

The CIT in exercise of his power u/s. 263 of the Act, held that the conclusion of the Assessing Officer on the above 2 issues namely transfer of development right and warranty expenses is erroneous and prejudicial to the interest of the Revenue. Moreover, the Commissioner also held that set off of short term capital loss without taking into account Section 94 of the Act was also erroneous and prejudicial to the interest of the Revenue. The CIT directed the Assessing Officer to complete the assessment proceedings in accordance with law as discussed in his order.

Being aggrieved, the assessee appealed to ITAT . The grievance of the assessee was that the asst order of the Assessing Officer was not erroneous nor prejudicial to the interest of the Revenue on the following three issues.

(a) Consideration received as transfer of Development Right.

(b) Warranty expenses and

So far as issue (a) above is concerned the Assessment Order, on consideration of all facts, records the conclusion that out of an amount of Rs.41 crore received, an amount of Rs.35.14 crore was in the nature of deposit as the receipt was subject to environmental clearance. Only Rs. 5.86 crore could be treated as income for the subject assessment year. In view of above, the ITAT held that asst. order cannot be treated as erroneous. So far as the issue (b) above with regard to warranty expenses is concerned, the ITAT held that the questions were posed during the assessment proceedings to the assessee. The same were responded to by the assessee justifying the warranty expenses claimed. On satisfaction, the Assessing Officer accepted the claim of expenditure made by assessee. Thus a view was taken that it cannot be said to erroneous.

So far as issue (c) above with regard to the set off of the short term capital loss is concerned, the ITAT upheld the order dated 31/10/2011 of the Commissioner of Income Tax holding the same is erroneous and prejudicial to the Revenue. The Revenue being aggrieved by the order of the ITAT insofar as it set aside the order dated 31/10/2011 of the Commissioner of Income Tax i.e. on issues (a) and (b) above viz. taxability of consideration received on transfer of development right and allowing of warranty expenses.

The Hon’ble Court observed with regard to issue (a) i.e. taxability of the transfer of development right, that the ITAT records findings of Assessing Officer in detail from which it is evident that the Assessing Officer applied his mind to the above claim and on the basis of the facts before him, came to the conclusion that an amount of Rs.5.86 crore out of Rs. 41 crore received could alone be subjected to the tax as income during the subject assessment year. The balance amount Rs.35.14 crore has to be treated as deposit as the same is subject to being refunded in the absence of the environmental clearance. Thus, the Assessing Officer has taken a view/formed an opinion on the facts before him and such a opinion cannot be said to be an erroneousas it does not proceed on the incorrect assumption of facts or law and the view taken is a possible view. Therefore, as held by the Apex Court in Malabar Industrial Co. Ltd vs. Commissioner of Income Tax, 243 ITR page 83 where two views are possible and the Income Tax Officer has taken one view with which the Commissioner of the Income Tax does not agree, cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is itself unsustainable in law.

So far as issue (b) i.e. warranty expenses claimed by the assessee is concerned, the court observed that the ITAT has recorded the fact that a specific query with regard to the same was made by the Assessing Officer during the assessment proceedings. This query was responded to by the assessee justifying the warranty expenses. The Assessing Officer being satisfied with regard to the justification offered, allowed the claim of warranty expenses as made by the assessee. It was thus clear that the Assessing Officer had considered the issue by raising questions during the assessment proceedings. The mere fact that it does not fall for discussion in the assessment order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind. It is clear that if the Assessing Officer is satisfied with the response of the assessee on the issue and drops the likely addition, it cannot be said to be non application of mind to the issue arising before the Assessing Officer. In fact this issue was a subject matter of the consideration by the Court in the Commissioner of Income Tax 8 V/s. M/s. Fine Jewellery (India) Ltd., Income Tax Appeal No. 296 of 2013 dt 03rd February, 2015. Thus to hold that if a query is raised during the assessment proceedings and responded to by the assessee, the mere fact that it has not been dealt with in the assessment order would not lead to a conclusion that the Assessing Officer has not applied his mind to the issues.

Thus on the issues (a) and (b) viz. consideration received on transfer of development right and warranty expenses are concerned, the impugned order of the ITAT has applied the principle of law laid down in Malabar Industrial Co. Ltd (supra) and M/s. Fine Jewellery (India) Ltd. (supra). Thus, appeal is dismissed.

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D. H. Patkar & Co. vs. ITO ITAT “D” Bench, Mumbai Before B.R.Baskaran (AM) and Ramlal Negi, (JM) I.T.A. No.: 4524/Mum/2013 A.Y.:2009-10. Date of Order: 18th March, 2016. Counsel for Assessee / Revenue: Jignesh R. Shah / B. S. Bist

Explanation u/s. 37(1) – Payment of speed money to dock workers are not bribes or prohibited under the law hence cannot be disallowed.

Facts
The assessee, a partnership firm, was engaged in clearing and forwarding agency business. During the year it paid the sum of Rs. 34.6 lakh as speed money to the dock workers on behalf of its clients. The AO took the view that these payments are in the nature of bribes and hence the same cannot be allowed as deduction as per the Explanation given u/s. 37(1) of the Act. The CIT(A) also confirmed the order of the AO.

Before the Tribunal, the assessee submitted that these expenses have been incurred on behalf of its clients and in support produced the copies of bills raised upon its clients. It was further submitted that the assessee was constrained to incur these expenses upon the instructions of its clients in order to get their job of loading and unloading done quickly. The payment was also justified on the ground that it was a prevailing practice to incentivise the dock workers by paying some extra charges to get the job done quickly. He submitted that these kinds of payments are not prohibited by law and hence the tax authorities are not justified in invoking the Explanation to section 37(1) of the Act to disallow the claim of the assessee.

Held
According to the Tribunal, the impugned disallowance merits deletion for the following reasons:

these payments have been made by the assessee on behalf of its clients and hence the same does not constitute its own expenditure;

even though the assessee has routed the expenditure and reimbursement received from its clients through the Profit and loss account, yet it is settled principle that the books of accounts of the assessee cannot be the sole determinative factor to decide about the nature of expenditure;

the AO has invoked the provisions of Explanation to section 37(1), but he has not cited the relevant law, which prohibits such kind of payments;

the assessee’s claim that it was paid to the workers has not been disproved.

Therefore, the Tribunal set aside the order of the AO and directed him to delete the disallowance.

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Director of Income Tax(IT)-I vs. M/s Credit Lyonnais [Income Tax Appeal No.2120 of 2013 dt 22/2/2016; Bombay High Court.]

[M/s.Credit Lyonnais (through their successors : Calyon Bank) vs. The Asstt. Director of Income-tax (IT ) – 1(2) Mumbai. ITA no. 9596/Mum/2004 & 214/ Mum/2005: Asst.Year 2001-2002]

TDS – Sub arranger fees and commission paid to non resident – nature of commission / brokerage – Circular No.786 dated 7th February 2000 – Not liable to deduct TDS u/s. 195 :

Amortization of expenditure – Entries in books of account are not determinative or conclusive :

During the A Y: 2001-02, the Assessee was appointed by State Bank of India (SBI) as an arranger for mobilizing deposits in its India Millennium Deposits Scheme (IMDS). In turn, Assessee was entitled to appoint sub-arrangers for mobilizing IMDs both inside and outside India. The assessee explained that it mobilized deposits worth Rs.1235.8 crore and SBI accordingly provided it a long term deposit of Rs.617.9 crore for a period of 5 years. Besides, the assessee received a sum of Rs.22.19 crore from SBI as arranger fees and commission. It in turn paid an amount of Rs.37.07 crore to the sub-arrangers by way of sub-arranger fees and commission. An amount of Rs.26.75 crore out of Rs.37.07 crore was paid by way of sub-arranger fees and commission to non-residents. However, the assessee had failed to deduct tax at source on Rs.26.75 crore paid to non-residents as sub-arranger fees and commission. Therefore, the Assessing Officer invoked section 40(a)(i) of the Act for failing to deduct tax u/s. 195 to disallow the expenditure on the ground that this payment to non-resident sub-arranger was in the nature of fees for technical services u/s. 9(1)(vii) of the Act.

In Appeal, the CIT(A) held that the amount paid to the nonresident sub-arranger was in the nature of commission / brokerage and not fees for technical services in terms of section 9(1)(vii) of the Act.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal. The Tribunal by relying upon the Circular No.786 dated 7th February, 2000 held that the amount paid to the non-resident sub-arrangers is in the nature of commission / brokerage and was not chargeable to tax in their hands. Consequently section 195 of the Act would have no application, thus upheld the deletion of the disallowance u/s. 40(a)(i) of the Act passed by the CIT(A).

The Tribunal further analyzed the nature of services being rendered by the sub-arrangers to the assessee and in the context of section 9(1)(vii) of the Act viz. whether these services are managerial, technical and consultancy services. whether these services are managerial, technical and consultancy services. The services could not be sort technical. So far as the managerial services are concerned, the impugned order relied on the decision of the Apex Court in the case of R. Dalmia vs. CIT, New Delhi, 106 ITR 895 wherein the Apex Court has held that the words “person concerned in the management of the business” would mean a person not only directly participates or engages in the management of the business but also one who indirectly controls its management through the managerial staff, from behind the scenes. Management includes the act of managing by direction, or regulation or administration or control or superintendence of the business. In the present case, the Tribunal, on examination of the services rendered by the sub-arrangers to the assessee concluded that the services rendered in obtaining deposits of IMD Scheme could not be considered to be management services. In the above view, the Tribunal upheld the order of the CIT(A) and held that there could be no application of provisions of section 40(a)(i) read with section 195 of the Act in the present facts

The Revenue filed an appeal before the High Court challenging the order of ITAT . The Hon’ble court observed that section 195 of the Act obliges a person responsible for paying to non-resident any sum chargeable to tax under the Act, to deduct tax at the time of payment or at the time of credit to such non-resident. In terms of section 5 of the Act, a non-resident is chargeable to tax received or deemed to be received in India or accrued or arising in India. Section 9 of the Act describes income which is deemed to accrue or arise in India. The impugned order examined the nature of fees in the context of section 9(1) (vii) of the Act to hold that it is not a technical service as defined therein. This view of the Tribunal in the context of the services being rendered by the sub-arrangers is a factual determination and is a possible view, not shown to be perverse or arbitrary. Moreover, the services are admittedly rendered by the non-resident sub-arrangers outside India. In such a case, there is no occasion for any income accruing or arising to the non-resident in India. The services of the non-resident sub-arrangers of attracting deposit to IMDS Scheme is carried out entirely outside India. As held by the Apex Court in the case of CIT, A.P. vs. Toshoku Ltd., 125 ITR 525, no income can be said to accrue or arise in India where payment is made for service by non-resident outside India. The CBDT had issued a Circular No.786 of 2000 dated 7th February 2000 reiterating the view of the Apex Court in Toshoku Ltd.’s case (supra). In the above view, as no income has accrued or arisen to the non-resident sub-arrangers in India, the question of deduction of tax u/s. 195 of the Act will not arise. Question of law raised on this issue was accordingly dismissed.

The other question of law raised was in regards to amortization of expenditure . Assessee received a sum of Rs.22.19 crore as fees and commission from SBI for services rendered as arranger. The Assessee had in turn paid an amount of Rs.37.07 crore by way of sub-arranger fes and commission to the subarrangers appointed. In the above view, the Assessee claimed as expenditure an amount of Rs.14.87 crore to determine its taxable income for the subject Assessment Year. However, in its books of account, the Assessee amortized the above expenditure of Rs.14.87 crore over a period of five years and for the subject A Y, only debited Rs.99.16 lakh to its profit and loss account. The Assessing Officer did not dispute that expenditure had been incurred for business purposes. However, in his assessment order it was held that the expenditure of Rs.14.87 crore had been amortized over a period of five years in the books of account i.e. in line thereto, a deduction only to the extent of Rs.99.16 lakh was allowable in the subject Assessment Year.

Being aggrieved, the Assessee carried the issue in appeal to the CIT(A). The CIT(A) upheld the order of the Assessing Officer . Being aggrieved, the Assessee carried the issue in Appeal to the Tribunal. The Tribunal, considered the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. v/s. CIT, 225 ITR 802 and earlier decision of the Supreme Court in the case of India Cements Ltd. vs. CIT, 60 ITR 52 to conclude that the expenditure incurred by making payment to sub-arrangers was the amounts spent in collecting deposits under the IMD Scheme and it was deductible in its entirety in the year of expenditure.

The Hon’ble court observed that the issue is no longer res integra in view of the decision of the Apex Court in Taparia Tools Ltd. vs. Joint CIT, 372 ITR 605 (SC). In the aforesaid case, the issue for consideration was whether the liability to pay interest is allowable as deduction in the first year itself or it be spread over for a period of five years. The High Court had on application of the principle of matching concept upheld the view of the Assessing Officer to spread the interest paid in the very first year over a period of five years because the term of the debt was five years and the Assessee therein had itself in its books of account amortized the interest over a period of five years. In Appeal, the Apex Court while reversing the decision of High Court held that normally the ordinary rule is that the Revenue expenditure incurred in a particular year is to be allowed in the year of expenditure and the Revenue cannot deny a claim for entire expenditure as deduction made by the Assessee. However, the apex Court also held that in case the expenditure is shown over a number of years and so claimed while determining its income, then it would open to Revenue only on the principles of matching concept to deal with the submission as the Assessee. It is not so in this case. The Apex Court held that once the return has been filed making a particular claim, then the Assessing Officer was bound to carry out assessment by applying provisions of the Act and he could not go beyond the return. The Apex Court made reference to the decision in the case of Kedarnath Jute Manufacturing Co.Ltd. vs. CIT, 82 ITR 363 to hold that entries in books of account are not determinative or conclusive for the purpose of determining whether or not a particular income is chargeable to tax under the Act. This had to be determined only on the basis of the provisions contained in the Act. In this case, in its return of income the Assessee had claimed the entire expenditure of Rs.14.87 crores in the subject assessment year. The expenditure was to be allowed.

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The Commissioner of Income-Tax-3 vs. M/s. Parrys (Eastern) Pvt Ltd [Income Tax Appeal No. 2220 OF 2013; dt 18/2/2016 (Bombay High court )]

(The IT O 3(2)(4), vs. Parrys (Eastern) P.Ltd. I.T.A. No. 26/Mum/2011; Bench: C ; A Y: 2005-06 ; dt : 13.2.2013)

Capital gain -Deeming fiction u/s 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 of the Act.

The assessee had disclosed an amount of Rs.7.12 crore as deemed short term capital gain u/s. 50 of the Act. This deemed short term capital gain arose on account of the sale of depreciable assets. This deemed short term capital gain was set off against brought forward long term capital losses and unabsorbed depreciation. The Assessing Officer passed an order u /s 143(3) of the Act holding that in view of section 74 of the Act, such set off on short term capital gain against the long term capital gain is not permitted. Thus, he disallowed the set off of brought forward long term capital loss and unabsorbed depreciation against the deemed short term capital.

In appeal, the CIT[A] allowed the assessee’s appeal holding that the issue stand concluded by the decision of High Court in the case of CIT vs. ACE Builders(P) Ltd reported in 281 ITR 210(Bom).

On further appeal by the Revenue, the Tribunal by the impugned order upheld the order passed by the CIT(A) by placing reliance upon the decision of this Court in the case of ACE Builders(P) Ltd(supra) and by following its own order in the case of Komac Investments and Finance Pvt Ltd vs. Income Tax Officer 132 ITD 290. On further appeal the Revenue contended that in view of the clear mandate of Section 74 of the Act, no set off of the carry forward long term capital loss against the deemed short term capital gain u/s. 50 of the Act is permissible..

The Hon. High Court, observed that the issue stands concluded by the decision of this Court in ACE Builders(P) Ltd (supra) in favour of the Assessee. The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the Act. Thus, the assessee was entitled to claim set off as the amount of Rs.7.12 Crore arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain continues to be long term capital gain. It was also observed that the Revenue has accepted the decision the Tribunal in Komac Investments and Finance Pvt Ltd (supra), as no information was provided as to whether any appeal being filed from that order. Therefore, no substantial questions of law arise for consideration , Appeal was dismissed.

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TDS: DTAA- Business expenditure- Disallowance u/s. 40(a)(i)- A. Y. 2001-02- Assessee paid administrative fee to its US-AE- Assessing Officer disallowed same for not deducting TDS- As condition of TDS-deduction was only applicable on payment to non-resident and not applicable on payment to resident for relevant period, it created discrimination- consequently, assessee would get benefit of DTAA and, therefore, action of Assessing Officer was not justified-

CIT vs. Herbalife International India (P.) Ltd.; [2016] 69 taxmann.com 205 (Delhi)

Assessee paid administrative fee to its US-AE for availing various services like data processing services, accounting, financial and planning services etc. In the A. Y. 2001-02, the Assessing Officer disallowed said payment on ground that said payment was fee for technical service warranting deduction of TDS which assessee did not deduct. 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) A rticle 26(3) of India-USA DTAA states that for the purpose of determining the taxable profits of a resident of a contracting state (India), the payment of interest, royalty and other disbursements paid to resident of other contracting state (USA) shall be deductible under the same conditions that apply to such payment being made to a resident of India. The expression other disbursements occurring in said article 26(3) is wide enough to encompass the administrative fee paid by the assessee to its US-AE.

ii) Section 40(a)(i), as it was during the assessment year in question i.e. 2001-02, did not provide for deduction of TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of clause (ia) to section 40(a) with effect from 1st April 2005.

iii) A s far as payment to a non-resident is concerned, section 40(a)(i) as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of section 40 (a)(i) as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under article 26(3). The object of article 26(3) was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua nonresident by requiring the TDS to be deducted while making payment of FTS.

iv) As per section 90(2), the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

v) In view of above, it is held that section 40(a)(i) is discriminatory and, therefore, not applicable in terms of article 26(3) of the Indo-US DTAA . Consequently, the administrative fee paid by the assessee to its AE is allowed.”

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TDS: Business expenditure- Disallowance u/s. 40(a)(i)- A. Ys. 2007-08 and 2008-09- Payment of commission to non-resident agent- Commission not income deemed to accrue or arise in India- Tax need not be deducted at source- Disallowance of expenditure u/s. 40(a)(i) not justified-

CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

In the A. Ys. 2007-08 and 2008-09, the assessee had made payment of commission to non-resident agents in respect of sales made outside India. The Assessing Officer disallowed the claim for deduction u/s. 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source. The basis of disallowance was that Circular No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non-resident agent for sale does not give rise to income chargeable to tax in India had been withdrawn by Circular No. 7 dated 22/10/2009. The Tribunal allowed the assesee’s claim and held that the provisions of section 40(a)(i) would have no application for the two assessment years under consideration. On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The circular of 1969 was admittedly in force during the two assessment years. It was only subsequently i.e. on 22/10/2009 that the circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier circular cannot have retrospective operation.

ii) Hence no tax was deductible at source and no disallowance of expenditure could be made u/s. 40(a)(i).”

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Housing Project- Deduction u/s. 80-IB(10) – A. Y. 2010-11- Two flats in project exceeding specified dimension- Assessee entitled to deduction in respect of other flats not exceeding specified dimension-

CIT vs. Elegant Estates; 383 ITR 49 (Mad);

In the A. Y. 2010-11, the assessee had claimed deduction u/s. 80-IB(10) of the Act in respect of the housing project. The Assessing Officer found that the assessee had built two flats measuring 1572 sq. ft. and 1653 sq. ft. respectively. Therefore he disallowed the entire claim for deduction. The Tribunal held that the assessee would be disqualified for the deduction proportionately, only in respect of the two flats of area exceeding 1500 sq. ft. but would be entitled to deduction in respect of the other flats which measured less than 1500 sq. ft.

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

“i) The language used in section 80-IB(10) does not bar a deduction claim altogether if some of the units sold exceed the specified dimensions.

ii) The Tribunal was right in holding that the assessee was entitled to deduction u/s. 80-IB(10) with respect to income from flats measuring less than 1500 sq. ft. limit and would not be entitled to deduction with respect to the income from the two flats exceeding the limit of 1500 sq. ft. when the assessee had considered all the flats as forming part of a single project on interpretation of the provisions of section 80-IB(10)(c).

iii) The order passed by the Appellate Tribunal was correct in the eye of law and the contentions raised on behalf of the Department could not be countenanced.”

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Tea Development allowance- Section 33AB- A. Y. 2000-01- Composite income: Deduction to be allowed from total composite income derived from growing and manufacturing tea- Rule 8 shall apply thereafter to apportion resultant income-

Singlo (India) Tea Ltd. vs. CIT; 382 ITR 537 (Cal):

The assessee company was engaged in the business of growing, manufacturing and selling tea. In the A. Y. 2000-01, the assessee had claimed deduction of tea development allowance u/s. 33AB of the Act at the rate of 20% on the composite income of Rs. 25,54,855/-. The Assessing Officer held that the deduction u/s. 33AB has to be allowed only from the non-agricultural component of the composite income determined under rule 8. The Tribunal upheld the decision of the Assessing Officer.

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

“The deduction u/s. 33AB is to be allowed from the total composite income derived from growing and manufacturing tea and only after such deduction is made, shall rule 8(1) be applied to apportion the resultant income into 60% agricultural income, not taxable under the Act and balance 40% taxable under the Act.”

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Charitable purpose- S/s. 2(15), 12A of I. T. Act 1961- A. Y. 2009-10- Premises let for running educational institutions- Auditorium let out to outsiders for commercial purpose- Incidental to principal object of promotion of educational activities- Will not fall in category of “advancement of any other object of general public utility” in section 2(15)- Cancellation of registration not justified-

DIT vs. Lala Lajpatrai Memorial Trust; 383 ITR 345 (Bom)

The assessee is a charitable trust with the object of “advancement of education” and was registered u/s. 12A of the Income-tax Act, 1961. The main object of the trust was promotion of education. The assessee trust owned a plot of land having a building consisting of an auditorium on the ground floor and class rooms from second to seventh floors. This building was let out to an educational institute which conducts junior college, senior college, law college, etc., and sixth and seventh floors were let out to run a management institute. The assesee claimed exemption of the income received by it from letting out the premises. A show cause notice was issued calling upon the assessee to explain why the rents received should not be treated as falling under the category of “any other object of general public utility” attracting the first proviso to section 2(15) of the Act. The assessee trust claimed that the object of its establishment was “advancement of education” which fell within the definition of charitable purpose as defined u/s. 2(15) of the Act. The assessee relied on Circular No. 11 of 2008 dated 19/12/2008 contending that the first proviso to section 2(15) would not be attracted to its case. The Director of Income-tax withdrew the registration of the assessee. The Appellate Tribunal set aside the order withdrawing the registration.

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

“i) The letting out of the premises was in consonance with the objects of the trust which was to conduct colleges and schools and achieve advancement of education.

ii) Admittedly, the premises were let out on a nominal rent. The Director of Income-tax had overlooked that the principal purpose for which the premises was let out was for conducting educational activity. There was no material before the authority to show that the sixth and seventh floors were used for any other purpose which was not an educational purpose. The service charges received in respect of the sixth and seventh floors were on account of educational purpose.

iii) Letting out of the auditorium was not the dominant object of the assessee and admittedly, the auditorium was incidentally let out to outsiders for commercial purposes. Letting out was incidental and not the principal activity of the assesee. The first proviso to section 2(15) would not be attracted. In the course of letting out, the assessee had incurred expenses for electricity and air conditioners.

iv) Under these circumstances, separate books of account could not be insisted upon as the activity became part and parcel of the educational activities carried out by the assessee and the benefit of exemption u/s. 11(4A) could not be denied. There was no fault with the order passed by the Appellate tribunal.”

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Capital gains- Transfer- S/s. 45(1), (4) – A. Y. 1992- 93- Conversion of firm to company- Takeover of business of firm with assets by private limited company with same partners as shareholders in same proportion: Subsequent revaluation of assets- No dissolution of partnership- No consideration accrued or received on transfer of assets: Transaction not transfer giving rise to capital gains-

CADD Centre vs. ACIT; 383 ITR 258 (Mad)

The assessee was a firm with two partners having equal shares. A private limited company was formed on 21/11/1991 and took over the business of the firm and its assets. The assets were revalued on 30/11/1991. The partners immediately before succession became the shareholders in the same proportion as in the capital account of the firm on the date of succession. For the A. Y. 1992-93, the Assessing Officer concluded that the transfer of the business assets of the firm to the company constituted distribution of assets which gave rise to capital gains taxable u/s. 45(4) of the Income-tax Act, 1961. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) When firm is transformed into a company, there is no distribution of assets and no transfer of capital assets as contemplated by section 45(1) of the Income-tax Act, 1961.

ii) There is no authority for the proposition that even in cases where the subsisting partners of a firm transfer assets to a company, there would be a transfer, covered under the expression “or otherwise in section 45(4). When a firm is transformed into a company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence there is no liability to pay tax on capital gains.

iii) There was no transfer of assets because
(a) no consideration was received or accrued on transfer of assets from the firm to the company,
(b) the firm had only revalued its assets which did not amount to transfer,
(c) the provision of section 45(4) of the Act, was applicable only when the firm was dissolved. The vesting of the property in the company was not consequent or incidental to a transfer.”

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Appeal to High Court- Section 260A- Competency of appeal- Decision of Tribunal following earlier decision- No appeal from earlier decision- No affidavit explaining reasons: Appeal not competent-

CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

Dealing with the competency of the Appeal before the High Court u/s. 160A of the Income-tax Act, 1961, the Bombay High Court held as under:

“i) Where the issue in controversy stands settled by decisions of High Courts or the Tribunal in any other case and the Department has accepted that decision the Department ought not to agitate the issue further unless there is some cogent justification such as change in law or some later decision of a higher forum.

ii) In such cases appropriately the appeal memo itself must specify the reason for preferring an appeal failing which at least before admission the officer concerned should file an affidavit pointing out the reasons for filing the appeal. It is only when the court is satisfied with the reasons given, that the merits of the issue need be examined of purposes of admission.”

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Appeal to Appellate Tribunal- No appearance by assessee’s counsel on date of hearing due to death in family- Refusal by Tribunal to grant adjournment and matter decided on merits: Violation of principles of natural justice- Order of Tribunal quashed and direction to decide matter on merits after hearing parties-

Zuari Global Ltd. vs. Princ. CIT; 383 ITR 171(Bom):

In an appeal before the Tribunal filed by the assessee, the assessee’s counsel could not appear on the date of hearing owing to a death in his family. The Tribunal refused to grant an adjournment and proceeded to decide the matter on merits. On appeal by the assessee, the Bombay High Court set aside the decision of the Tribunal and held as under:

“i) Considering that the assessee was not unnecessarily delaying the matter and as on the relevant date there was justifiable reason which prevented counsel for the assessee from being present before the Tribunal, the Tribunal was not justified to refuse an adjournment. Failure to grant a short adjournment has resulted in passing the order in breach of the principle of natural justice.

ii) The order of the Tribunal is quashed and set aside. The tribunal is directed to decide the appeals afresh after hearing the parties in accordance with law.”

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Business Expenditure – Provision for interest in terms of compromise agreement with bank is an ascertained liability.

CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

The assessee filed a return for the assessment year 1995- 96 on Novembr 24, 1995, declaring a loss of Rs.57,99,781. During the course of the assessment proceedings, the Assessing Officer specifically required the assessee to show cause why the provision of interest of Rs.49.23 lakh should not be disallowed as the provision amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax (Appeals). The view taken by the Assessing Officer as well as the Commissioner of Income Tax (Appeals), was set aside by the Income-tax Appellate Tribunal upon appeal by the assessee.

The Tribunal held that the assessee had provided interest liability only at the rate of 10 per cent which was as per the compromise agreement with the bank and not as per the original terms and conditions of loan. Therefore, it could not be treated to be a contingent liability, rather it was an ascertained liability. According to the Tribunal the assessee could not be penalized for claiming less interest liability.

The High Court dismissed the appeal of the Revenue holding that it was not an unilateral act on the part of the assessee but was a bilateral consented action on behalf of the parties which was of binding in terms of the agreement and as such it could not be termed as an unascertained liability.

On further appeal by the Revenue to the Supreme Court it was held that the matter was covered against the Revenue by the judgment of the Supreme Court in Taparia Ltd. vs. Joint CIT [2015] 372 ITR 605 (SC).

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Export – Special Deduction – Computation of deduction u/s. 80HHC – 90% of the net commission (and not gross) has to be reduced from the profits of the business for determining deduction under section 80HHC.

Veejay Marketing vs. CIT [2016] 382 ITR 395 (SC)

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s. 143(3) of the Act, the Assessing Officer found that the assessee had reduced 90 per cent of the net commission while working out the profits of business under the Explanation (baa) to section 80HHC of the Act.

The Assessing Officer held that 90 per cent of gross commission receipts had to be deducted from the profits of the business and accordingly, allowed deductions under section 80HHC for the said assessment years on that basis.

Aggrieved against the said orders of the Assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The Appellate authority held that only 90 per cent of the net commission had to be deducted from the profit of the business and accordingly, directed the Assessing Officer to redo the exercise.

Against the said orders of the Commissioner of Income Tax (Appeals), the Revenue preferred appeals before the Income-tax Appellate Tribunal.

The Income-tax Appellate Tribunal, by following the decision of the Income-tax Appellate Tribunal, Delhi Bench ‘E’ (Special Bench) in Lalsons Enterprises vs. Deputy CIT [2004] 89 ITD 25 (Delhi) [SB], held that only 90 per cent of the net commission had to be reduced from the profit of the business for determining deduction under section 80HHC of the Act.

Against the said order of the Tribunal, the Revenue filed the appeals before the High Court.

By following the ratio laid down in the CIT vs. Chinnapandi [2006] 282 ITR 389 (Mad), in which it was held that 90% of the gross interest had to be reduced from the profits of the business for determining deduction under section 80HHC, the High Court held that the reasons given by the Tribunal in the impugned order were not sustainable. Accordingly, the order of the Tribunal was set aside.

On appeal to the Supreme Court, it was held that these cases were covered by the decision in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd.) vs. CIT [2012] 343 ITR 89 (SC). Accordingly, the issue arising in the appeal was answered in favour of the assessee and against the Revenue. The Supreme Court allowed the appeals and the order of the High Court was set aside and the matter was remanded to the Assessing Officer for a fresh consideration.,

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Refund –When an amount though found refundable to the assessee is utilised by the Department, interest is payable u/s. 244(1A) for the period of such utilization.

CIT v. Jyotsna Holding P. Ltd. [2016] 382 ITR 451 (SC)

The
Supreme Court took note of the facts in respect of the assessment year 1987-88
(similar fact situation appeared in respects of all three assessment years viz.
1985-86, 1986-87 and 1987-88.) For the assessment year 1987- 88, the respondent
filed its return on the basis of self tax assessment made by it and paid a sum
of Rs.3,23,68,834 on September 12, 1987. The assessment was made u/s. 143(3) by
the assessing authority on March 28, 1988, as per which an amount of
Rs.2,03,29,841 was found refunable to the respondent/assessee. Instead of
immediate refund of this amount, the assessing authority ordered that the same
would be adjusted against the demand for the year 1986-87. It was ultimately
adjusted on July 25, 1991. The question that arose, in these circumstances, was
as to whether the assessee would be entitled to interest on the aforesaid
amount which was kept by the Revenue for the period from March 28, 1988 to July
25, 1991. The assessee claimed the interest, which request was rejected by
Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed
the appeal of the assessee against the order of the Assessing Officer by
invoking the provisions of section 244(1A) of the Income-tax Act and held that
the interest was payable on the aforesaid amount. This order was upheld by the
Income-tax Appellate Tribunal as well as by the High Court.

On appeal, the
Supreme Court after going through the order of High Court did not find anything
wrong with the same. According to the Supreme Court the amount in question,
though found refundable to the assessee, was utilized by the Department and,
therefore, interest was payable u/s. 244(1A) of the Income-tax Act.

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WRITE – BACK OF LOANS – SECTIONS 41 (1) & 28 (iv)

ISSUE FOR CONSIDERATION

On account of the inability to repay a borrower, may write-back a part of the
amount due or the full amount so due, in pursuance of the negotiations with the
lender or otherwise. It is usual to come across cases of write back of
liability towards repayment of loans taken by an assesssee in the course of his
business. The amount so written back is credited to the profit & loss
account of the year of write back or is credited to the reserves.

Important issues arise, under the income-tax law, concerning the treatment and
taxability of the amount written back. Will such a write back attract the
provisions of section 41 (1) of the Act and be taxed in the hands of the
assesssee in the year of write back? Alternatively, will the write back attract
the provisions of section 28 (i) or (iv) of the Act and be taxed in the hands
of the assesssee? Whether the fact that the borrowings were made for the
purposes of acquiring a capital asset, make any difference to liability for
taxation? Whether it can be said that the write back does not represent any
benefit or a perquisite for the assessment and is hence not taxable?

Conflicting decisions are rendered by the courts over a period of years
requiring us to take a fresh view of the issues on hand. Recently, the Madras
High Court has taken a view that the amount of loan written back by the
borrower is taxable in his hands in contrast to its own decision delivered a
few years ago.

Iskraemeco Regent Ltd ‘s case.

The issue arose in the case of Iskraemeco Regent Ltd. vs. CIT, 331 ITR 317
(Mad.). In that case the assessee, engaged in the business of manufacturing
energy meters, obtained a term loan from State Bank Of India for the purchase
of capital assets, both by way of import as well as in the local market. The
company also procured credit facility, through cash credit account, for import
of capital assets as well as for meeting the working capital requirements.

The assessee was declared a sick industrial company by the BIFR, which had
sanctioned a scheme for its revival, and in pursuance thereto, the State Bank
of India waived the outstanding dues of principal amount of about Rs.5 crores
and the interest outstanding for a sum of about Rs. 2 crores under the one time
settlement scheme. The assessee credited the waiver of principal amount to the
“Capital Reserve Account” in the balance sheet treating it as capital
in nature and the waiver of interest was credited to its “Profit and Loss
Account” for the financial year ending 31.03.2001 corresponding to the
assessment year 2001-02.

The assessee filed its return declaring its total income assessable at Rs.
45,160 after setting off the carried forward business losses and unabsorbed
depreciation. The AO in assessing the total income added the amounts of loan
and interest waived under the head business income by applying the provisions
of section 41(1) and section 28(iv) of the Act.

The appeals filed by the
assessee, before the Commissioner of Income Tax (Appeals) and the Tribunal,
were dismissed on the ground that the issue in appeal was no longer res integra
in as much as the same had already been concluded by the judgment in CIT vs.
T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344(SC). Aggrieved by the order
of the tribunal, the assessee preferred an appeal to the high court by raising
the following substantial questions of law;

“Whether the learned
Tribunal misdirected itself in law, and it adopted a wholly erroneous
approach, in interpreting the provisions of Section 28(iv) of the
Income-tax Act, 1961, to hold that the sum of Rs.5,07,78,410/-
representing the principal loan amount, waived by the bank under the One
Time Settlement Scheme (OTS), and credited by the appellant assessee to
its Capital Reserve Account, in its Balance Sheet drawn as at 31st March,
2001, is assessable to tax as a revenue receipt in the assessment for the
assessment year 2001-02; and whether the findings of the learned Tribunal
to this effect were wholly unreasonable, based on irrelevant
considerations, contrary to the facts and evidence on record and/or
otherwise perverse?
Whether the decision of the
Hon’ble Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd.
[1996] 222 ITR 344, applied by the learned Tribunal in passing its said
impugned order dated 26th March, 2010, has any application whatsoever, in
the facts and circumstances of the instant case, and particularly in
relation to section 28(iv) of the said Act?
Whether on a correct
interpretation of section 28(iv) of the Income Tax Act, 1961, the Tribunal
ought to have held that the principal amount of loan waived by the Bank
under the OTS, not being a trading liability and also not being a
“benefit or perquisite, whether convertible into money or not”,
the expression used in the said section, did not constitute revenue
receipt and/or business income of the appellant assessee assessable to tax
in its assessment for the assessment year 2001-02?
Whether ………….
Whether
……………..

On behalf
of the assessee it was submitted that:—

it was not in dispute that
the assessee had obtained loan from the State Bank of India for the purchase
of fixed assets, both within the country and outside the country, which
were admittedly capital assets. It was a pure loan transaction and the
same could never be termed as a trading transaction.
the loan was obtained for
the purchase of capital assets and the waiver amounted to a capital
receipt and not a revenue receipt.
it was not involved in any
business involving the transaction of money lending .
the AO had not gone behind
the loan arrangement and the loan arrangement in its entirety was not
obliterated by the waiver, considering the fact that the assessee had paid
a sum of Rs. 5 crores from the date of receipt of the loan.
a grave error was committed
in mechanically applying the judgment rendered by the apex court in T.V.
Sundaram Iyengar & Sons Ltd.’s case (supra ) without appreciating the
factual scenario that the loan had been obtained towards the purchase of
capital assets and not for a business transaction. The facts involved in
the judgment referred above disclosed that the transaction therein was a
trading transaction as against the facts involved in the assessee’s case.
reliance was placed on the
decisions in the cases of Mahindra & Mahindra Ltd. vs. CIT, 261 ITR
501(Bom.), CIT v. Alchemic (P.) Ltd., 130 ITR 168 and CIT vs. Mafatlal
Gangabhai & Co. (P.) Ltd.219 ITR 644 (SC).
relying on the decision in
the case of Solid Containers Ltd. vs. Dy. CIT, 308 ITR 417 it was
submitted that, in a case where a transaction involved a purchase related
to capital assets, a waiver made of the loan taken for the said purchase
would not constitute a business receipt.
the reasoning of the
authorities that, section 28(iv) of the Act was applicable to a money
transaction was totally misconceived and contrary to the provision itself.
Section 28(iv) provided for chargeability of profits and gains of business
or profession with relation to the value of any benefit or perquisite
arising out of business or the exercise of profession and therefore the
same would not include a money transaction. Since in the present case on
hand, the transaction involved a loan transaction, being a transaction of
money, section 28(iv) had no application.
Section 41(1) also did not
apply as it mandated that there had to be an actual allowance or deduction
made for the purpose of computing under the said section. In as much as
there was no allowance or deduction in the present case on hand, the
question of application of section 41(1) also did not arise for
consideration.
in support of the
contentions, the company placed reliance on the following judgments, CIT
vs. P. Ganesa Chettiar, 133 ITR 103 (Mad.), CIT vs. A.V.M. Ltd., 146 ITR
355 , Alchemic Pvt. Ltd.’s case (supra), Mafatlal Gangabhai & Co. (P.)
Ltd.’s case (supra ) and Dy. CIT v. Garden Silk Mills Ltd., 320 ITR 720
(Guj.) to submit that section 28(iv) had no application to a money
transaction. In so far as the scope of section 41(1) was concerned, the
judgments in Polyflex (India) (P.) Ltd. vs. CIT, 257 ITR 343 (SC) and
Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT, 78 ITR 55 (SC) were
relied upon by the company. the combOn behalf of the Revenue it was
submitted that:—ined reading of section 41(1) and section 28(iv) showed
that the words “whether in cash or any other manner” as found in
s. 41(1) had not been incorporated in section 28(iv) which was indicative
of the fact that section 28(iv) did not cover a cash transaction.

On behalf
of the Revenue it was submitted that:

the appellate authorities
had not rejected the company’s appeal on application of section 28(iv) but
was on application of section 28(i)of the Act and therefore, the findings
rendered by the authorities below had to be seen in the context of the
provisions contained in section 28(i) of the Act.
the ratio laid down by the
apex court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), held
good and had been followed in CIT vs. Rajasthan Golden Transport Co. (P.)
Ltd., 249 ITR 723, CIT v. Sundaram Industries Ltd., 253 ITR 396, CIT vs.
Aries Advertising (P.) Ltd., 255 ITR 510 and the authorities below had
rightly applied the same in rejecting the case of the assessee.
it was not in dispute that
the amount had been borrowed by the assessee for the purpose of his
business and once the said amount was used for business, the question as
to whether it had been used for the purchase of capital assets or revenue
receipts was immaterial. The assessee having become richer by the
settlement, the said transaction would partake the character of the income
assessable to tax. Even assuming an amount was utilised towards the
capital assets, it would take the character of a revenue receipt,
subsequently. The borrowal and waiver were in the course of business
during carrying on of which the benefit accrued to the assessee and hence
was taxable. If the amount was received in pursuance to a business or a
contractual liability, then it was taxable as income.
relying on Jay Engg. Works
Ltd. v. CIT, 311 ITR 299 it was submitted that the facts involved in the
cases relied upon by the assessee company were different and that some of
the judgments had been rendered prior to the decision in the case of T.V.
Sundaram Iyengar & Sons Ltd.’s (supra). The Madras high court after
considering the submissions of the parties to the dispute observed and
held that;-
the assessee was not
trading in money transactions. A grant of loan by a bank could not be
termed as a trading transaction and it could not also be construed to be
in the course of business. Indisputably, the assessee obtained the loan
for the purpose of investing in its capital assets. The facts involved in
the present case were totally different than the facts involved in T.V.
Sundaram Iyengar & Sons Ltd.’s case (supra). What had been done in the
present case was a mere waiver of loan. There was no change of character
with regard to the original receipt which was capital in nature into that
of a trading transaction. There was a marked difference between a loan and
a security deposit.
every deposit of money would
not constitute a trading receipt. Even though a receipt might be in
connection with the business, it could not be said that every such receipt
was a trading receipt. Therefore, the amount referable to the loans
obtained by the assessee towards the purchase of its capital asset would
not constitute a trading receipt. The finding of the court had been
fortified by the judgment of this Court in A.V.M. Ltd.’s case (supra).
the same contention had been
raised on behalf of the revenue before the Bombay High Court in Solid
Containers Ltd.’s case (supra), by relying upon the judgment rendered in
T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), however, in the said
case, a finding was given that the money was received by the assessee in
the course of carrying on his business and the agreement was completely
obliterated and the loan in its entirety was completely waived and the
loan itself was taken for a trading activity and on waiving it was
retained in business by the assessee. In the said judgment, the court had
distinguished its earlier judgment rendered in Mahindra & Mahindra
Ltd.’s case (supra) by highlighting that in the facts of the Solid
Container’s case, there was a trading transaction and the money received
was used towards a business transaction and accordingly the ratio laid
down in. T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) was
applicable.
therefore, the above said
facts indicated that the ratio laid down in T.V. Sundaram Iyengar &
Sons Ltd.’s case (supra) had no application at all to the facts and
circumstances of the present case on hand. Hence, the authorities below
had wrongly applied the ratio laid down in T.V. Sundaram Iyengar &
Sons Ltd.’s case (supra) and the orders passed by them could not be
sustained. In the matter of applicability or otherwise of section 28(iv)
and 41(1), the court deemed it fit to give its views even though the
Revenue had conceded that the said provisions did not apply to the present
case. It observed that;-
Section 28(iv) of the Act
dealt with the benefit or perquisite received in kind. Such a benefit or
perquisite received in kind other than in cash would be an income as
defined u/s. 2(24) of the Act. In other words, to any transaction which
involved money, section 28(iv) had no application.
the transaction in the
present case being a loan transaction having no application with respect
to section 28(iv), the same could not be termed as an income within the
purview of section 2(24) of the said Act. In other words, in as much as
section 28(iv) was not applicable to the transactions on hand, it could
not be termed as income which could be made taxable as receipt. A receipt
which did not have any character of an income being that of a loan could
not be made eligible to tax.

Section 41(1) could apply only to
a trading liability. A loan received for the purpose of capital asset would not
constitute a trading liability.

Ramaniyam Homes P Ltd .’s case,

The issue once again arose recently before the Madras High Court, in the Tax
Case (Appeal) No.278 of 2014, in the case of CIT v. Ramaniyam Homes P Ltd., in
an appeal filed u/s 260-A of the Act. In that case, the assessee filed a return
of income for the assessment year 2006-07 admitting a total loss of
Rs.2,42,20,780. It was found by the AO that the assessee was indebted to the
Indian Bank which bank, vide a letter dated 15.2.2006, had mooted a proposal
for a one time settlement requiring the company to pay Rs.10.50 crore on or
before 30.4.2006 against which the company paid only a sum of Rs.93,89,000 by
that date.

The AO appears to have held that the One Time Settlement Scheme was accepted by
the assessee during the year and the interest waived was taxable u/s 41(1) of
the Act and the balance was taxable u/s 28(iv) of the Act. The CIT(Appeals)
held that the mere acceptance of the conditional offer of the bank under the
One Time Settlement Scheme, without complying with the substantive part of the
terms and conditions, would not give a vested right of waiver and therefore,
interest waived to the extent of Rs.1.68 Crores was not exigible to tax u/
s.41(1) and consequently, he deleted the addition of Rs.1,67,74,868. On the
issue of addition u/s 28(iv), he followed the decision in the case of Iskraemeco
Regent Limited vs. CIT, (supra) and held that Section 28(iv) had no application
to cases involving waiver of principal amounts of loans. In the appeal of the
Revenue, on the issue of the deletion of the principal portion of the term loan
waived by the bank, the Tribunal held in para 12 of its order that the term
loan had admittedly been used by the assessee for acquiring capital assets and
following the decision of the jurisdictional Madras high court in the case of
Iskraemeco Regent Limited(supra) it confirmed the order of the first appellate
authority.

In the appeal by the revenue to the high court, the following substantial
questions of law were raised therein:-

• ” Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that the amount representing the
principal loan amount waived by the bank under the one time settlement scheme
which the assessee received during the course of its business is not exigible
to tax?
• Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal ought to have seen that the waiver of principal amount would
constitute income falling under Section 28(iv) of the Income Tax Act being the
benefit arising for the business?”

The Revenue invited attention to the definition of the expressions
“income” and “total income” u/s. (24) and (45) of section 2
and the provisions of the charging section 4 as well as the relevant provisions
of sections 28(iv), 41(1) and 59. It was contended that the principal amount of
loan waived by the bank under the one time settlement was a taxable receipt
coming within the definition of the expression “income” by relying
upon the decisions in cases of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. 222
ITR 344(SC), Solid Containers Ltd. vs. DCIT, 308 ITR 417 (Bom.), Logitronics P
Ltd. v. CIT,333 ITR 386 and Rollatainers Ltd. vs. CIT, 339 ITR 54.

In so far as the decision in Iskraemeco Regent Limited was concerned, it was
submitted that the Supreme Court had already granted leave to the Department
and the decision was the subject matter of Civil Appeal No.5751 of 2011, on the
file of the Supreme Court, and the Court was entitled to consider the issue
independently. At the outset, the Madras high court examined the decision in
Iskraemeco Regent Limited, since the appellate authorities had merely followed
the said decision. The court found that in the said decision it was held that a
loan transaction had no application with respect to s.28(iv) of the Act and
that the same could not be termed as an income within the purview of section
2(24).The Madras high court thereafter examined the statutory provisions and
also the decisions relied upon by the contesting parties in support of their
respective submissions. The Madras high court in particular examined the
decisions in the cases of T.V. Sundram Iyengar & Sons Ltd. (SC), Solid
Containers Ltd.(Bom), Mahindra & Mahindra (Bom.) and Logitronics P.
Ltd.(Del.) and Rollatainers Ltd. (Del).

The court noted that the law as expounded by the Delhi High Court appeared to
be that if a loan had been taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax and if the loan was taken for
trading purposes and was also treated as such from the beginning in the books
of account, the waiver thereof might result in the income, more so when it was
transferred to the profit and loss account. Having noted so, the court observed
that;

the Delhi High Court, both in
Logitronics as well as in Rollatainers cases, did not take note of one fallacy
in the reasoning given in paragraph 27.1 of the decision of the Madras high
court rendered in Iskraemeco Regent Limited’s case.
in paragraph 27.1 of the
decision in Iskraemeco Regent Limited’s case, it was held that s.28(iv)
spoke only about a benefit or perquisite received in kind and that
therefore, it had no application to any transaction involving money which
was actually based upon the decision of the Bombay High Court in Mahindra
& Mahindra Ltd.(supra), which, in turn, had relied upon the decision
of the Delhi High Court in the case of Ravinder Singh vs. C.I.T.205 I.T.R.
353.
with great respect, the
above reasoning did not appear to be correct in the light of the express
language of section 28(iv). What was treated as income chargeable to
income tax under the head ‘profits and gains of business or profession’
u/s 28(iv), was “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.”
therefore, it was not the
actual receipt of money, but the receipt of a benefit or perquisite, which
had a monetary value, whether such benefit or perquisite was convertible
into money or not, which was what was covered by section 28(iv). For
instance, if a gift voucher was issued, enabling the holder of the voucher
to have a dinner in a restaurant, it was a benefit or perquisite, which
had a monetary value. If the holder of the voucher was entitled to
transfer it to someone else for a monetary consideration, it became a
perquisite, convertible in to money. Irrespective of whether it was
convertible into money or not, to attract section 28(iv) it was sufficient
that it had a monetary value.
a monetary transaction, in
the true sense of the term, can also have a value.
we do not know why it should
not happen in the case of waiver of a part of the loan. Therefore, the
finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent
Limited that Section 28(iv) had no application to any transaction, which
involved money, was a sweeping statement and might not stand in the light
of the express language of section 28(iv).
in our considered view, the
waiver of a portion of the loan would certainly tantamount to the value of
a benefit. The benefit might not arise from “the business” of
the assessee. But, it certainly arose from “business”.
the absence of the prefix
“the” to the word “business” made a world of
difference. The Madras high court thereafter dealt with the issue of the
distinction, sought to be made, between the waiver of a portion of the
loan taken for the purpose of acquiring capital assets on the one hand and
the waiver of a portion of the loan taken for the purpose of trading
activities on the other hand. In the context, it held that;-
in so far as accounting
practices were concerned, no such distinction existed. Irrespective of the
purpose for which, a loan was availed by an assessee, the amount of loan
was always treated as a liability and it got reflected in the balance
sheet as such. When a repayment was made in monthly, quarterly, half
yearly or yearly installments, the payment was divided into two
components, one relating to interest and another relating to a portion of
the principal. To the extent of the principal repaid, the liability as
reflected in the balance sheet got reduced. The interest paid on the
principal amount of loan, would be allowed as deduction, in computing the
income under the head “profits and gains of business or
profession”, as per the provisions of the Act.
Section 36(1)(iii) made a
distinction where under the amount of interest paid in respect of capital
borrowed for the purpose of business or profession was allowed as
deduction, in computing the income referred to in section 28. But, the
proviso there under stated that any amount of interest paid in respect of
capital borrowed for acquisition of an asset for extension of existing
business or profession, whether capitalised in the books of account or not
for any period beginning from the date on which the capital was borrowed
for the acquisition of the asset, till the date on which such asset was
put to use, should not be allowed as deduction.
therefore, it was clear that
the moment the asset was put to use, then the interest paid in respect of
the capital borrowed for acquiring the asset, could be allowed as
deduction. When the loan amount borrowed for acquiring an asset got wiped
off by repayment, two entries were made in the books of account, one in
the profit and loss account where payments were entered and another in the
balance sheet where the amount of un repaid loan was reflected on the side
of the liability.
when a portion of the loan
was reduced, not by repayment, but by the lender writing it off (either
under a one time settlement scheme or otherwise), only one entry got into
the books, as a natural entry. A double entry system of accounting would
not permit of one entry. Therefore, when a portion of the loan was waived,
the total amount of loan shown on the liabilities side of the balance
sheet was reduced and the amount shown as capital reserves, was increased
to the extent of waiver. Alternatively, the amount representing the waived
portion of the loan was shown as a capital receipt in the profit and loss
account itself.
these aspects had not been
taken note of in Iskraemeco Regent Ltd.
In view of the above, the
Madras High court decided the issue in favour of the Revenue and the
appeal filed by the Revenue was allowed without any costs.

Observations

The issue
under consideration, of the write back of loans, has over the years turned
rotten and worse, has produced many off shoots. The sheer size of the quantum
involving this issue is another reason for addressing it at the earliest.
Settlement between the lenders and the borrowers is an everyday phenomenon and
the issues arising there from require to be handled with care importantly, due
to the fact that the borrower involved is admittedly in a precarious financial
health that can be worsened by the additional tax borrowings that may not have
been intended by the legislature.

It is time proper that a clear guideline is provided by the CBDT as regards the
Revenue’s understanding of the subject and its desired tax treatment. This
clarification is necessary in view of the fact that varied stands have been
taken by the Revenue before the courts in different cases. It is also most
desired that the apex court addresses the issue, at the earliest, in view of
the conflicting stands of the high courts, sometimes of the same high court, as
is seen by the conflicting decision of the Madras High Court and to an extent
of the Bombay High Court.

A classic case is the case of a company which has
been declared sick, under a statue, by the Board of Industrial & Financial
Reconstruction. The Board on one side mandates the lenders to compromise their
dues, in the interest of the financial health of the company, but, on the other
side, rests on the fringe when it comes to saving a sick company from
consequences of tax, directly arising out of the reliefs granted by it. We are
of the firm view that the relief from taxation should be granted in respect of
a sick company as has been done by some courts even where the CBDT has resisted
the tax relief before the BIFR.

Section 41(1) of the Act brings to tax the value of a benefit in respect of a
trading liability accruing to an assesssee by way of remission or cessation
thereof. The said section also seeks to tax the amount obtained by an
assesssee, in cash or otherwise in respect of a loss or an expenditure. In both
the cases, the charge of tax is attracted provided an allowance or deduction
has been granted to the assesssee. A charge once attracted, is placed in the
year of relief. By and large, the issues about the applicability of section
41(1) are settled. An understanding seems to have been reached that no
liability to tax arises unless an allowance or deduction has been granted to an
assesssee and subsequent thereto a relief has been obtained by him or a benefit
has accrued to him. Obviously in a case of a loan taken, the provisions of
s.41(1) should not be attracted unless the issue involves the settlement of an
interest, on the loan taken, for which a deduction was allowed.

Section 28(i) provides that the profits or gains of any business or profession
which was carried on during the year shall be chargeable to income tax under
the head “profits and gains of business or profession”. Section
28(iv) brings to tax the value of any benefit or perquisite, whether
convertible into money or not arising from business or the exercise of a
profession. The issue of taxation of a write back of a loan mainly revolves
around application of section 28. The questions that arise, in addressing the
issue are;

Whether a relief from
repayment of loan taken can be held to be profits or gains of business
carried on during the year? In other words, can a loan be said to have
been taken by the person in the ordinary course of his business where he
is not engaged in the business of granting of loans and advances? Will
such a transaction be treated as a trading transaction?
Will it make any difference
whether the loan was taken for the purpose of acquiring a capital asset or
was taken for meeting the working capital requirements of the business?
Will the relief, if any,
resulting on settlement be construed as a benefit or a perquisite arising
from the business?
Has the apex court in the
case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a write back
of loan shall be liable to be taxed as business income and that too only
where it was taken for the purposes of meeting a trading liability?

For the sake of brevity, we place our views on each of the above issues,
so identified, instead of referring and analyzing the entire case law on the
subject including the facts of the said T.V.Sundaram Iyengar & Sons Ltd
(supra)’s case . A reader however is advised to do so.

Section 28(i) brings to tax profits or gains from business carried on during
the year. Unless the profits arise from the business that was carried on during
the year, a charge under section 28(i) fails. An ordinary businessman, not
engaged in the business of money lending, etc, cannot be said to be engaged in
the business of receiving or granting loans and therefore no profits can be
said to have arisen from such a business. The Act makes a clear distinction
between an ordinary business and the business of granting any loans or advances
for the purposes of section 36(2) and section 73, for example. Accordingly, a
waiver of loan and it’s consequential write back cannot be said to be
representing any profits and gains arising from the business carried on during
the year. This finding should hold true in respect of all businessmen other
than the one engaged in the business of receiving and granting loans. The
transactions of loans are on capital account only and holding it otherwise will
lead to a situation where under a write off of an irrecoverable loan, advanced
in the past, will have to be allowed as a deduction in all cases. A loan taken
is a thing with which a person does his business; he carries on his business
with the funds borrowed. He does not deal in them; his business is that of
dealing in things other than the funds borrowed. He is a user of funds and not
a dealer of funds. He does not derive any profits from such funds nor is he
expected to derive any and rather derives profits from optimum use of such
funds in his business.

Once it is accepted that an ordinary businessman obtains a loan for the purpose
of carrying on his business, it is natural to accept that the purpose of loan
would not make any difference. Unless a loan is inextricably linked to the
regular business and its customers, it is not possible to hold that a purpose
for which a loan was taken will have any material bearing on its eventual
transaction. With great respect, we beg to differ with the view which seeks to
make a distinction, for the purposes of taxation, on the basis of the purpose
for which a loan is taken. In our opinion, the purpose for which a loan is
taken is immaterial unless the assesssee is in the business of dealing in loans
or the loan taken is inextricably linked to his business deal. The Madras high
court is spot on in the case of Ramaniyam Homes P.Ltd. (supra) when it
concludes on this aspect of the issue by holding that there is no difference
between a loan taken for the purpose of a capital asset or for meeting working
capital requirements.

Section 28(iv) reads as: “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.” From a reading, it is noticed that a benefit or a perquisite
should arise from business and if so it would be taxable whether its value can
be converted into money or not. The twin conditions are cumulative in nature
and both of them require satisfaction before a charge of taxation is attracted.
The use of the expression “whether convertible into money or not”
clearly indicate that the benefit or perquisite is the one which is capable of
being converted into cash but is certainly not the cash itself. Had it been so
then the expression would have been “whether received in cash or in
kind”. Section 41(1) explicitly uses the expression ‘whether in cash or in
any other manner”. The intention of the legislature is adequately
communicated by the use of appropriate expression; the intention being to bring
to tax such benefit or perquisite i.e. received in kind irrespective of its
possibility to convert in money or not. Again, the use of the term ‘value’,
supports such an interpretation in as much as cash carries the same value and
therefore does not require any prefix. Even otherwise can a remission in a loan
liability ever be construed as a benefit or perquisite and be considered to
have arisen from a business are the questions that remain open for being
addressed before a charge u/s 28(iv) is completed.

An interesting aspect of section 28(iv) is brought out by the Madras High Court
in paragraph 39 of the decision in the case of Ramaniyam Homes P Ltd.’s
(supra). The Madras High Court, in the context of applicability of section
28(iv), held that a benefit might not arise from “the business” of
the assesssee but it certainly arose from “business” and the absence
of the prefix “the” to the word “business” made a world of
difference. It seems that the court would have taken a different view had the
prefix “the” before the word “business” been placed in
section 28(iv). Had that been so the court would have concluded that the waiver
of loan did not attract the provisions of section 28(iv)!! In our very
respectful opinion, the logic supplied requires a reconsideration. The court
has failed to appreciate that the benefit or perquisite, for application of
section 28(iv), has to be from a business even though not from the specific business.
In the absence of any other business, the question of attracting section 28(iv)
does not arise at all. Even otherwise the legislative intent does not seem to
support such an interpretation which is evident from a bare reading of section
28(i) and section 28(va) which has consciously used the prefix “any’
before the term expression “business” to convey the wider scope of
the provisions.

The apex court in the case of T.V.Sundaram Iyengar & Sons Ltd (supra)
has neither, explicitly nor implicitly, stated that a loan on being written
back would attain the character of income. It was a case wherein the assessee
had received deposits from it’s customers for the purposes of the trading
transactions carried on with the customers . The said deposits or a part of it
got adjusted against regular trading transactions and the excess balance
remaining with the assessee was carried in the balance sheet as the liability
to creditors. On a later day it was found that the said excess balance so
obtained from the customers was not repayable and the company wrote back the
said liability by crediting the same to the profit & loss account. It is in
such facts that the Supreme Court held that a write back of such non-repayable
deposits were to be treated as business income.

It is a settled position of law that every receipt need not be an income even
though the amount may be received as a part of the business activity of the
assesssee. It is also a settled position in law that a receipt, originally of a
capital nature, will not change its character merely by a lapse of time subject
to an exception in respect of an amount received in the course of a trading
activity, for example, advances received from a customer or a deposit received
from a contractor or a customer or a supplier or margin money received for
security of performance by the customer. An act of borrowing a loan is not a
trading transaction in that manner.

In exceptional cases a receipt originally of a capital nature would, with lapse
of time, attain the character of an income. It is this principle of law which
was propounded in the case of Jay’s- The Jewellers Ltd, 1947 (29 TC 274) (KB)
that was followed by the Supreme Court in the case of Karamchand Thapar Sons
222 ITR 112 (SC) and was reconfirmed in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra). The Supreme Court in the said case of T.V.Sundaram Iyengar
& Sons Ltd (supra) had clearly restricted the application of the exception
to the case of an amount received as a part of the trading operations where a trading
liability was incurred out of an ordinary trading transaction. In our opinion,
a transaction of a loan borrowed for the purposes of funding a trading activity
can never be considered as a transaction that could be covered by the above
mentioned tests laid down by the Supreme Court. An ordinary loan, at its
inception, is of a capital character and retains its character even with the
flux of time it does not change even where it was later on waived.

Another important part of the facts in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra) was that in the said case the unclaimed deposit representing
excess balance was credited to the profit & loss account of the company and
it is this fact which had influenced the Supreme Court when it observed that
“when the assessee itself had treated the money as its own money and taken
the amount to its profit & loss account then the amounts were assessable in
the hands of the assessee”. It appears that all those decisions of the
courts require a reconsideration wherein the courts relying on the ratio of the
decision in the case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a
waiver of an ordinary loan was to be treated as income. The high courts had
failed to notice that in all such cases before them the amount received did not
have any trading character which was so in the case of T.V.Sundaram Iyengar
& Sons Ltd (supra).

Attention of the reader is invited to the following pertinent
observations of the author on page 1095 of the 10th edition of Kanga &
Palkhivala’s The Law and Practice of Income Tax in the context of the ratio of
the decision in the case of T.V. Sundaram Iyengar & Sons Ltd (supra).

“The Supreme Court erroneously held that crediting deposits that had been
given by the parties to a profit and loss account after they had reminded
unclaimed for a long period of time, would definitely be trade surplus and part
of assessee’s taxable income. Surprisingly, the court did not even refer to the
statutory provisions of section 41(1). It failed to note that unless the
assesssee had claimed an allowance or deduction in respect of a loss of
expenditure or trading liability, the subsequent cessation of liability would
not attract section 41(1)”. Also see the later decision of the Supreme
Court in the case of Kesaria Tea, 254 ITR 434.

The Supreme Court in a later decision in the case of Travancore Rubber, 243 ITR
158 has reconciled the legal position and reemphasised that unless a different
quality is imprinted on the receipt by a subsequent event, a receipt which is
not in the first instance a trading receipt cannot become a trading receipt by
any subsequent process. Under the circumstances it is very respectfully
observed that the decisions delivered by different high courts simply relying
on the ratio of the decision in the case of T.V.Sundaram Iyengar & Sons Ltd
(supra) require a fresh application of mind.

shailesh.kwebmaker

RULES FOR INTERPRETATION OF TAX STATUTES – PAR T – III

Introduction
In the April and May issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts are dealt with hereunder and hereafter.

1. Rules of Consistency, Resjudicata & Estoppel :

The principle of consistency is a principle of equity and would not override
the clear provisions of law. It is well accepted that each assessment year is
separate and if a particular aspect was not objected to in one year, it would
not fetter the Assessing Officer from correcting the same in a subsequent year
as the principles of res judicata are not applicable to tax proceedings. In Radhasaomi
Satsang the Supreme Court held that (page 329 of 193-ITR) : “where a
fundamental aspect permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed that position to
be sustained by not challenging the order, it would not be at all appropriate
to allow the position to be changed in a subsequent year”. As is apparent
from the said decision, the rule of consistency has limited application – where
a fundamental aspect permeates through several assessment years; the said
aspect has been found as a fact one way or the other; and the parties have not
challenged the said finding and allowed the position to sustain over the years.
Clearly, the said principle will have no application where the position
canvassed militates against an express provision of law as held by Delhi High
Court in Honey Enterprises vs. C.I.T. (2016) 381-ITR-258 at 278.

1.1. In Radhasaomi itself, the Supreme Court acknowledged that there is
no res judicata, as regards assessment orders, and assessments for one year may
not bind the officer for the next year. This is consistent with the view of the
Supreme Court that there is no such thing as res judicata in income-tax
matters’ (Raja Bahadur Visheshwara Singh vs. CIT (1961) 41-ITR- 685 (SC); AIR
1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the
authorities into repeating them, by application of a rule such as estoppel, for
the reason that being an equitable principle, it has to yield to the mandate of
law. A deeper reflection would show that blind adherence to the rule of
consistency would lead to anomalous results, for the reason that it would
endanger the unequal application of laws, and direct the tax authorities to
adopt varied interpretations, to suit individual assessees, subjective to their
convenience – a result at once debilitating and destructive of the rule of law.
The rule of consistency cannot be of inflexible application.

1.2. Res judicata does not apply in matters pertaining to tax for different
assessment years because res judicata applies to debar courts from entertaining
issues on the same cause of action whereas the cause of action for each
assessment year is distinct. The courts will generally adopt an earlier
pronouncement of the law or a conclusion of fact unless there is a new ground
urged or a material change in the factual position. The reason why courts have
held parties to the opinion expressed in a decision in one assessment year to
the same opinion in a subsequent year is not because of any principle of res
judicata but because of the theory of precedent or precedential value of the
earlier pronouncement. Where the facts and law in a subsequent assessment year
are the same, no authority whether quasi-judicial or judicial can generally be
permitted to take a different view. This mandate is subject only to the usual
gateways of distinguishing the earlier decision or where the earlier decision
is per incuriam. However, these are fetters only on a co-ordinate Bench, which,
failing the possibility of availing of either of these gateways, may yet differ
with the view expressed and refer the matter to a Bench of superior
jurisdiction. In tax cases relating to a subsequent year involving the same
issues as in the earlier year, the court can differ from the view expressed if
the case is distinguishable as per incuriam, as held by the Apex Court in
Bharat Sanchar Nigam Ltd. vs. Union of India (2006) 282-ITR-273 (SC) at
276-277.

1.3. Estoppel normally means estopped from re agitating same issue. However,
it is settled position in law that there cannot be an estoppel against a
statute. There is no provision in the statute which permits a compromise
assessment. The above position was indicated by the apex court in Union of
India vs. Banwari Lal Agarwal (1999) 238-ITR-461 (S.C.).

2. Actus Curiae Neminem gravabit :

An act of the Court should not prejudice anyone and the maxim actus curiae
neminem gravabit is squarely applicable. It is the duty of the Court to see
that the process of the court is not abused and if the court’s process has been
abused by making a statement and the same court is made aware of it, especially
a writ court, it can always recall its own order, for the concession which
forms the base is erroneous. It is a well settled proposition of law that no
tax payer should suffer on account of inadvertent omission or mistake of an
authority, because to do justice is inherent and dispensation of justice should
not suffer. It is equally well settled that any order on concession has no binding
effect and there is no waiver or estoppel against statue.

3. Same word in different statues :

In interpreting a taxing statute, the doctrine of “aspect”
legislation must be kept in mind. It is a basic canon of interpretation that
each statute defines the expressions used in it and that definition should not
be used for interpreting any other statute unless in any other cognate statute
there is no definition, and the extrapolation would be justified as held by
Kerala High Court in All Kerala Chartered Accountants’ Association vs. Union of
India & Others (2002) 258-ITR-679 at 680. “A particular word occurring
in one section of the Act having a particular object, cannot carry the same
meaning when used in a different section of the same Act, which is enacted for
a different purpose. In other words, one word occurring in different sections
of the same Act can have different meanings, if the objects of the two sections
are different and they operate in different fields as held by the Supreme Court
in J.C.I.T. vs. Saheli Leasing and Industries Ltd. (2010) 324-ITR-170 at 171.

“The words and expressions defined in one statute as judicially
interpreted do not afford a guide to the construction of the same words or
expressions in another statute unless both the statutes are pari materia
legislations or it is specifically provided in one statute to give the same
meaning to the words as defined in another satute as held in Jagatram Ahuja vs.
C.I.T. (2000) 246-ITR-609 at 610 (SC).

4. Rules to yield to the Act :

Rules are made by the prescribed authority, while Act is enacted by the
Legislature, hence rules are subservient to the Act and cannot override the
Act. If there is conflict the Act would prevail over the rules. Rules are
subordinate legislation. Subordinate legislation does not carry the same degree
of immunity as enjoyed by a statute passed by a competent Legislature.
Subordinate legislation may be questioned on any of the grounds on which
plenary legislation is questioned; in addition, it may also be questioned on
the ground that it does not conform to the statute under which it is made. It
may further be questioned in the ground that it is inconsistent with the
provisions of the Act, or that it is contrary to some other statute applicable
in the same subject-matter. It may be struck down as arbitrary or contrary to
the statute if it fails to take into account vital facts which expressly or by
necessary implication are required to be taken into account by the statute or
the Constitution. Subordinate legislation can also be questioned on the ground
that it is manifestly arbitrary and unjust. It can also be questioned on the
ground that it violates article 14 of the Constitution of India as held in J.
K. Industries Ltd. and Another vs. Union of India (2008) 297-ITR-176 at
178-179.

5. Literal Interpretation & Casus Omissus :

The principles of interpretation are well-settled :
(i) a statute has to be read as a whole and the effort should be to give full
effect to all the provisions;
(ii) interpretation should not render any provision redundant or nugatory;
(iii) the provisions should be read harmoniously so as to give effect to all
the provisions;
(iv) if some provision specifically deals with a subject-matter, the general
provision or a residual provision cannot be invoked for that subject as held in
C.I.T. vs. Roadmaster Industries of India (P) Ltd. (2009) 315-ITR-66 (P&H).
Except where there is a specific provision of the Income-tax Act which
derogates from any other statutory law or personal law, the provision will have
to be considered in the light of the relevant branches of law as held in C.I.T.
vs. Bagyalakshmi & Co. (1965) 55-ITR-660 (SC).

5.1. When the language of a statute is clear and unambiguous, the courts are to
interpret the same in its literal sense and not to give a meaning which would
cause violence to the provisions of the statute, as held in Britania Industries
Ltd. vs. C.I.T. (2005) 278-ITR-546 at 547 (SC). It is a well settled principle
of law that the court cannot read anything into a statutory provision or a
stipulated condition which is plain and unambiguous. A statute is an edict of
the Legislature. The language employed in a statute is the determinative factor
of legislative intention. While interpreting a provision the court only
interprets the law and cannot legislate it. If a provision of law is misused
and subjected to the abuse of process of law, it is for the Legislature to
amend, modify or repeal it, if deemed necessary. Legislative casus omissus
cannot be supplied by judicial interpretative process.

A casus omissus ought not to be created by interpretation, save in some case of
strong necessity” as held in Union of India vs. Dharmendra Textiles
Processors and Others (2008) 306-ITR-277 at page 278 (SC).

5.2. I f the construction of a statutory provision on its plain reading leads
to a clear meaning, such a construction has to be adopted without any external
aid as held in C.I.T. vs. Rajasthan Financial Corporation (2007) 295-ITR-195
(Raj F.B.). A taxing statute is to be construed strictly : in a taxing statute
one has to look merely at what is said in the relevant provision. There is no
presumption as to a tax. Nothing is to be read in, nothing is to be implied.
There is no room for any intendment. There is no equity about a tax. In
interpreting a taxing statute the court must look squarely at the words of the
statute and interpret them. Considerations of hardship, injustice and equity
are entirely out of place in interpreting a taxing statute as held in Ajmera
Housing Corporation and Another vs. C.I.T. (2010) 326-ITR-642 (SC).

5.3. In construing a contract, the terms and conditions thereof are to be read
as a whole. A contract must be construed keeping in view the intention of the
parties. No doubt, the applicability of the tax laws would depend upon the
nature of the contract, but the same should not be construed keeping in view
the taxing provisions as held in Ishikawajima – Harima Heavy Industries Ltd.
vs. Director of Income-tax (2007) 288-ITR-408 (SC). The provisions of a section
have to be interpreted on their plain language and not on the basis of
apprehension of the Department. A statute is normally not construed to provide
for a double benefit unless it is specifically so stipulated or is clear from
the scheme of the Act as held in Catholic Syrian Bank Ltd. vs. C.I.T. (2012)
343-ITR-270 (SC). Where any deduction is admissible under two Sections and
there is no specific provision of denial of double deduction, deduction under
both the sections can be claimed and deserves to be allowed.

5.4. It is cardinal principle of interpretation that a construction resulting
in unreasonably harsh and absurd results must be avoided. The cardinal
principle of tax law that the law to be applied has to be the law in force in
the assessment year is qualified by an exception when it is provided expressly
or by necessary implication. That the law which is in force in the assessment
year would prevail is not an absolute principle and exception can be either
express or implied by necessary implication as held in C.I.T. vs. Sarkar
Builders (2015) 375-ITR-392 (SC)

5.5. The cardinal rule of construction of statutes is to read the statute
literally that is, by giving to the words used by legislature their ordinary
natural and grammatical meaning. If, however, such a reading leads to absurdity
and the words are susceptible of another meaning the Court may adopt the same.
But if no such alternative construction is possible, the Court must adopt the
ordinary rule of literal interpretation. It is well known rule of
interpretation of statutes that the text and the context of the entire Act must
be looked into while interpreting any of the expressions used in a statute The
Courts must look to the object, which the statute seeks to achieve while interpreting
any of the provisions of the Act. A purposive approach for interpreting the Act
is necessary.

5.6. It is a settled principle of rule of interpretation that the Court cannot
read any words which are not mentioned in the Section nor can substitute any
words in place of those mentioned in the section and at the same time cannot
ignore the words mentioned in the section. Equally well settled rule of
interpretation is that if the language of statute is plain, simple, clear and
unambiguous then the words of statute have to be interpreted by giving them
their natural meaning as observed in Smita Subhash Sawant vs. Jagdeshwari
Jagdish Amin AIR 2016 S.C. 1409 at 1416.

6. Interpretations – favourable to the tax payer to be adopted.

It is
well settled, if two interpretations are possible, then invariably the court
would adopt that interpretation which is in favour of the taxpayer and against
the Revenue as held in Pradip J. Mehta vs. C.I.T. (2008) 300-ITR-231 (SC).
While dealing with a taxing provision, the principle of ‘strict interpretation’
should be applied. The court shall not interpret the statutory provision in
such a manner which would create an additional fiscal burden on a person. It
would never be done by invoking the provisions of another Act, which are not
attracted. It is also trite that while two interpretations are possible, the
court ordinarily would interpret the provisions in favour of a taxpayer and
against the Revenue as held in Sneh Enterprises vs. Commissioner of Customs
(2006) 7-SCC-714.

7. Doctrine of Ejusdem generis :

Birds of the same feather fly to-gether. The rule of ejusdem generis is applied
where the words or language of which in a section is in continuation and where
the general words are followed by specific words that relates to a specific
class or category. The Supreme Court in the case of C.I.T. vs. Mcdowel and
Company Ltd. (2010 AIR SCW 2634) held : “The principle of statutory
interpretation is well known and well settled that when particular words
pertaining to a class, category or genus are followed by general words are
construed as limited to things of the same kind as those specified. This rule
is known as the rule of ejusdem generis. It applies when :

(1) the statute contains an enumeration of specific words;
(2) the subjects of enumeration constitute a class or category;
(3) that class or category is not exhausted by the enumeration;
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent. The maxim ejusdem
generis is attracted where the words preceding the general words pertain to
class genus and not a heterogeneous collection of items as held in the case of
Housing Board, Haryana (AIR 1996 SC 434). Same view has been iterated in Union
of India vs. Alok Kumar AIR 2010 S.C. 2735.

7.1. General words in a statute must receive general construction. This is,
however, subject to the exception that if the subject-matter of the statute or
the context in which the words are used, so requires a restrictive meaning is
in permissible to the words to know the intention of the Legislature. When a
restrictive meaning is given to general words, the two rules often applied are
noscitur a sociis and ejusdem generis. Noscitur a sociis literally means that
the meaning of the word is to be judged by the company it keeps. When two or
more words which are susceptible of analogous meaning are coupled together,
they are understood to be used in their cognate sense. The expression ejusdem
generis – “of the same kind or nature” – signifies a principle of
construction whereby words in a statute which are otherwise wide but are
associated in the text with more limited words are, by implication given a
restricted operation and are limited to matters of the same class of genus as preceding
them.

8. “Mutatis Mutandis” & “As if” :

Earl Jowitt’s ‘The Dictionary of English Law 1959) defines ‘mutatis mutandis’
as ‘with the necessary changes in points of detail’. Black’s Law Dictionary
(Revised 4th Edn, 1968) defines ‘mutatis mutandis’ as ‘with the necessary
changes in points of detail, meaning that matters or things are generally the
same, but to be altered when necessary, as to names, offices, and the like…..
‘Extension of an earlier Act mutatis mutandis to a later Act, brings in the idea
of adaptation, but so far only as it is necessary for the purpose, making a
change without altering the essential nature of the things changed, subject of
course to express provisions made in the later Act. It is necessary to read and
to construe the two Acts together as if the two Acts are one and while doing so
to give effect to the provisions of the Act which is a later one in preference
to the provisions of the Principal Act wherever the Act has manifested an
intention to modify the Principal Act.

8.1. “The expression “mutatis mutandis” itself implies
applicability of any provision with necessary changes in points of detail. The
phrase “mutatis mutandis” implies that a provision contained in other
part of the statute or other statutes would have application as it is with
certain changes in points of detail as held in R.S.I.D.I. Corpn. vs. Diamond
and Gen Development Corporation Ltd. AIR 2013 SC 1241.

8.2. The expression “as if”, is used to make one applicable in
respect of the other. The words “as if” create a legal fiction. By
it, when a person is “deemed to be” something, the only meaning
possible is that, while in reality he is not that something, but for the
purposes of the Act of legislature he is required to be treated that something,
and not otherwise. It is a well settled rule of interpretation that, in
construing the scope of a legal fiction, it would be proper and even necessary,
to assume all those facts on the basis of which alone, such fiction can
operate. The words “as if”, in fact show the distinction between two
things and, such words must be used only for a limited purpose. They further
show that a legal fiction must be limited to the purpose for which it was
created. “The statute says that you must imagine a certain state of affairs;
it does not say that having done so, you must cause or permit your imagination
to boggle when it comes to the inevitable corollaries of that state of
affairs”. “It is now axiomatic that when a legal fiction is
incorporated in a statute, the court has to ascertain for what purpose the
fiction is created. After ascertaining the purpose, full effect must be given
to the statutory fiction and it should be carried to its logical conclusion.
The court has to assume all the facts and consequences which are incidental or
inevitable corollaries to giving effect to the fiction. The legal effect of the
words ‘as if he were’ in the definition of owner in section 3(n) of the
Nationalisation Act read with section 2(1) of the Mines Act is that although
the petitioners were not the owners, they being the contractors for the working
of the mine in question, were to be treated as such though, in fact, they were
not so”, as held in Rajasthan State Industrial Development and Investment
Corporation vs. Diamond and Gem Development Corporation Ltd. AIR-2013-1241 at
1251.

9. Approbate and Reprobate :

A party cannot be permitted to “blow hot-blow cold”, “fast and
loose” or “approbate and reprobate”. Where one knowingly accepts
the benefits of a contract, or conveyance, or of an order, he is estopped from
denying the validity of, or the binding effect of such contract, or conveyance,
or order upon himself. This rule is applied to ensure equity, however, it must
not be applied in such a manner, so as to violate the principles of, what is
right and, of good conscience. It is evident that the doctrine of election is
based on the rule of estoppel the principle that one cannot approbate and
reprobate is inherent in it. The doctrine of estoppel by election is one among
the species of estoppels in pais (or equitable estoppel), which is a rule of
equity. By this law, a person may be precluded, by way of his actions, or
conduct, or silence when it is his duty to speak, from asserting a right which
he would have otherwise had.

10. Legal Fiction – Deeming Provision :

Legislature is competent to create a legal fiction, for the purpose of assuming
existence of a fact which does not really exist. In interpreting the provision
creating a legal fiction, the Court is to ascertain for what purpose the
fiction is created and after ascertaining this, the Court is to assume all
those facts and consequences which are incidental or inevitable corollaries to
the giving effect to the fiction. This Court in Delhi Cloth and General Mills
Company Limited vs. State of Rajasthan : (AIR 1996 SC 2930) held that what can
be deemed to exist under a legal fiction are facts and not legal consequences
which do not flow from the law as it stands. When a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the Court is entitled and bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to.

10.1. It would be quite wrong to carry this fiction beyond its originally
intended purpose so as to deem a person in fact lawfully here not to be here at
all. The intention of a deeming provision, in laying down a hypothesis shall be
carried so far as necessary to achieve the legislative purpose but no further.
“When a Statute enacts that something shall be deemed to have been done,
which, in fact and truth was not done, the Court is entitled and bound to
ascertain for what purposes and between what persons the statutory fiction is
to be resorted to”. “If you are bidden to treat an imaginary state of
affairs as real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents, which, if the putative state of affairs
had in fact existed, must inevitably have flowed from or accompanied it…. The Statute
says that you must imagine a certain state of affairs; it does not say that
having done so, you must cause or permit your imagination to boggle when it
comes to the inevitable corollaries of that state of affairs”. In The
Bengal immunity Co.Ltd. vs. State of Bihar and Others AIR 1955 SC 661, the
majority in the Constitution Bench have opined that legal fictions are created
only for some definite purpose.

10.2. In State of Tamil Nadu vs. Arooran Sugars Ltd. AIR 1997 SC 1815 : the
Constitution Bench, while dealing with the deeming provision in a statute,
ruled that the role of a provision in a statute creating legal fiction is well
settled, and eventually, it was held that when a statute creates a legal
fiction saying that something shall be deemed to have been done which in fact
and truth has not been done, the Court has to examine and ascertain as to for
what purpose and between which persons such a statutory fiction is to be
resorted to and thereafter, the courts have to give full effect to such a statutory
fiction and it has to be carried to its logical conclusion. The principle that
can be culled out is that it is the bounden duty of the court to ascertain for
what purpose the legal fiction has been created. It is also the duty of the
court to imagine the fiction with all real consequences and instances unless
prohibited from doing so. That apart, the use of the term ‘deemed’ has to be
read in its context and further the fullest logical purpose and import are to
be understood. It is because in modern legislation, the term ‘deemed’ has been
used for manifold purposes. The object of the legislature has to be kept in
mind.

shailesh.kwebmaker

THE FINANCE ACT, 2016

1. Back ground:

The Finance Minister, Shri Arun Jaitley, presented his third Budget with the Finance Bill, 2016, in the Lok Sabha on 29th February, 2016. After some discussions, the Parliament has passed the Budget with some amendments. The President has given his assent to the Finance Act, 2016, on 14th May, 2016. There are in all 241 Sections in the Finance Act, 2016, which include 115 sections which deal with amendments in the Income tax Act, 1961. The Finance Minister has divided his tax proposals in nine categories such as (i) Relief to small tax payers (ii) Measures to boost growth and employment generation (iii) Incentivising domestic value addition to help Make in India (iv) Measures for moving towards a pensioned society (v) Measures for promoting affordable housing (vi) Additional resource mobilization for agriculture, rural economy and clean environment (vii) Reducing litigation and providing certainty in taxation (viii) Simplification and rationalization of taxation and (ix) Use of Technology for creating accountability.

1.1 It will be noticed that one of the objectives stated above is “Reducing Litigation and providing certainty in taxation.” In this context, Paragraphs 163 to 165 of the Budget Speech outline his “Dispute Resolution Scheme”.

1.2 One of the important features of this year’s Budget is that a “Income Declaration Scheme, 2016,” has been announced in Sections 181 to 199 of the Finance Act, 2016. .

1.3 In Para 187 of the Budget Speech he has stated that the Direct Tax Proposals will result in revenue loss of Rs.1,060 Cr., and Indirect Tax Proposals will yield additional revenue of Rs.20,670 Cr. Thus the net revenue gain from this year’s proposals will be of Rs.19,610 Cr.

1.4 In this article some of the important amendments made in the Income tax Act by the Finance Act, 2016, have been discussed. These amendments have only prospective effect.

2. Rates of taxes:

2.1 There are no changes in the tax slabs, rates of Income tax or rates of education cess for all categories of assesses, other than companies. As per the announcement made earlier, in this Budget a beginning to reduce the corporate rates in a phased manner has been made. In the case of an Individual, HUF, AOP and BOI whose total income is more than Rs. 1 crore, the surcharge has been increased from 12% to 15%. This has been done to tax the super rich Individuals, HUF etc. There is no change in rate of surcharge in other cases.

In the case of a Resident Individual having total income not exceeding Rs. 5 Lakh Rebate Upto Rs. 2,000/- or tax payable whichever is less is allowable upto A.Y. 2016- 17. This Rebate in now increased upto Rs. 5,000/- or tax payable, whichever is less, for A.Y. 2017-18.

2.2 The surcharge on income tax will be as under in A.Y. 2016-17 and 2017-18:

Note: The rate of surcharge on Dividend Distribution Tax u/s 115- 0, Tax payable on Buy back of Shares u/s 115-QA and Income Distribution tax payable by M.F u/s 115R is 12% as in earlier years.

The existing rate of 3% of Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and Surcharge will continue in A.Y. 2017-18.

2.3 In view of the above, the effective maximum marginal rate of tax
(including Surcharge and Education Cess) will be as under in A.Y. 2017 – 18:

2.4 I n the case of a Domestic Company, which is newly set up on or after 1.3.2016, engaged in the business of Manufacture or Production and Research in relation to, or distribution of articles manufactured or produced by it, the rate of Income tax for A.Y. 2017-18 will be 25% plus applicable surcharge and education cess. This will be subject to following conditions stated in new section 115 BA

(i) Such company shall not be entitled to claim deduction u/s 10AA, 32(1)(iia), 32 AC, 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii), (2AA), 2(AB), 35AC, 35AD, 35CCC, 35CCD as well as under Chapter VIA Part C i.e. sections 80H, to 80RRB (excluding section 80 JJAA).

(ii) Such company will not be entitled to claim set off of loss carried forward from earlier years if the same is attributed to the above deductions. Such carried forward loss shall be deemed to have been allowed and will not be allowed in any subsequent year.

(iii) Depreciation u/s 32 {other than u/s 32(1)(iia)} shall be deducted in the manner as may be prescribed.

(iv) The above concessional rate u/s 115 BA will be available at the option of the assessee company. Such option is to be exercised before the due date for filing Return of Income for the first year after incorporation of the company. Further, such option once exercised, cannot be withdrawn by the company in any subsequent year.

2.5 A new section 115 BBDA has been inserted w.e.f. A.Y. 2017-18 (F.Y 2016-17). This section provides that in the case of any resident individual, HUF or a Firm (including LLP) if the total income for A.Y. 2017-18 and onwards includes Dividend from domestic company or companies, in excess of Rs. 10 Lakh, the dividend upto Rs 10 Lakh will be exempt u/s 10(34) but the excess over Rs 10 Lakh will be chargeable to tax at the rate of 10% plus applicable surcharge and education cess. It is also provided that no deduction in respect of any expenditure or allowance or set off of loss shall be allowed under any provision of the Income tax Act against such dividend.

2.6 Section 115JB is amended from A.Y:2017-18 to provide that in the case of a Company located in International Financial Services Centre and deriving its income solely in convertible Foreign Exchange, the MAT u/s 115JB shall be chargeable at the rate of 9% instead of 18.5%.

3. Tax deduction at source:

3.1 The Income tax Simplification Committee, under the Chairmanship of Justice R.V. Easwar, has suggested in its Interim Report that the provisions relating to tax deduction at source (TDS) should be simplified.

The committee has suggested higher threshold limits and lower rates for TDS in respect of payment u/s 193 to 194 LD. The Finance Minister has accepted this recommendation only partially and amended various sections of the Income tax Act for TDS w.e.f. 1.6.2016 as under:

(i) Revision in Threshold Limit for tds unde r variou s sections.

(ii) Revision in Rates of tds under various Sections

(iii) Provision for TDS under Section 194 K (Income in respect of Units) and section 194L (Payment of compensation on acquisition of capital Asset) deleted w.e.f. 1.6.2016.

3.2 The provisions for issue of certificates for lower or non-deduction of tax at source by an assessing officer u/s 197 have been extended with effect from 1st June, 2016, to cover income payable to a unit holder in respect of units of alternate investment funds (AIFs Category I or II), which is subject to TDS u/s 194LBB, and income payable to a resident investor in respect of investment in a securitization trust, which is subject to TDS u/s 194LBC.

3.3 The provision for non- deduction of TDS on issue of a declaration u/s 197A, has been extended to cover payments of rent, on which tax is deductible u/s 194-I, with effect from 1st June, 2016.

3.4 Section 206AA provides for higher rate of TDS at either the prescribed rate or at the rate of 20%, whichever is higher, if the payee does not furnish his Permanent Account Number to the payer. There has been litigation as to whether this provision applies to foreign companies and non-residents. With effect from 1st June, 2016, the provisions of this section will not apply to a foreign company or to a non-resident in respect of payment of interest on long-term bonds referred to in Section 194 LC or any other payment subject to prescribed conditions. The Finance Minister has announced that any payment to Non-Resident will not attract the higher rate of TDS (i.e 20%) u/s 206AA if any alternate document, as may be prescribed, is furnished.

3.5 TAX COLLECTION AT SOURCE (TCS ): Section 206C has been amended w.e.f. 1.6.2016 to provide as under:

(i) u/s 206C (1D), at present, tax is to be collected by seller of bullion or jewellery at 1% if the payment is made by the purchaser of bullion (exceeding Rs 2 Lakh) or Jewellery (exceeding Rs. 5 Lakh).

(ii) The above requirement of TCS is now enlarged from 1.6.2016 to the effect that the seller will have to collect tax @ 1% if purchase of any other goods or services for amount exceeding Rs 2,00,000/- is made and the purchaser / service receiver makes payment for the same in cash. It may be noted that this provision will not apply to payments by such class of buyers who comply with the conditions as may be prescribed. It is also provided that the above requirement of TCS will not apply where tax is required to be deducted at source by the payer under chapter XVII-B of the Income tax Act.

(iii) New clause (IF) added in this section provides that w.e.f. 1.6.2016 seller of a Motor Vehicle of the value exceeding 10 Lacs will have to collect from the buyer tax @ 1% of the sale consideration. This provision for TCS will apply even if payment for purchase of Motor vehicle is made by cheque.

(iv) The above provisions have been made to enable the Government to bring high value transactions in the tax net.

4. Exemptions and Deductions:

In order to give benefit to assessees certain amendments are made in the Income tax Act as under:

4.1 Section 10 – Income not included in total income: This section is amended from A.Y. 2017-18 (F.Y. 2016-17) as under:

(i) SECTION 10(12A) – This is a new provision. At present deduction is available for contribution made to National Pension Scheme (NPS) u/s 80 CCD. Withdrawal of such contribution along with the accumulated income from the NPS on account of closure or opting out of NPS is taxable in the year of withdrawal if deduction was claimed in the earlier years.

It is now provided that out of any such withdrawal from NPS, 40% of the amount will be exempt u/s 10(12A). However, the whole amount received by the nominee on death of the assessee under the circumstances referred to in section 80CCD (3) (a) shall be exempt from tax. Section 80CCD (3) is also amended for this purpose.

(ii) SECTION 10(13) – At present, any payment from an approved superannuation fund to an employee on his retirement is exempt from tax. The scope of this exemption is now extended by new subclause (v) to transfer of an amount to the account of the assessee under NPS as referred to in section 80CCD and notified by the Government.

(iii) SECTION 10(15) – At present, interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999 is exempt. It is now provides that interest on Deposit Certificates issued under the Gold Monetization Scheme, 2015, will also be exempt from tax.

A consequential amendment is made in section 2(14) that such Deposit Certificates issued under the above scheme will not be considered as a Capital Asset. Therefore, any gain on transfer of such Deposit Certificates will also be exempt from Capital Gains tax.

(iv) SECTION 10(23FC) – At present interest received by a Business Trust from a Special Purpose Vehicle is exempt from tax. It is now provided that Dividend received by such Trust from a Specified Domestic Company as referred to in the newly inserted clause (7) of section 115-0 will also be exempt from tax.

(v) SECTION 10(38) – This section grants exemption from tax in respect of long – term capital gain from transfer of equity share where STT is paid. It is now provided that in respect of long term capital gain arising from transfer of equity shares through a recognized Stock Exchange Located in International Financial Service Centre (IFSC), where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

(vi) SECTION 10(48A) – This is a new provision. It is now provided that income of a Foreign Company on account of storage of Crude Oil in India and sale of such Crude Oil to any person resident in India will not be taxable. This is subject to terms and conditions of the agreement entered into with the Central Government.

(vii) SECTION 10(50) – This is a new provision. It provides that income arising from specified services as stated in chapter VIII (Sections 160 to 177) of the Finance Act, 2016, shall be exempt from tax. Chapter VIII deals with “Equalization Levy”. This provision will be applicable after the above Chapter VIII of the Finance Act, 2016 comes into force.

4.2 SECTION 10AA – DEDUCTION TO SEZ UNITS : This section grants 100% deduction to income of newly established units in SEZ (i.e eligible business) which begin activity of manufacture, production or rendering services on or after 1.4.2006. This is subject to conditions provided in section 10AA. Now a sun-set clause is added in this section whereby such Units which commence such eligible business on or after 1.4.2021 will not be able to claim deduction under section 10AA.

4.3 SECTION 17 – PERQUISITES: At present, u/s 17(2)(vii) contribution to approved Superannuation Fund by the employee upto Rs. 1 Lakh is exempt from tax. This limit is now increased to Rs.1.5 Lakh from A.Y. 2017 – 18.

4.4 SECTION 80EE – DEDUCTION FOR INTEREST ON LOAN FOR RESIDENTIAL HOUSE: The existing section 80EE granted deduction for interest on housing loan to a limited extent. This section is replaced w.e.f. A.Y. 2017-18 to provide for deduction upto Rs. 50,000/- in respect of interest on Housing Loan taken by an individual from the Financial Institution or Housing Finance Company if the following conditions are complied with.

(i) Loan should be sanctioned during 1.4.2016 to 31.3.2017.

(ii) Loan amount should not exceed Rs.35 Lakh and the value of the Residential House should not exceed Rs 50 Lakh.

(iii) The assessee should not own any other Residential House on the date of sanction of the Loan.

(iv) The above deduction can be claimed in A.Y. 2017- 18 and in subsequent years.

It may be noted that the above deduction can be claimed even if the Residential House is not for self occupation and is let out. Further, the above deduction can be claimed in addition to deduction of interest upto Rs. 30,000/- (Rs 2 Lakh in specified cases) allowable for interest on housing loan for self-occupied residential house property.

4.5 SECTION 80GG – DEDUCTION FOR RENT : At present, an assessee can claim deduction for expenditure incurred on Rent for Residential House occupied by himself if he is not in receipt of House Rent Allowance from his employer subject to certain conditions. This deduction is limited to Rs 2,000/- P.M. or 25% of total income or actual rent paid in excess of 10% of total income whichever is less. The above limit of Rs 2,000/- P.M. is now increased to Rs 5,000/- P.M. effective from A.Y. 2017-18.

4.6 SECTION 80-IA – DEDUCTION TO INFRASTRUCTURE UNDERTAKINGS: Section 80 – 1A(4) grants exemption to infrastructure undertakings subject to certain conditions. It is now provided that this exemption will not be available to an undertaking which starts the development or operation and maintenance of the infrastructure facility on or after 1.4.2017.

4.7 SECTION 80 – IA B – DEDUCTION TO INDUSTRIAL UNDERTAKING: By amendment of this section it is provided that the provisions of Section 80-IAB shall not apply to an assessee, being a Developer, where the development of SEZ begins on or after 1.4.2017.

4.8 SECTION 80 – IAC – THE INCENTIVES FOR START UPS:

(i) With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, this new section is inserted w.e.f. A.Y. 2017-18. It provides for 100% deduction of the profits and gains derived by an Eligible Start-UP (Company or LLP) from a business involving Innovation, Development, Deployment or Commercialization of new products, processes or services driven by technology or intellectual property. This deduction is available at the option of the assessee for any three consecutive assessment years out of five years starting from the date of incorporation.

(ii) Eligible start-up means a company or LLP incorporated between 1.4.2016 to 31.3.2019. The turnover of the business should be less than Rs 25 Crores in any of the years between 1.4.2016 to 31.3.2021. Further, such company / LLP should hold a certificate for eligible business from the Inter Ministerial Board of Certification.

(iii) It is necessary to ensure that such start-up is not formed by splitting up or reconstruction of a business already in existence or by transfer of machinery or plant previously used for any other purpose, subject to certain exceptions provided in the section.

(iv) With a view to encourage an Individual or HUF to invest in such a start-up company or LLP, section 50 GB has been amended to grant exemption from Capital Gain Tax if the capital gain on sale of Residential House is invested in such a company or LLP. Similarly, a new section 54 EE has been inserted to grant deduction upto Rs. 50 Lacs if investment is made in such a company or LLP out of capital gain arising on transfer of long term specified asset.

4.9 SECTION 80 – IB – DEDUCTION TO CERTAIN INDUSTRIAL UNDERTAKINGS:
The deduction granted to certain specified Industrial Undertakings stated in Section 80 – 1B(9)(ii),(iv) and (v) will be discontinued in respect of Industrial undertakings started on or after 1.4.2017.

4.10 SECTION 80 – IBA – DEDUCTION TO CERTAIN HOUSING PROJECTS

This is a new section which provides for 100% deduction in respect of profits and gains of eligible Housing Projects of Affordable Residential Units from A.Y. 2017-18. The section applies to assessees engaged in developing and building Housing Projects approved by the competent Authority after 1.6. 2016 but before 1.4.2019. This deduction is subject to following conditions:

(i) The project is completed within a period of three years from the date on which the building plan of such project is first approved and it shall be deemed to have been completed only when certificate of completion of project is obtained from the Competent Authority.

(ii) The built-up area of the shops and commercial establishments does not exceed 3% of the aggregate built up area.

(iii) If the project is located in Delhi, Mumbai, Chennai or Kolkata or within 25 km from the municipal limits of these cities:

(a) It is on a plot of land measuring not less than 1000 sq. meters

(b) The residential unit does not exceed 30 square meters and

(iv) If the project is located in any other area:

(a) It is on a plot of land measuring not less than 2,000 sq. meters

(b) The residential unit does not exceed 60 square meters and

(v) In both above cases the project is the only project on the land specified above.

(vi) The assessee maintains separate books of account.

(vii) If the housing project is not completed within the specified period of three years, deduction availed in the earlier years will be taxed in the year in which the period of completion expires. The definitions, of certain terms such as ‘housing project’, ’ built-up area’ etc. are also given in section 80-IBA(6)

(viii) The benefit under this section is not available to a person who executes the Housing Project as a works contract awarded by any other person (including any state or Central Government)

4.11 SECTION 80JJAA – INCENTIVE FOR EMPLOYMENT GENERATION:

At present, an assessee engaged in manufacture of goods in a factory can claim deduction of 30% of additional wages paid to new regular workmen for 3 assessment years. This deduction can be claimed in respect of additional wages paid to a workman employed for 300 days or more in the relevant year. Further, there should be an increase of at least 10% in the existing workforce employed on the last date of the preceding year. The existing section will apply in A.Y. 2016-17 and earlier years. New Section 80JJAA has been inserted w.e.f. AY 2017-18.

This new section applies to all assesses who are required to get their accounts audited u/s 44AB. The deduction allowable is 30% of additional employee cost for a period of 3 assessment years from the year in which such additional employment is provided. This deduction is subject to the following conditions:

(i) The business should not be formed by splitting up, or the reconstruction of an existing business.

(ii) The business should not be acquired by the assessee by way of transfer from any other business or as a result of any business reorganization.

(iii) Additional employee cost means total emoluments paid to additional employees employed during the year. However, in the first year of a new business, emoluments paid or payable to employees employed during the previous year shall be deemed to be the additional employee cost. Accordingly, deduction will be allowed on that basis in such a case.

(iv) No deduction will be available in case of existing business, if there is no increase in number of employees during the year as compared to number of employees employed on the last day of the preceding year or the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system.

(v) Additional employee would not include employee whose total emoluments are more than Rs. 25,000 per month or an employee whose entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government or if an employee has been employed for less than 240 days in a year or the employee does not participate in recognized provident fund.

(vi) Emoluments means all payments made to the regular employees. This does not include contribution to P.F., Pension Fund or other statutory funds. Similarly, it does not include lump-sum payable to employee on termination of service, Superannuation, Voluntary Retirement etc.

(vii) The assessee will have to furnish Audit Report from a Chartered Accountant in the prescribed form.

4.12 FOURTH SCHEDULE – PART A: Rule 8 of this Schedule is amended from A.Y:2017-18 to grant exemption to the employee if the entire balance standing to the credit of the employee in a recognized Provident Fund is transferred to his account in the National Pension Scheme referred to in Section 80CCD.

5. CHARITABLE TRUSTS:

5.1 A new chapter XII – EB (Sections 115 TD, 115 TE and 115TF) has been inserted in the Income tax Act effective from 1.6.2016. The provisions of these sections are very harsh and are likely to create great hardship to trustees of charitable trusts. In the Explanatory Memorandum to Finance Bill, 2016, it is explained that “there is no provision in the Income tax Act which ensure that the corpus and asset base of a trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes. In the absence of a clear provision, it is always possible for charitable trusts to transfer assets to a non-charitable trust. In order to ensure that the intended purpose of exemption availed by the trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an Exist Tax which is attracted when the charitable organization is converted into a non-charitable organization”. It appears that the stringent provisions in section 115TD to 115 TF have been inserted to achieve this objective. This is another blow to charitable trusts. Since these sections apply to all trusts and institutions registered u/s 12A/12AA which claim exemption u/s 10(23C) or 11, they will apply to all charitable or religious trusts claiming exemption u/s 11 and education institutions, hospitals etc., claiming exemption u/s 10(23C).

5.2 Broadly stated these sections provide as under:

(i) A trust or an institution shall be deemed to have been converted into any form not eligible for registration u/s 12AA in a previous year, if,

(a) The registration granted to it u/s 12AA has been cancelled; or

(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration u/s 12AA in the said previous year; or has filed application for fresh registration u/s 12AA but the said application has been rejected.

(ii) Under the Section 115TD, it has been provided that the accretion in income (accreted income) of the trust or institution will be taxable on

(a) Conversion of trust or institution into a form not eligible for registration u/s 12 AA, or

(b) On merger into an entity not having similar objects and registered u/s 12AA, or

(c) On non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period of twelve months from end of month of dissolution. The accreted income will be the amount of aggregate of total assets as reduced by the liability as on the specified date.

(iii) The assets and the liability of the charitable organization which has been transferred to another charitable organization within specified time would be excluded while calculating the accreted income. Similarly, any asset which is directly acquired out of Agricultural Income of the Trust or institution will be excluded while computing accreted income. It is not clear whether Agricultural Land Settled in Trust or received by the Trust by way of Donation will be excluded from such computation.

(iv) Any asset acquired by the Trust or Institution during the period before registration is granted u/s 12A / 12AA and no benefit u/s 11 has been enjoyed during this period, will be excluded from the above computation of accreted income.

(v) The method of valuation of such assets / liability will be prescribed by Rules.

(vi) The accreted income will be taxable at the maximum marginal rate (i.e. 30% plus applicable surcharge and education cess) in addition to any income chargeable to tax in the hands of the entity. This tax will be the final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it will be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

(vii) The principal officer or trustee of the trust has to deposit the above tax within 14 days of the due date as under:

(a) Date on which the time limit to file appeal to the Tribunal u/s 253 against order cancelling Registration u/s 12AA expires if no appeal is filed.

(b) If such appeal is filed but the Tribunal confirms such cancellation, the date on which Tribunal order is received.

(d) When the period of 12 months end from the date of dissolution of trust if the assets are not transferred to an entity registered u/s 12A / 12AA.

(viii) Section 115 TE provides that if there is delay in payment of the above Exist Tax, the person responsible for payment of such tax will have to pay interest at the rate of 1% P.M. or part of the month.

5.3 Section 115TF provides that the principal officer or any trustee of the trust will considered as assessee in default if the above tax and interest is not paid before the due date. In other words, they can be made personally responsible for payment of such tax and interest. It is also provided that the non-charitable entity with which the trust has merged or to whom the assets of the trust are transferred will also be liable to pay the above exist tax and interest. However, the liability of such an entity will be limited to the value of the assets of the trust transferred to such entity.

6. INCOME FROM HOUSE PROPERTY:

6.1 Under Section 24 (b) interest paid on loan taken on or after 1-4-1999 for acquiring or constructing a residential house for self occupation is allowed as deduction subject to the limit of Rs.2 Lakh. This deduction is available provided the acquisition or construction is completed within 3 years from the end of the financial year in which loan was taken. By amendment of this section this period is now extended to 5 years from A.Y. 2017-18.

6.2 Existing Sections 25A, 25AA and 25B dealing with taxation of unrealised rent are now consolidated into a new section 25A from A.Y. 2017-18. The new section provides that arrears of rent or amount of unrealised rent which is received by the assessee in subsequent years shall be chargeable to tax as income of the financial year in which such rent is received. This amount will be taxable in the year of receipt whether the assessee is owner of the property or not. The assessee will be entitled to claim deduction of 30% of such arrears of rent which is taxable on receipt basis.

7. INCOME FROM BUSINESS OR PROFESSION:

7.1 INCOME-SECTION 2(24)(XVIII ): The definition of “income” u/s 2(24) was widened by insertion of clause (xviii) last year. Under this definition any receipt from the Government or any authority, body or agency in the form of subsidy, grant etc., is considered as income. However, if any subsidy, grant etc., is required to be deducted from the cost of any asset under Explanation (10) of section 43(1) is not considered as income. Amendment in the section, effective from A.Y.2017-18, now provides that any subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government will not be considered as income. It may be noted that u/s 2(24) (xviii) no destinction is made between Government Grants of a capital nature and revenue grants. From the wording of the section it is not clear as to whether subsidy or grant received to set up any business or to complete a project will be exempt as held by the Supreme Court in the case of Sahney Steel and Press Works Ltd vs. CIT (228 ITR 253). Further, from the amendment made this year, it is not clear whether subsidy or grant by a State Government for the purpose of corpus of a trust or Institution established by the Government will be exempt.

7.2 NON-COMPETE FEES RECEIVABLE BY A PROFESSIONAL – SECTION 28(VA): At present a Noncompete Fees receivable in cash or kind is chargeable to tax in the case of a person carrying on a Business u/s 28(va). This section is amended w.e.f. A.Y. 2017-18 to extend this provision to a person carrying on a profession. Consequential amendment is also made in section 55 to treat cost of acquisition or cost of improvement as ‘NIL’ in the case of right to carry on any profession. In view of this, any amount received on account of transfer of right to carry on any profession will be taxable as capital gains.

7.3 ADDITIONAL DEPRECIATION – SECTION 32(1)(IIA ) : At present benefit of Additional Depreciation at 20% of actual cost of new plant and machinery is available to the assessee engaged in generation or generation and distribution of power. It is now provided that from A.Y. 2017-18 the benefit can be claimed also by an assessee engaged in Generation, Transmission or Distribution of power.

7.4 INVESTMENT ALLOWANCE – SECTION 32 AC : This section was amended by the Finance (No.2) Act, 2014 w.e.f. A.Y 2015-16. At present it provides for deduction of 15% of cost of new plant and machinery acquired and installed during the year if the total cost of such plant & machinery is more than Rs.25 crore. From reading the section it was not clear whether the benefit of the section can be claimed only if the plant or machinery is purchased and installed in the same year. By amendment of this section, effective from A.Y. 2016-17, it is now provided that even if the plant or machinery is acquired in one yare but installed in a subsequent year, the benefit of deduction can be claimed in the year of installation. Therefore, if the new plant or machinery is acquired in an earlier year but installed on or before 31.3.2017, deduction can be claimed in the year of installation.

7.5 WEIGHTED DEDUCTION FOR SPECIFIED PURPOSES:

In line with the Government policy for reduction of rates of taxes in a phased manner and reduction of incentives provided in the Income tax Act, section 35,35AC, 35AD, 35CCC and 35CCD have been amended w.e.f. A.Y 2018- 19 as under:

7.6 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM – SECTION 35ABA: (i) This is a new section inserted w.e.f. A.Y. 2017-18. It provides for deduction for capital expenditure incurred for acquiring any right to use spectrum for telecommunication services. The actual amount paid will be allowed to be spread over the period of right to use the license and allowed as a deduction in each year. This deduction will be allowed starting from the year in which the spectrum fee is paid. If such fee is paid before the business to operate telecommunication services is started, deduction will be allowed from the year in which business commences. It is also provided that provisions of section 35ABB(2) to (8) relating to transfer of licence, amalgamation and demerger will apply to spectrum also.

(ii) It is also provided that if deduction is claimed and granted for part of the capital expenditure, as stated above, in any year, the same will be withdrawn in any subsequent year if there is failure to comply with any of the provisions of this section. Such withdrawal can be made by rectification of the earlier assessments u/s 154.

7.7 DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS – SECTION 35AD: (i) At present, deduction of 100% of capital expenditure is allowed in the case of an assessee engaged in certain

specified business listed in section 35AD(8). In respect of business listed in section 35AD (i),(ii),(v), (vii) and (viii) such deduction is allowed at 150% of the capital expenditure. From A.Y. 2018-19 such expenditure will be allowed at 100% only.

(ii) Further, the list of specified business in section 35AD(8) has been expanded. By this amendment, effective from A.Y. 2018-19, capital expenditure in the business of “Developing or Maintaining and Operating or Developing, Maintaining and Operating a new Infrastructure facility” which commences operation on or after 1.4.2017 will be entitled to the benefit u/s 35AD. This is subject to the condition that such business is owned by (i) an Indian Company or a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act and (ii) such entity has entered into an agreement with the Central or State Government or Local authority or any Statutory body Developing, Maintaining etc., of the new Infrastructure facility.

7.8 NBFC – DEDUCTION FOR PROVISION FOR DOUBTFUL DEBTS – SECTION 36(1),(VIIIA )
Deduction for provision for Bad and Doubtful Debts is allowed at present to Banks u/s 36(1)(viiia) subject to certain conditions. This benefit is now extended to a NBFC also. This amendment is effective from A.Y. 2017- 18. This deduction cannot exceed 5% of the total income computed before making deduction under this section and deduction under Chapter VI A.

7.9 DISALLOWANCE OF EQUALISATION LEVY – SECTION 40(a): This is a new provision which is effective from 1.6.2016. Chapter VIII of the Finance Act, 2016, provides for payment of Equalisation Levy on certain payments to Non-Residents for specified services. Now, section 40(a)(ib) provides that if this Levy is not deposited with the Government before the due date for filing Return of Income u/s 139(1), deduction for the payment to Non- Resident will not be allowed to the assessee. If the above Levy is deposited after the such due date for filing Return of Income, the deduction for the payment to Non-Resident will be allowed in the year of deposit of this Levy with the Government.

7.10 DEDUCTION ON ACTUAL PAYMENT – SECTION 43B: This section is amended w.e.f. A.Y. 2017- 18 to provide that any amount payable to Indian Railways for use of Railway Assets will be allowed only in the year in which actual payment is made. However, if such actual payment is made before the due date for filing the Return of Income u/s 139(1), for the year in which it was payable, deduction will be allowed in the year in which the amount was payable. This provision will apply to rent payable in premises of Indian Railways taken on rent or such similar transactions.

7.11 TAX AUDIT – SECTION 44AB: At present a person carrying a profession is required to get his accounts audited if his gross receipts exceed Rs.25 Lakh in any Financial Year. This limit is increased to Rs.50 Lakh from A.Y. 2017-18. In a case where the profits are not declared in accordance with provisions of section 44AD (Business) or 44ADA (Profession) the assessee will have to get the accounts audited u/s 44AB irrespective of the amount of turnover or gross receipts.

7.12 PRESUMPTIVE BASIS OF COMPUTING BUSINESS INCOME – SECTION 44AD:

(i) This section provides for computation of Business Income in the case of an eligible assessee engaged in eligible business at 8% of total turnover or gross receipts in any financial year. For this purpose the limit for turnover or gross receipts was Rs. 1 Cr. This has now been increased to Rs. 2 Cr., from A.Y. 2017-18.

(ii) Section 44AD (2) provides that in the case of a Firm / LLP declaring profit on presumptive basis, deduction for salary and interest paid by the Firm / LLP to its partners is allowable. This provision is deleted w.e.f. AY. 2017-18. Hence no such deduction will be allowed. It may be noted that the partner will have to pay tax on such salary or interest received from the Firm/LLP.

(iii) Section 44AD(4) is replaced by another section 44AD(4) from A.Y. 2017-18. It is now provided that any eligible person who carries on eligible business and declares profit at 8% or more of total turnover or gross receipts for any year in accordance with this section, but does not declare profit on such presumptive basis in any of the five subsequent years, shall not be eligible to claim the benefit of taxation on presumptive basis under this section for 5 subsequent assessment years. In view of this, such assessee will be required to maintain books as provided in section 44AA and get the accounts audited u/s 44AB.

7.13 PRESUMPTIVE BASIS OF COMPUTING INCOME FROM PROFESSION – SECTION 44ADA:

(i) This is a new provision which will come into force from A.Y. 2017-18. This provision will benefit resident professionals who carry on the profession on a small scale and the yearly gross receipts are less than Rs. 50 Lacs. Broadly stated the provisions of the new section 44ADA are as under:

a) The section is applicable to every resident assessee who is engaged in any profession covered by section 44AA(1) i.e. legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession as is notified by the Board in the Official Gazette. The Explanatory Memorandum states that this section is applicable only to individuals, HUF and partnership firms (excluding LLPs). However the wording of the Section makes it clear that it applies to all resident assesses.

b) Presumptive profit shall be 50% of the total gross receipts or sum claimed to have been earned from such profession, whichever is higher.

c) Deductions under sections 30 to 38 shall be deemed to have been allowed and no further deduction under these sections will be allowed.

d) The written down value of any asset used for the purpose of profession shall be deemed to have been calculated as if the depreciation is claimed and allowed as a deduction.

e) The assessee is required to maintain books of account and also get them audited if he declares profit below 50% of the gross receipts.

(ii) It may be noted from the above that there is no provision in Section 44ADA for deduction of salary and interest paid by a Firm or LLP to its partners. Therefore, if a professional Firm/LLP offers 50% of its gross receipts for tax under this section, the partners will have to pay tax on salary and interest received by the partners.

(iii) It may be noted that Justice Easwar Committee has suggested in its report that taxation of income on presumptive basis is popular with small business entities as they are not required to maintain books or get their accounts audited. The committee has, therefore, suggested that this scheme should be extended to persons engaged in the profession. In para 5.1 of their report it is stated that “the committee recommends the introduction of a presumptive income scheme whereby income from profession will be estimated to be thirty three and one-third (33 1/3%) of the total receipts in the previous year. The benefit of this scheme will be restricted to professionals whose total receipts do not exceed one crore rupees during the financial year”. From the provisions of new section 44ADA it will be noticed that the above recommendation has been partly implemented.

(iv) A question for consideration is whether remuneration and interest on capital received by a partner of a firm or LLP engaged in any profession can be considered as income from the profession within the meaning of section 44 ADA. It is possible to take a view that this is income from profession as section 28(v) provides that “any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm” shall be chargeable under the head “Profits and gains of Business or Profession”. Even in the Income tax Return Form such Interest and Remuneration received by a partner from the firm is to be shown under the head profits and gains from business or profession. Therefore, if a professional has received total interest and remuneration of Rs.25 Lakh and Rs.15 lakh as share of profit from the professional firm in which he is a partner and he has no other income under the head profits and gains from business or profession, he can offer Rs.12.5 Lakh for tax u/s 44ADA.

7.14 INCOME FROM PATENTS – SECTION 115BBF:

This is a new section which provides for taxation of Royalty from Patents at a concessional rate of 10% from A.Y. 2017-18. The new section provides as under:

(i) If the total income of the eligible assessee includes any income by way of Royalty in respect of Patent developed and registered in India, tax on such Royalty shall be payable at the Rate of 10% plus applicable surcharge and education cess.

(ii) Such tax will be payable on the gross amount of Royalty. No expenditure incurred for this purpose shall be allowed against the Royalty Income or any other income.

(iii) For this purpose the Eligible assessee is defined to mean a person resident in India who is the true and first Inventor of the invention and whose name is entered on the Patent Register as a Patentee in accordance with the Patents Act. Further, a person being the true and first Inventor of the invention will be considered as an eligible assessee, where more than one persons are registered as Patentees under the Patents Act in respect of the Patent.

(iv) Explanation to the section defines the expressions Developed, Patent, Patentee, Patented Article, Royalty etc.

(v) The eligible assessee has to exercise option, if he wants to take benefit of this section, in the prescribed manner before the due date for filing Return of Income u/s 139(1) for the relevant year.

(vi) If the eligible assessee who has opted to claim the benefit of this section does not offer for taxation such Royalty income in accordance with this section, he will not be able to take benefit of this section in subsequent 5 assessment years.

(vii) The above Royalty Income shall not be included in the “Book Profit” computation u/s 115JB. Similarly, any expenditure relatable to Royalty income will not be deductible from such “Book Profit”.

7.15 CARRY FORWARD OF LOSS – SECTIONS 73A(2) AND 80: At present Section 73A (2) provides that carry forward of Loss incurred in any business specified in section 35AD(8)(C) is allowable for set-off against income of any specified business in subsequent year. Section 80 is amended w.e.f. A.Y. 2016-17 to provide that such carry forward of Loss u/s 73A(2) will be allowed only if the Return of Income for the year in which loss is incurred is filed before the due date u/s 139(1).

8. INCOME FROM OTHER SOURCES – SECTION 56(2)(vii):
Section 56(2)(vii) provides for levy of tax an Individual or HUF in respect of any asset received without consideration or for inadequate consideration. Second Proviso to this section provides for certain exceptions whereby the said section does not apply to certain transactions. The scope of this proviso is now extended w.e.f. A.Y. 2017-18 to receipt by individual or HUF of shares of-

(i) A successor Co-op. Bank in a business reorganization in lieu of shares of a predecessor co-op. Bank (Section 47(vicb).

(ii) A resulting company pursuant to a scheme of Demerger (Section 47(vid).

(iii) An amalgamated company pursuant to a scheme of amalgamation (Section 47 (vii).

9 CAPITAL GAINS:

9.1 DEFINITIONS – SECTION 2 (14) AND 2(42A):

(i) Section 2(14) defining “Capital Asset” is amended from A.Y. 2016-17 to state that Deposit Certificates issued under Gold Monetization Scheme, 2015, will not be considered as Capital Asset for fax purposes.

(ii) Section 2(42A) defines the term “Short-term Capital Asset”. This definition is amended from A.Y. 2017-18 to provided that shares (equity or preference) of a non-listed company will be treated as short-term capital asset if they are held for less than 24 Months. It may be noted that prior to 10.7.2014, this period was 12 months. It was increased to 36 months by the Finance (No.2) Act, 2014 w.e.f. 11.7.2014. Now, this period is reduced to 24 Months from 1.4.2016.

9.2 SOVEREIGN GOLD BONDS – SECTION 47 (VIIC ):
It is now provided from A.Y. 2017-18 that any gain made by an Individual on redemption of Sovereign Gold Bonds issued by RBI shall not be chargeable as capital gains.

9.3 CONVERSION OF A COMPANY INTO LLP – SECTION 47(XIII B):
The exemption from capital gains given to a private or a public unlisted company u/s 47 (xiiib) is subject to several conditions. One of the conditions, at present, is that the total sales, turnover or gross receipts in a business of the company in any of the three preceding years does not exceed Rs. 60 Lacs.

Instead of removing this condition or increasing the limit of turnover, a new condition is now added from A.Y. 2017- 18. It is now provided that total value of the assets, as appearing in the books of account of the company, in any of the three preceding years, does not exceed `5 Crores. This will prevent many small investment or property companies from converting themselves into LLP.

9.4 UNITS OF MUTUAL FUNDS – SECTION 47(XIX): Capital Gain arising on transfer of units in a consolidated plan of a M.F. Scheme in consideration of allotment of units in consolidated plan of that scheme will not be chargeable to tax from A.Y. 2017-18.

9.5 MODE OF COMPUTATION OF CAPITAL GAIN – SECTION 48: This section which deals with computation of capital gain is amended from A-Y 2017-18 as under:

(i) For computing long term capital gain on transfer of Sovereign Gold Bonds issued by RBI it will now be possible to consider indexed cost as cost of acquisition.

(ii) In the case of a non-resident assessee, for computing capital gain on redemption of Rupee Denominated Bond of an Indian company subscribed by him, the gain arising on account of appreciation of Rupee against a Foreign Currency shall be ignored.

9.6 COST OF CERTAIN ASSETS – SECTION 49: Section 49 provides for determination of cost of acquisition of certain Assets. By amendment of this section it is provided, from A.Y. 2017-18, that in respect of any asset declared under the “Income Declaration Scheme, 2016” Under Chapter IX of the Finance Act, 2016, the fair market value of the Asset as on 1.6.2016 shall be deemed to be the cost of acquisition for the purpose of computing capital gain on transfer of that asset.

9.7 FULL VALUE OF CONSIDERATION – SECTION 50C: This section is amended from A.Y.2017-18 to bring it in line with the provisions of section 43CA. This amendment is based on the recommendation of Justice R. Easwar Committee Report (Para 6.2). At present, Stamp Duty valuation as on the date of transfer of immovable property is compared with the consideration recorded in the transfer document. It is now provided that if the date of the agreement for sale and the date of actual transfer of the property is different, the stamp duty valuation on the date of Agreement for sale will be considered for the purpose of section. This is subject to the condition that the amount of the consideration or a part there of has been received by the seller by way of an account payee cheque or draft or by use of electronic clearing system through a bank on or before the date of the Agreement for sale.

9.8 EXEMPTION ON REINVESTMENT OF CAPITAL GAIN – SECTION 54 EE AND 54 GB: As discussed in Para 4.8 above, new section 54EE and amendment in section 54GB provides for exemption upto `50 Lacs if the capital gain on transfer of specified assets are invested in startup company or LLP. These provisions come into force from A.Y. 2017-18. Broadly stated these provisions are as under:

(i) Section 54EE Provides that if whole or part of capital gain arising from transfer of a long term capital asset (original asset) is invested within 6 months, from the date of such transfer, in a longterm Specified Asset, the assessee can claim exemption in respect of such capital gain. For this purpose the “Specified Asset” is defined to mean unit or units issued before 1.4.2109 by such Fund as may be notified by the Central Government. The Explanatory Memorandum to Finance Bill, 2016, states that it is proposed to establish a Fund of Funds to finance the start-ups. The following are certain conditions for claiming this exemption.

(a) Investment in long term specified asset should not exceed `50 lakh during a financial year. In case where the investment is made in two financial years, for the capital gains of the same year, the aggregate investment which qualifies for exemption from capital gain will not exceed Rs. 50 lakh.

(b) The long term specified asset is not transferred by the assessee for a period of three years from the date of its acquisition. The assessee does not take any loan or advance against the security of such long term specified asset. In a case where the assessee takes a loan or an advance against security of long term specified asset, it shall be deemed that the assessee has transferred the long term specified asset on the date of taking the loan or an advance.

(e) If the assessee, within a period of three years from the date of its acquisition, transfers that long term specified asset or takes a loan or an advance against security of such long term specified asset, the amount of capital gain which is allowed as exempt u/s 54EE will be charged to tax under the head “Capital Gains” as gain relating to long term capital asset of the previous year in which the long term capital asset was transferred.

(ii) Section 54GB, at present, grants exemption to an Individual or HUF in respect of long term capital gain arising on transfer of a Residential property (House or a Plot of Land) if the net consideration is utilized for subscription in equity shares of an eligible company. This provision will not apply to transfer of a residential property after 31.3.2017. By amendment of this section it is now provided that this exemption will be available to an Individual or HUF if net consideration on transfer of Residential property (Land, Building or both) is invested in an “Eligible Start Up” company or LLP. The term “Eligible Start-up” has been given the same meaning as in Explanation below section 80-IAC(4). (Refer Para 4.8 above). The above investment is to be made before the due date for filing the Return of Income. The above concession is not available if the transfer of Residential property is made after 31.3.2019. It may be noted that other conditions in existing section 54GB will apply to the above Investment also.

(iii) It may be noted that an Individual or HUF who is claiming exemption u/s 54 or 54F on transfer of a long term Capital Asset (including a Residential House) can claim deduction u/s 54EC (Investment in Bonds upto Rs. 50 Lakh) as well as u/s 54EE Investment in specified units (upto Rs. 50 Lakh) and u/s 54GB (Investment in eligible start up without any limit). If we read sections 54EC, 54EE and 54GB it will be noticed that no restriction is put in any of these sections that claim for deduction on reinvestment can be made under any one section only. Therefore, if an individual / HUF sells his Residential House, he can claim deduction u/s 54EC (upto Rs. 50 Lakh), u/s 54EE (up to Rs. 50 Lakh), u/s 54GB (without limit) as well as u/s 54 for purchase of another Residential House.

9.9 TAX ON SHORT -TERM CAPITAL GAIN – SECTION 111A: At present, this section provides for levy of tax on short-term Capital Gain at 15% from transfer of equity shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is provided that in respect of short-term capital gain arising from transfer of equity shares through a Recognized Stock Exchange located in International Financial Service Centre (IFSC) where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

9.10 TAX ON LONG – TERM CAPITA L GAIN – SECTION 112: At present, the tax on long – term capital gain on transfer of unlisted securities in the case of nonresident u/s 112 (1)(a) (iii) is chargeable at the rate of 10% if benefit of first and second proviso to section 48 is not taken. There was a doubt whether the word “Securities” include shares in a company. In order to clarify the position this section is amended from A.Y. 2017-18 to provide that long term Capital Gain from transfer of shares of a closely held company (whether public or private) shall be chargeable to tax at 10% if benefit of first and second proviso to section 48 is not claimed.

10. MINIMUM ALTERNATE TAX (MAT) – SECTION 115JB:

Applicability of MAT to foreign companies has been a burning issue. In line with the recommendations of the Justice A.P. Shah Committee, section 115JB is amended to provide that the provisions of section 115JB shall not be applicable to a foreign company if

(i) The assessee is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1) or an agreement u/s 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of the relevant Agreement; or

(ii) The assessee is a resident of a country with which India does not have an agreement under the above referred sections and is not required to seek registration under any law for the time being in force relating to companies.

This amendment is made effective retrospectively from A.Y. 2001-02.

11. DIVIDEND DISTRIBUTION TAX (DDT) – SECTION 115-O:

(i) At present, under the specific taxation regime for business trusts, a tax pass through status is given to Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (INVITS). However, a Special Purpose Vehicle, being a company, which is held by these business trusts, pays normal corporate tax and also suffers dividend distribution tax (DDT) while distributing the income to the business trusts being a shareholder.

(ii) It is now provided by amendment of section 115-0 w.e.f. 1.6.2016 that no DDT will be levied in respect of distribution of dividend by an SPV to the business trust. The exemption from levy of DDT will only be in the cases where the business trust holds 100% of the share capital of the SPV excluding the share capital other than that which is required to be held by any other person as part of any direction of the Government or any regulatory authority or specific requirement of any law to this effect or which is held by Government or Government bodies. The exemption from the levy of DDT will only be in respect of dividends paid out of current income after the date when the business trust acquires the shareholding of the SPV as referred to above. Such dividend received by the business trust and its investor will not be taxable in the hands of trust or investors as provided in the amended sections 10(23FC) & 10(23FD). The dividends paid out of accumulated and current profits upto this date will be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

(iii) It is further provided in section 115-0(8) that no DDT will be levied on a company, being a unit located in an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount of dividend declared, or paid by such company on or after 1 April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

12. TAX ON BUY BACK OF SHARES:

(i) At present section 115QA of the Act provides that income distributed on account of buy back of unlisted shares by a company is subject to the levy of additional Income-tax at 20%. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company, for issue of such shares. Buy-back has been defined to mean the purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

(ii) It is now provided w.e.f. 1.6.2016 that section 115QA will apply to any buy back of unlisted shares undertaken by the company in accordance with the law in force relating to companies. Accordingly, it will also cover buy-back of shares under any of the provisions of the Companies Act, 1956 and the Companies Act, 2013. It is further provided that for the purpose of computing distributed income, the amount received by a company in respect of the shares being bought back shall be determined in the prescribed manner. These Rules may provide the manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganizations and in different tranches as stated in the Explanatory Memorandum.

13. SECURITIZATION TRUSTS – CHAPTER XII EA :

(i) Chapter XII EA was added by the Finance Act, 2013, effective from A.Y. 2014-15. Under these provisions it was provided that: (a) A ny income of Securitisation Trust will be exempt u/s 10 (23DA), (b) Income received by the Investor any securitized debt instrument or securities issed by such trust will be exempt u/s 10(35A), and (c) The Trust was required to pay additional Income tax on distributed income u/s 115TA (25% in the case of Individual / HUF and 30% in case of others). There were other procedural provisions in sections 115TA to 115TC.

(ii) Section 115 TA is amended w.e.f 1.6.2016. New Section 115TCA has been inserted from A.Y. 2017-18. It is now provided that the current tax regime for Securitization Trust and its investors, will be discontinued for the distribution made by Securitisation Trust with effect from 1 June, 2016, and will be substituted by a new regime with effective from A.Y 2017-18. This effectively grants pass through status to the Securitisation Trust. The new regime will apply to a Securitisation Trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitization of standard assets issued by RBI or a trust setup by a securitization company or a reconstruction company in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or guidelines or directions issued by the RBI (SARFAE SI Act).

(iii) The income of Securitisation Trust will continue to be exempt section under 10(23DA) which is also amended to effectively define the term securitization. The income accrued or received from the Securitisation Trust will be taxable in the hands of investor in the same manner and to the same extent as it would have happened had the investor made investment directly in the underlying assets and not through the trust. Consequential amendment is made in section 10(35A). The payment made by Securitisation Trust will be subject to tax deduction at source u/s 194LBC at the rate of 25% in case of payment to resident investors who are individual or HUF and @ 30% in case of others. In case of payments to non-resident investors, the deduction of tax will be at rates in force. The facility for the investors to obtain lower or nil deduction of tax certificate will be available. The trust will also provide breakup regarding nature and proportion of its income to the investors and also to the prescribed income-tax authority.

14. TAXATION OF NON-RESIDENTS:

(i) PLACE OF EFFECTIVE MANAGEMENT (POEM) – SECTION 6:

(a) The concept of treating a foreign company as resident in India if its place of effective management is in India was introduced by the Finance Act, 2015 and was to become effective from Assessment Year 2016-17. Under this concept, foreign companies will be considered as resident in India if its POEM is in India. The Finance Minister has now recognized that before introducing this concept, its ramifications need to be analyzed in detail. Accordingly, the implementation of concept of POEM has been deferred by one year and the same will now be applicable from Assessment year 2017-18.

(b) A new section115JH is inserted to empower the Government to issue notification to provide detailed transition mechanism for companies incorporated outside India, which due to implementation of POEM, will be assessed for the first time as resident in India. The notification will be issued to bring clarity on issues relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, applicability of transfer pricing provisions, etc., applicable to such foreign companies considered to be resident in India.

(ii) INCOME DEEMED TO ACCRUE OR ARISE IN INDIA – SECTION 9(1)(I)

A new clause has been inserted in Explanation 1, providing that no income shall be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities confined to display of uncut and unassorted diamonds in any notified special zone. This amendment is effective from Assessment Year 2016-17.

(iii) FUND MANAGER’S ACTIVITIES – SECTION 9A:

(a) This section lays down the conditions under which a fund manager based in India does not constitute a business connection of the foreign investment fund. One of the conditions is that the fund is a resident of a country or a specified territory with which India has entered into a double taxation avoidance agreement. This condition is now modified effective from A.Y. 2017-18 by extending it to funds established, incorporated or registered in a notified specified territory.

(b) Another condition is that the fund should not carry on or control and manage, directly or indirectly, any business in India or from India. This condition is now modified to apply only to a fund carrying on, or controlling and managing, any business in India.

(iv) REFERENCE TO TRANSFER PRICING OFFICER (TPO) – SECTION 92CA : At present where a reference has been made by the A.O. to a TPO, the TPO has to pass the order at least 60 days prior to the date of limitation u/s 153/153 B for passing the assessment or reassessment order. Section 92CA has been amended w.e.f. 1.6.2016 to extend this period in cases where the period of limitation available to the TPO for passing the order is less than 60 days, to a period of 60 days, if the assessment proceedings were stayed by an order or injunction of any court, or a reference was made for exchange of information by the Competent Authority under a double taxation avoidance agreement.

(v) MAINTENANCE OF RECORDS – SECTION 92D: This section requires every person who has entered into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed. A requirement is now introduced for a constituent entity of an International Group to keep and maintain such information and documents in respect of an international group as may be prescribed, and to furnish such information and documents in such a manner, on or before the date, as may be prescribed. Failure to furnish such information and documents will attract a penalty of Rs. 5,00,000 u/s 271AA unless reasonable cause is shown u/s 273B.

15. REPORT RELATING TO INTERNATIONAL GROUP :

(i) Section 286 is a new section inserted from A.Y. 2017-18. The OECD in Action Plan 13 of the BEPS Project has recommended a standardized approach to transfer pricing documentation to be adopted by various Countries. Pursuant to this recommendation, this section is inserted to provide for a specific reporting system in respect of country- by country (CbC) reporting. This system is a three-tier structure with (i) a master file containing standardized information relevant for all members of an International Group; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a CbC report containing certain information relating to the global allocation of the International Group’s income and taxes paid together with certain indicators of the location of economic activity within the group.

(ii) This section provides that every Constituent Entity, resident in India if it is constituent of an International Group and every parent entity or the alternate reporting entity, resident in India, has to furnish report in the prescribed form to the prescribed authority before the due date for filing return of Income u/s 139(1). The manner in which report is to be submitted is provided in the section.

(iii) Penalties are prescribed in section 271GB for nonfurnishing of the information by an entity which is obligated to furnish as also for knowingly providing inaccurate information in the report.

16. EQUALIZATION LEVY:

Chapter VIII (Sections 163 to 180) of the Finance Act, 2016, provides for Equalization Levy on Non-Residents. This Chapter will come into force on the date to be notified by the Central Government. In order to overcome the challenges of typical direct tax issues relating to e-commerce i.e characterization of nature of payments, establishing a nexus between a taxable transaction, activity and a taxing jurisdiction and keeping in view the recommendations of OECD in respect of Action 1 – Addressing the Tax Challenges of Digital Economy, of the BEPS Project, this new chapter is inserted. The chapter is a complete code for charge of Equalisation Levy, its collection, recovery, furnishing statements, processing Statements, Rectification of Mistakes, charge of interest for delayed payment, penalty for non-compliance with the provisions, Appeals to CIT(A) and ITA Tribunal, Prosecution, Power of Government to frame Rules etc. The provisions for Equalisation Levy can be briefly stated as under:

(i) The Equalisation Levy is at 6% of the amount of consideration for specified services received or receivable b y a non-resident (not having a PE in India) from a resident carrying on a business or profession or from a non-resident having a PE in India (Payer).

(ii) The specified services are (a) Online advertisement; (b) Any provision for digital advertising space; (c) Any other facility or service for the purpose of online advertisement; and (d) Any other services as may be notified.

(iii) Simultaneously with the introduction of this chapter for Equalisation levy, section 10(50) has been inserted to provide exemption to income arising from the above-mentioned specified services chargeable to Equalisation Levy.

(iv) The payer is obliged to deduct the Equalisation Levy from the amount paid or payable to a nonresident in respect of such specified services at 6% if the aggregate amount of consideration for the same in a previous year exceeds Rs.1 lakh.

(v) In addition, section 40(a)(ib) is inserted to provide that the expenses incurred by a payer towards specified services chargeable to Equalisation Levy shall not be allowed as deduction in case of failure to deduct and deposit the same to the credit of Central Government before the due date as explained in Para 7.9 above.

(vi) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

17. ASSESSMENTS AND REASSESSMENTS:

(i) JURISDICTION OF ASSESSING OFFICER – SECTION 124: This section is amended from 1.6.2016. It is now provided that u/s 124(3) no person will be entitled to call into question the jurisdiction of A.O. after the expiry of one month from the date on which notice u/s 153A(1) or 153C(2) is served or after completion of assessment whichever is earlier. This provision is in line with the existing provision in section 124(3) which applies to objection to jurisdiction of A.O. when return u/s 139 is filed or notice u/s 142(1) or 143(2) is issued.

(ii) POWER TO CALL FOR INFORMATION – SECTION 133C: This section is amended from 1.6.2016. It is now provided that when information or document is received in response to any notice u/s 133C(1) the prescribed authority can process the same and available outcome will be forwarded to A.O.

(iii) HEARING BY A.O. – SECTION 2 (23C): This clause is inserted from 1.6.2016 to provide that notices for hearing can be given by electronic mode and communication of data and Documents can be made by electronic mode.

(iv) FILING INCOME TAX RETURN – SECTION 139: At present an Individual, HUF, AOP and BOI is required to file return of income before the due date if the total income, without considering deductions under Chapter VI-A, exceeds the maximum amount which is not chargeable to tax. It is now provided in the sixth proviso to section 139 (1) that income from long term capital gains exempt u/s 10(38) shall also be added to the total income for determining the threshold limit for determining whether the assessee is required to file the return of income.

(v) BELATED FILING OF RETURN OF INCOME – SECTION 139(4): The existing section 139(4) is replaced by new section 139(4) from A.Y. 2017- 18. It is now provided that if an assessee has not furnished his Return of Income before due date u/s 139(1), he can file the same at any time before the end of the relevant assessment year or before completion of assessment whichever is earlier.

(vi) REVISED RETURN – SECTION 139(5): The existing Section 139(5) is replaced by new section 139(5) from A.Y. 2017-18. At present a revised return can be filed u/s 139(5), only if the return originally filed is before the due date u/s 139(1). Such a revised return can be filed before the expiry of one year from the end of the relevant assessment year or completion of assessment, whichever is earlier. It is now provided that a belated return filed pursuant to section 139(4), can also be similarly revised within the time limit given above.

(vii) DEFECTIVE RETURN – SECTION 139(9): This section is amended from A.Y. 2017 – 18. At present a return of income will be treated as defective if self-assessment tax and interest payable u/s 140A is not paid before the date of furnishing the return. Now clause (aa) of the Explanation to section 139(9) has been deleted and hence a return will now not be treated as defective merely because self-assessment tax and interest thereon is not paid before the date of furnishing the return.

(viii) ADJUSTMENT TO RETURNED INCOME – SECTION 143(1): This section is now amended from A.Y. 2017-18. The scope of adjustments that can be made at the time of processing the Return of Income u/s 143(1) has been expanded to cover the following items:

(a) Disallowance of loss claimed, if return for the year for which loss has been claimed was furnished beyond the due date specified in section 139(1).

(b) Disallowance of expenditure indicated in tax audit report but not considered in the Return of Income

(c) Disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if the return has been filed beyond the due date specified in section 139(1).

(d) Addition of income due to mismatch in income as reflected in the return of income and as appearing in Form 26AS or Form 16A or Form 16.

The above adjustments will be made based on information available on the record of the tax department either physically or electronically. However, no adjustment will be made without intimating the assessee about such adjustment in writing or in electronic mode and giving him a time of 30 days to respond. The adjustment will be made only after considering the response received or after the lapse of 30 days in case no response is received.

(ix) PROCESSING OF RETURN OF INCOME – SECTION 143(ID): This section is amended w.e.f. A.Y. 2017-18. It is now provided that the processing of the Return of Income u/s 143(1) will not be necessary within one year if notice u/s 143(2) is issued. However, such Return of Income shall be processed u/s 143(1) before assessment order u/s 143(3) is passed.

(x) INCOME ESCAPING ASSESSMENT – SECTION 147: This section has been amended from 1.6.2016. New clause (ca) has been added in Explanation 2 to section 147. The amendment provides that income shall be deemed to have escaped assessment if, on the basis of the information received u/s 133C(2), it is noticed by the A.O that the income exceeds the maximum amount not chargeable to tax or where the assessee had understated the income or has claimed excessive loss, deduction, allowance or relief in the return.

(xi) LIMITATION FOR COMPLETING ASSESSMENT OR REASSESSMENT – SECTION 153
The existing section 153 has been replaced by a new section 153 from 1.6.2016. This new section provides as under:

(a) The time limit for completion of assessment has now been reduced as under:
• For order u/s 143 and section 144 – from the existing two years to twenty one months from the end of the assessment year in which the income was first assessable.
• For order u/s 147 – from the existing one year to nine months from the end of the financial year in which the notice u/s 148 was served.
• For giving effect to order passed u/s 254, 263, 264, setting aside or cancelling an assessment – from the existing one year to nine months from the end of the financial year in which the order is received or passed by the designated Commissioner.

(b) The period for completing the assessment shall be extended by one year where reference has been made to the Transfer pricing Officer u/s 92CA,

(c) At present, there is no time limit for giving effect to an order passed u/s 250 or 254 or 260 or 262 or 263 or 264. Now it is provided that action under the above section shall be completed within three months from the end of the month in which order is received or passed by the designated Commissioner. Additional time of six months may be granted to the Assessing Officer by the Principal Commissioner or the Commissioner, based on reasons submitted in writing, if the Commissioner is satisfied that the delay is for reasons beyond the control of the Assessing Officer.

(d) At present there is no time limit for completion of assessment, reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order under the above mentioned sections or in an order of any court in a proceeding otherwise than by way of appeal or reference under the Act. Now such order giving effect should be passed on or before the expiry of twelve months from the end of the month in which such order is received by the designated Commissioner.

(e) Similarly, in case of assessment made on a partner of a firm in consequence of an assessment made on the firm u/s 147, the time limit is now introduced. Accordingly, the assessment of the partner shall be completed within twelve months from the end of the month in which the assessment order in case of the firm is passed.

In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153(9) shall be excluded.

(f) For cases pending on 1st June, 2016, the time limit for taking requisite action (in case of (c), (d) and (e) above will be 31st March, 2017 or twelve months from the end of the month in which such order is received, whichever is later.

(g) The existing Section 153 shall aply to any order of assessment, reassessment or recomputation made before 1/6/2016.

(xii) LIMITATION FOR COMPLETION OF ASSESSMENT IN SEARCH CASES – SECTION 153B:

The existing Section 153B is replaced by new Section 153B w.e.f. 1.6.2016. The old section 153B shall apply in relation to any order of assessment, reassessment or re-computation is made on or before 31.5.2016. The new section 153B provides for reduction in time limit for completion of assessment, reassessment etc., in case of a search u/s 153 A or 153C as under:

(a) In each assessment year falling within the six years referred to in section 153A(1)(b) or assessment year in which search is conducted u/s 132 or requisition is made u/s 132A – from two years to twenty one months from the end of the financial year in which the last of the authorization for search or requisition was executed:

(b) In case of other persons referred to in section 153C, to twenty one months (from the existing two years) from the end of the financial year in which the last of the authorization for search or requisition was executed or nine months (from the existing one year) from the end of the financial year in which the books of account or documents or assets seized or requisitioned are handed over u/s 153C to the Assessing Office having jurisdiction over such person, whichever is later.

(c) In case where reference is made to the Transfer Pricing Officer u/s 92CA, the period of limitation as given above will be extended by a period of twelve months.

(d) In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153B(3) shall be excluded.

18. PAYMENT OF TAXES AND INTEREST:

18.1 ADVANCE TAX PAYMENT – SECTION 211: (i) The provisions of Section 211 have been amended from 1.6.2016. Now, all non-corporate assesses, who are liable to pay advance tax, will have to pay such tax in 4 installments as applicable to corporate assesses instead of 3 installments. The installments for advance tax payment are as follows:

(i) Eligible assesses referred to in section 44AD opting for computation of profits and gains of business on presumptive basis are required to pay the entire advance tax in one installment on or before 15th March of the financial year. No similar exception has been given for eligible professionals covered under presumptive taxation u/s 44ADA.

(ii) The provisions of section 234C in respect of interest payable for deferment of advance tax have been amended to bring them in line with the provisions of section 211 of the Act. Interest u/s 234C will be levied at 1% p.m. for 3 months on shortfall of advance tax paid as compared with the amount payable as per the above installments in case of all assesses (except the eligible assesses u/s 44AD). However, no interest will be levied if the advance tax paid is more than 12% (For 15th June instalment) and more than 36% (For 15th September instalment).

(iii) A new exception is now provided that interest u/s 234C will not be levied in case of assesses having income chargeable under the head ‘profits and Gains of business or Profession’ for the first time. These assesses will be required to pay the whole amount of tax payable in the remaining installments of advance tax which are due after they commence business or by 31st March of the financial year if no installments are due.

18.2 INTEREST ON REFUNDS – SECTION 244A:

(i) Section 244A granting interest on refunds to assesses has been amended w.e.f. 1.6.2016 to provide that in case where the return of income is filed after the due date as per section 139(1), then interest on refund out of TDS, TCS and advancetax will be granted only from the date of filing the return and not from 1st April of the assessment year.

(ii) It is further provided that an assessee will be entitled to interest on refund of self-assessment tax paid u/s 140A of the Act from the date of payment to tax or date of filing the return, whichever is later up to the date on which the refund is granted.

(iii) It is also provided that an assessee will be entitled to additional interest on refund arising on giving effect to an appellate / revisionary order which has been passed beyond a time limit of 3 months from the end of the month of receipt of the appellate / revisionary order by the Commissioner. It is further clarified that if an extension is granted by the Principal Commissioner / Commissioner for giving effect to the appellate/ revisionary order, then the additional interest will be granted from the expiry of the extended period. The Principal Commissioner / Commissioner may extend the period for giving effect to the appellate / revisionary order up to 6 months. The additional interest on such refunds will be calculated at the rate of 3% p.a. from the date following the date of expiry of the specified time limit upto the date of granting the refund. Effectively, the assessee will be entitled to interest in such cases at the rate of 9% p.a. against the normal rate of 6% p.a for delay in giving effect to an appellate order beyond the specified time limit.

18.3 RECOMMENDATION OF JUSTICE R. EASHWAR COMMITTEE: It may be noted that this committee had made two recommendations as under

(i) The tax payer should be allowed automatic stay on payment of 7.5% of disputed taxes till the first appeal is decided. In cases of High-Pitched assessments, it may be difficult for the assessee to pay even 7.5% of the disputed demand. In such cases he can approach the CIT(A) and request stay of the entire demand. No such amendment is made in the Act. However, CBDT has modified the Instruction No. 1914 of 21.3.1996 on 29.2.2016 directing assessing officers to grant stay till the disposed of first appeal on payment of 15% of disputed tax subject to certain conditions.

(ii) As regards interest on delayed refunds the committee has suggested that section 244A may be amended to provide that interest of 1% P.M. should be paid if the refund is delayed up to 3 months and interest at 1.5% P.M. should be paid if the delay is more than 3 months. It will be noticed that this recommendation is only partly accepted while amending section 244A.

19. APPEALS AND REVISION:

19.1 APPEAL BY DEPARTMENT – SECTION 253(2A): Section 253(2A) has been amended from 1.6.2016. Now, it will not be possible for the Department to file appeal before ITA Tribunal against the order passed pursuant to the directions of Dispute Resolution panel (DRP).

19.2 RECTIFICATION OF ORDER OF ITA TRIBUNA L – SECTION 254: At present the ITA Tribunal can rectify any mistake in its order which is apparent from the records within 4 years of the date of the order. This period is now reduced to 6 months from the end of the month in which the order is passed. This amendment is effective from 1.6.2016. Although it is not clarified in the Finance Act, 2016, it is presumed that this amendment will apply to orders passed on or after 1.6.2016.

19.3 SINGLE MEMBER CASES – SECTION 255(3): This section is amended from 1.6.2016 to provide that a Single Member Bench of ITA Tribunal may dispose of any case where assessed income does not exceed Rs. 50 Lacs. At present, this limit is Rs. 15 Lakh which has now been increased to Rs. 50 Lakh.

20. DISPUTED TAX SETTLEMENT SCHEME – SECTIONS 197 TO 208 OF THE FINANCE ACT, 2016:

20.1 The Finance Minister has, in his Budget speech on 29th February 2016, stated that the tax litigation in our country is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the tax payer and administrative cost of the Government. He has also stated that there are over 3 Lac tax cases pending with the commissioner of Income tax (Appeals) with disputed amount of tax of about 5.5 Lac Crores. In order to reduce these appeals before the first appellate authority he has announced a new scheme called “ Dispute Resolution Scheme -2016” Two separate Schemes are announced in this Budget, one for settlement of disputed taxes under Income tax and wealth tax Act and the other for disputed taxes under Indirect Tax Laws.

20.2 In chapter X of the Finance Act, 2016, (Act), Sections 201 to 211 Provide for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI (Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution Scheme – 2016”.

20.3 THE SCHEME:

(i) The Direct Tax Dispute Resolution Scheme 2016 (Scheme) will come into force on 1st June, 2016. This scheme will enable all assesses whose assessments under the Income tax Act or the wealth tax have been completed for any assessment year and whose appeals are pending before the Commissioners of Income tax (Appeals) as on 29.2.2016 to settle the tax dispute. The scheme also applies to those assesses in whose case any disputed additions are made as a result of retrospective amendments made in the Income tax or wealth tax Act and whose appeals are pending before the CIT(A), ITA Tribunal, High Court, Supreme Court or before any other authority.

(ii) Section 202 of the Finance Act provides that the assessee who wants to settle the tax dispute pending before the concerned appellate authority as on 29.02.2016, can make a declaration in the prescribed Form on or after 01.06.2016 but before the date to be notified by the Central Government. In the case of an assessee in whose case the assessment or reassessment is made in the normal course and not due to any retrospective amendment, and the appeal is pending before CIT (A) as on 29.02.2016, the tax dispute can be settled as under:-

(a) If the disputed tax does not exceed `10 Lacs for the relevant assessment year, the assessee can settle the same on payment of such tax and interest due upto the date of assessment or reassessment.

(b) If the disputed tax exceeds ` 10 Lacs for the relevant assessment year, the dispute can be settled on payment of such tax with 25% of minimum penalty leviable and interest upto the date of assessment or reassessment. It is difficult to understand why minimum penalty is required to be paid when the disputed addition may not be for concealment or inaccurate furnishing of particulars of income.

(c) In the case of appeal against the levy of penalty, the assessee can settle the dispute by payment of 25% of minimum penalty leviable on the income as finally determined.

(iii) In a case where the disputed tax demand relates to addition made in the assessment or reassessment order made as a result of any retrospective amendment in the Income tax or wealth tax Act, the dispute can be settled at the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court etc.) by payment of disputed tax. No interest or penalty will be payable in such a case.

20.4 PROCEDURE FOR DECLARATION:

(i) The declaration for settlement of disputed tax for which appeal is pending before CIT(A) is to be filed in the prescribed form with the particulars as may be prescribed to the Designated Authority. The Principal Commissioner will notify the Designated Authority who shall not be below the rank of commissioner of Income tax. Once this declaration is filed for settlement of a tax dispute for a particular year, the appeal pending before the CIT (A) for that year will be treated as withdrawn.

(ii) In the case where the tax dispute is in respect of any addition made as a result of retrospective amendment, the assessee can file the declaration in the prescribed form with the designated authority. The assessee will have to withdraw the pending appeal for that year before CIT (A), ITA Tribunal, High Court, Supreme Court or other Authority after obtaining leave of the Court or Authority whereever required. If any proceedings for the disputed tax are initiated for arbitration, conciliation or mediation or under an agreement entered into by India with any other country for protection of Investment or otherwise, the assessee will have to withdraw the same. Proof of withdrawal of such appeal or such other proceedings will have to be furnished by the assessee with the declaration. Further, the declarant will have to furnish an undertaking in the prescribed form waiving his right to seek or pursue any remedy or any claim for the disputed tax under any agreement.

(iii) It is also provided that if (a) any material particulars furnished by the declarant are found to be false at any stage, (b) the declarant violates any of the conditions of the scheme or (c) the declarant acts in a manner which is not in accordance with the undertaking given by him as stated above, the declaration made under the scheme will be considered as void. In this event all proceedings including appeals, will be deemed to be revived.

20.5 PAYMENT OF DISPUTED TAX:

(i) On receipt of the declaration from the assessee the Designated Authority will determine the amount payable by the declarant under the scheme within 60 days. He will have to issue a certificate in the prescribed form giving particulars of tax, interest, penalty etc., payable by the Declarant.

(ii) The Declarant will have to pay the amount determined by the Designated Authority within 30 days of the receipt of the Certificate. He will have to send the intimation about the payment and produce proof of payment of the above amount. Upon receipt of this intimation and proof of payment, the Designated Authority will have to pass an order that the declarant has paid the disputed tax under the scheme. Once this order is passed it will be conclusive about the settlement of disputed tax and such matter cannot be re-opened in any proceedings under the Income tax or Wealth tax Act or under any other law or agreement.

(iii) Once this order is passed, the Designated Authority shall grant immunity to the declarant as under:

(a) Immunity from instituting any proceedings for offence under the Income tax or Wealth tax Act.

(b) Immunity from imposition or waiver of any penalty or interest under the income tax or wealth tax Act. In other words, the difference between interest or penalty chargeable under the normal provisions of the Income tax or wealth tax Act and the interest or penalty charged under the scheme cannot be recovered from the declarant.

It is also provided that any amount of tax, interest or penalty paid under the Scheme will not be refundable under any circumstances.

20.6 WHO CAN MAKE A DECLARATION:

(i) Section 208 of the Finance Act provides that in the following cases declaration under the Scheme for settlement of disputed taxes cannot be made.

(a) In relation to assessment year for which assessment or reassessment under Section 153A or 153C of the Income tax Act or Section 37A or 37B of the Wealth tax Act is made.

(b) In relation to assessment year for which assessment or reassessment has been made after a survey has been conducted under section 133A of the Income tax Act or 38A of the Wealth tax Act and the disputed tax has a bearing on findings in such survey.

(c) In relation to assessment year in respect of which prosecution has been instituted on or before the date of making the declaration under the scheme.

(d) If the disputed tax relates to undisclosed income from any source located outside India or undisclosed asset located outside India.

(e) In relation to assessment year where assessment or reassessment is made on the basis of information received by the Government under the Agreements under section 90 or 90A of the Income tax Act.

(f) Declaration cannot be made by following persons.

• If an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

• If prosecution has been initiated under the Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985. The Prevention of Corruption Act, 1988 or for purposes of enforcement of any civil liability.

(g) Declaration cannot be made by a person who is notified u/s. 3 of the Special Court (Trial or Offences Relating to Transactions in Securities) Act, 1992.

20.7 GENERAL:

(i) The Act authorizes the Central Government to issue directions or orders to the authorities for the proper administration of the scheme. The Act also provides that if any difficulty arises in giving effect to any of the provisions of the scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after expiry of 2 years i.e after 31.5.2018. Central Government is also authorized to notify the Rules for carrying out the provisions of the scheme and also prescribe the Forms for making Declaration, for certificate to be granted by the Designated Authority and for such other matters for which the rules are required to be made under the scheme.

(ii) In 1998 similar attempt was made to reduce tax litigation through “Kar Vivad Samadhan Scheme” which was introduced by the Finance (No:2) Act, 1998. This year, similar attempt is made to reduce tax litigation through this Scheme. One objection that can be raised is with regard to levy of penalty when the disputed tax is more than Rs.10 Lakh. There is no logic in levying such a penalty. Even if the assessee is not successful in the appeal before CIT(A), his liability will be for payment of disputed tax and interest. Penalty is not automatic. The disputed addition or disallowance may be due to interpretation of some provision in the tax law for which no penalty is leviable. Therefore, in case where disputed tax is more than Rs.10 Lakh, the assessee will not like to take benefit of the scheme and to that extent litigation will not be reduced.

(iii) As stated earlier, section 202 of the Finance Act provides that declaration can be filed for settlement of disputed taxes only in respect of an appeal pending before CIT (A). There is no reason for restricting this benefit to appeal pending before the first appellate authority. This scheme should have been made applicable to appeals filed by the assessee before ITA Tribunal, High Court or the Supreme Court which are pending on 29.02.2016. If this provision had been extended to all such appeals, pending litigation before all such judicial authorities would have been reduced.

(iv) The provision in section 202 of the Finance Act relating to settlement of disputed taxes levied due to retrospective amendment in the Income tax and Wealth tax Act is very fair and reasonable. In such cases only tax is payable and no interest or penalty is payable. This provision is made with a view to settle the disputed taxes levied due to retrospective amendment made in section 9 by the Finance Act, 2012. This related to taxation as a result of acquisition of interest by a Non-Resident in a company owning assets in India. (Cases like VODAFONE, CAIRN and others). However, there are some other sections such as sections 14A, 37, 40 etc., where retrospective amendments have been made. It appears that it will be possible to take advantage of the scheme if appeals on these issues are pending before any Appellate Authority or Court as on 29.2.2016.

(v) It may be noted that last year the CBDT had made one attempt to reduce the tax litigation by issue of Circular No. 21/2015 dated 10/12/2015 whereby appeals filed by the Income tax Department where disputed taxes were below certain level were withdrawn with retrospective effect. This year the Government has issued this scheme whereby assesses can settle the demand for disputed taxes and thus reduce the tax litigation.

21. PENALTIES AND PROSECUTION:

21.1 Sections 98 to 110 of the Finance Act, 2016, make major amendments in Penalty provisions under the Income tax Act. In Para 166 of his Budget Speech the Finance Minister has explained the new Scheme for levy of penalty.

21.2 EXISTING PENALTY PROVISIONS FOR CONCEALMENT .

(i) At present, Section 271 of the Income tax Act (Act) provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income at the rate of 100% of tax which may extend to 300%. The Assessing Officer (AO) has discretion in the matter of levy of penalty. There are 8 Explanations in the Section to explain the circumstances under which a particular income will be considered as concealment of income or when the assessee will be deemed to have furnished inaccurate particulars of Income. Various clauses of this section have been considered and interpreted by the various High Courts and the Supreme Court in various judgements. The law relating to levy of penalty appeared to be more or less settled by now. How far these judgements will apply to the new Scheme for levy of penalty will depend on the manner in which officers administer the new provisions.

(ii) Recently, Income tax Simplification Committee (Justice Eashwar Committee) has submitted its Report. In para 26.1 of its Report the committee has considered the provisions of sections 271 and 273B and made certain suggestions. These suggestions have been made with a view to reduce tax litigation. If we consider the amendments made by the Finance Act, 2016, it will become evident that these suggestions are only partly implemented.

21.3 NEW SECTION 270A (UNDER REPORTING OF INCOME)

(i) It is now provided that existing Section 271 shall apply upto Assessment Year 2016-17. For A.Y. 2017-18 and onwards new sections 270A and 270AA have been added. The provisions of these sections are as under.

(ii) Section 270A authorizes an Assessing Officer, CIT (A), Commissioner or Principal Commissioner to levy penalty at the rate of 50% of tax in case where the assessee has “Under Reported” his income. In cases where the assessee has “Misreported” his income the penalty of 200% of tax will be levied. It may be noted that u/s 271, although the minimum penalty was 100% of tax and maximum penalty was 300% of tax, in most of the cases only minimum penalty of 100% was levied.

(iii) Section 270A(2) provides that the assessee will be considered to have “Under Reported” his income (a) If Income assessed is greater than income determined under section 143(1) (a) i.e Income as per Return of Income, or if Income assessed is greater than the maximum amount not chargeable to tax, if Return of Income is not filed by the assessee, (b) If Income assessed or deemed book profit u/s 115JB/115JC is greater than the income assessed or reassessed immediately before such assessment, (c) If Book Profit assessed u/s 115JB / 115 JC is greater than Book Profit determined u/s 143(1)(a) or Book Profit assessed u/s 115JB/115JC, if no return of income is filed by the assessee or (d) If Income assessed or reassessed has the effect of reducing loss declared or such loss is converted into income.

(iv) In all the above cases the difference between the income assessed or reassessed and the income computed u/s 143(1)(a) will be considered as Under Reported income and penalty at 50% of tax will be levied. If the loss declared by the assessee is reduced or converted into income the difference will be liable to penalty @ 50% of tax. The concept of income concealed or furnishing of inaccurate particulars of income, which existed u/s 271, is now given up under the new section 270A.

(v) In a case where Section 115JB / 115JC is applicable the amount of Under Reported income will be worked out by applying the formula given in the section. This can be explained by the following illustration.

In the above case Under Reported Income u/s 270A will be Rs. 3,00,000/- (Rs. 2,00,000+ Rs.1,00,000/-)

(vi) Section 270A(4) provides that where any addition was made in the computation of total income in any earlier year and no penalty was levied on such addition in that year, and the assessee contends that any receipt, deposit or investment made in a subsequent year has come out of such addition made in earlier year, the assessing officer can consider such receipt, deposit or investment as under reported income. This provision is on the same lines as existing Explanation (2) of Section 271.

(vii) Section 270A (6) provides that no penalty will be levied in respect of any Under Reported Income where (a) the assessee offers an explanation and the Income tax Authority is satisfied that the explanation is bona fide and all material facts have been disclosed, (b) Such Under Reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot be properly deduced there from (c) The addition is on the basis of estimate and the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance, (d) Addition is made under Transfer pricing provisions but the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all material facts relating to the transaction or (e) The undisclosed income is on account of a search operation and penalty is leviable under section 271 AAB.

21.4 NEW SECTION 270A (MISREPORTIN G OF INCOME):

(i) A s stated earlier, the penalty on Unreported Income in consequence of Misreporting of Income will be 200% of the tax on such Misreported Income. Section 270A (9) provides that the assessee will be considered to have Misreported his income due to (a) Misrepresentation or suppression of facts (b) Failure to record investments in the books of account (c) Claim of expenditure not substantiated by any evidence (d) Recording of any false entry in the books of account, (e) Failure to record any receipt in books of account having a bearing on total income or (f) Failure to report any International transaction or any transaction deemed to be an International transaction or any specified domestic transaction, to which provisions of Chapter X apply.

(ii) It may be noted that disputes may arise due to the wording of the above clauses in Section 270A(9). Clause (b) refers to Investments not recorded in books of account. In the case of an Individual or HUF it may so happen that certain genuine Investments may have been debited to personal Capital Account and may not appear separately in the books of account. If the assessee is declaring income from such Investments regularly, there is no reason to consider cost of Investments not recorded in books as Misreporting of Income. If the income from such Investment is declared, there is no Under Reporting much less Misreporting of Income. Moreover, when the Investment is debited to Capital Account it cannot be said that the same is not recorded in the books.

(iii) Similarly, clause (c) above states that expenditure claimed for which there is no evidence will be treated as Misreporting of Income. It is not clear as to what will be considered as an adequate evidence for this purpose. Disputes will arise on the question about adequacy of the evidence for this purpose.

(iv) Section 270A (10) provides that for the purpose of levy of penalty as a result of Under Reporting or Misreporting of income amount of tax on such income will be calculated on notional basis according to the Formula given in that Section.

(v) It is pertinent to note that there is no provision similar to Section 270A(6), as discussed in Para 21.3 (vii) above, whereby the assessee can offer an explanation about his bona fides for omission to disclose any amount of income which the tax authority wants to consider as Misreporting of Income . In other words, before the A.O. comes to the conclusion that there is misreporting of income on any of the grounds stated in Para (i) above, there is no provision to give an opportunity to the assessee to offer explanation as provided in section 270A(6). The assesses will have to litigate on such matters as absence of such a provision is against principles of the natural justice.

21.5 IMMUNITY FROM PENALTY AND PROSECUTION (SECTION 270AA ):

(i) New Section 270AA has been inserted in the Income tax Act w.e.f. assessment year 2017-18 to grant immunity from imposition of penalty and initiation of prosecution in certain circumstances. Under this section an assessee can make an application to the A.O. to grant immunity from imposition of penalty under Section 270A and initiation of prosecution proceedings under Section 276C. or 276CC. For this purpose the following conditions will have to be complied with by the assessee:-

(a) Tax and Interest payable as per the assessment order u/s 143(3) or reassessment order u/s 147 should be paid before the period specified in the Notice of Demand.

(b) No Appeal against the above order should be filed before CIT(A).

(c) The application for immunity should be filed within one month of the end of the month in which the above assessment order is received. This application is to be made in the prescribed form.

(ii) It may be noted that the power to grant immunity under this section is given to the AO only with reference to penalty leviable u/s 270A (7) @ 50% of Tax for Under Reporting of Income. If the addition or disallowance is made in the assessment or reassessment order on the ground of Misreporting of Income as explained u/s 270A(9) and where penalty is @ 200% of Tax, no such immunity u/s 270AA can be granted. To this extent this provision in section 270AA is very unfair.

(iii) After the A.O. receives the application for grant of immunity, he will have to pass an order accepting or rejecting the application within one month from the end of the month when such application is received. If he accepts the application, no penalty u/s 270A will be levied and no prosecution u/s 276C or 276CC will be initiated. If the A.O. wants to reject the application he will have to give an opportunity to the assessee of being heard. If the A.O. rejects the application, the assessee can file an appeal before CIT(A) against the assessment / reassessment order. For this purpose the time taken for making the application to the AO and the time taken by A.O. in passing the order for rejection of the application will be excluded in computing the period of limitation u/s 249 for filing appeal to CIT(A).

(iv) The order passed by the A.O. accepting or rejecting the application shall be treated as final. If the A.O. has accepted the application by his order u/s 270AA(4), no appeal before CIT(A) or revision application before CIT can be filed against the assessment or reassessment order.

(v) It may be noted that the A.O. is given discretion to accept or reject the application. This appears to be an absolute power given to the same officer who has passed the assessment order. There are no guidelines as to when the application can be rejected. There is no provision for appeal against the order rejecting the application for immunity. To this extent this provision is unfair.

(vi) As stated in (ii) above the above application for immunity can be filed only in respect of additions / disallowances made due to Under Reporting of Income where penalty is of 50% of Tax. No such application can be made if the additions/ disallowances are for Misreporting of Income where penalty is of 200% of Tax. There is no clarity in Section 270AA about a situation where in any assessment / reassessment order some additions / disallowances are for Under Reporting of Income and some additions / disallowances are for Misreporting of Income. Question arises whether the application for immunity u/s 270AA can be made in such a case for getting immunity. If so, whether such application will be for items added/ disallowed for Under Reported Income only and whether the assessee can file appeal to CIT(A) only with reference to items added / disallowed on the ground of Misreporting of Income. If this is the position, then a question will arise whether the assessee will have to revise the appeal petition later on in respect of addition / disallowance made for items of Under Reported Income if the application for immunity is rejected. If the intention of the Government is to reduce litigation and grant immunity from penalty and prosecution the benefit of Section 270 AA should have been given to all assessee where additions / disallowances are made for Under Reporting or Misreporting of Income.

21.6 PENALTY FOR FAILURE TO MAINTAIN INFORMATION AND DOCUMENTS (SECTION 271 AA ): This section has been amended w.e.f. A/Y: 2017-18 to provide that if the assessee fails to furnish the information and documents as required under Section 92D(4), the prescribed authority can levy penalty of Rs.5 Lakh. It may be noted that Under Section 92D(4) a constituent entity of an International Group is required to maintain certain information and documents in the prescribed manner and furnish the same to the prescribed authority before the due date as provided in that section.

21.7 PENALTY WHERE SEARCH HAS BEEN INITIATED (SECTION 271AA B):

Section 271AAB provides for levy of penalty in which search has been conducted on or after 1.7.2012. Specific rates are provided u/s 271AAB(1) (a),(b) and (c). Amendment made in this section, effective from A.Y. 2017-18, is in clause (c). Here the rate of minimum penalty is 30% and maximum penalty is 90% of the Undisclosed Income. This will now be a flat rate of 60% of Undisclosed Income from A.Y. 2017-18. Further, it is also provided that no penalty u/s 270 A shall be levied on undisclosed income where penalty u/s 271 AAB (1) is leviable.

21.8 PENALTY FOR FAILURE TO FURNISH REPORT U/S. 286 (NEW SECTION 271 GB): A new Section 286 has been added from A.Y 2017-18 providing for furnishing of report in respect of International Group. New 271 GB has been added effective from A.Y. 2017-18 to provide for penalty for non compliance of Section 286 as under.

(i) If any Reporting Entity referred to in section 286 fails to furnish report referred to in Section 286(2) before the due date, the Prescribed Authority can levy penalty at Rs.5,000/- per day if the delay in upto one month and at Rs.15,000/- per day if the failure continues beyond one month.

(ii) If any Reporting Entity fails to produce the information or documents within the period allowed u/s 286(6), the prescribed authority can levy penalty at Rs.5,000/- per every day when the default continues. If this default continues even after the above order levying penalty is passed, the prescribed authority can levy penalty at the rate of Rs.50,000/- per day if the default continues even after service of the first penalty orders.

(iii) If any Reporting Entity Knowingly furnishes inaccurate information in the Report required to be furnished u/s 286(2) the prescribed authority can levy penalty of Rs.5 Lakh.

21.9 PENALTY FOR FAILURE TO FURNISH INFORMATION, STATEMENTS ETC (SECTION 272A): Section 272 A provides for levy of penalty of Rs. 10,000/- for each failure or default to answer the questions raised by an Income tax Authority, refusal to sign any statement or failure to attend and give evidence or produce books or documents as required u/s 131(1). The scope of this section is now extended by amendment of the section from A.Y. 2017-18. It is now provided that penalty of Rs. 10,000/- for each default or failure to comply with a notice issued u/s 142(1), 143(2) or 142(2A) can be levied by the Income tax Authority.

21.10 POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES (SECTION 273A):

This section empowers the Principal Commissioner or the commissioner of Income tax to reduce or waive penalty levied u/s 271 of the Income tax Act. This power is extended to penalty levied u/s 270A also w.e.f. A.Y. 2017-18. Further, new subsection (4A) has been added in this section from 1/6/2016 to provide that the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application for waiver or reduction of penalty within a period of one year from the end of the month when application is made by the assessee. As regards all applications for waiver or reduction of penalty pending as on 1.6.2016, the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application on or before 31.5.2017. The Principal Commissioner or the Commissioner shall have to give hearing to the assessee before passing the above order.

21.11 POWER TO GRANT IMMUNITY FROM PENALTY BY PRINCIPAL COMMISSIONER OR COMMISSIONER (SECTION 273 AA ): This section has been amended w.e.f. 1.6.2016. As in section 273A, the Principal Commissioner or the Commissioner is now required to pass the order accepting or rejecting the application for grant of immunity from levy of penalty within one year from the end of the month in which the assessee has made the application for such immunity. As regards pending applications as on 1.6.2016, the Principal Commissioner or the Commissioner has to pass orders accepting or rejecting the application on or before 31.5.2017.

21.12 GENERAL:
(i) From the above discussion it is evident that the existing concept of levying penalty u/s 271 for concealment of income or furnishing of inaccurate particulars of income is now given up. New Section 270A, which will replace Section 271 from 1.4.2016, introduces a new concept of “Under Reporting of Income” and “Misreporting of Income”. Considering the way these two terms are explained in the new Section 270A, it appears that there will be a thin line of distinction between the two in respect some of the items of additions and disallowances. Since the penalty with respect to Under Reporting of Income is 50% and the penalty with respect of Misreporting of income is 200%, the A.O. will try to bring as many items of additions / disallowances under the head Misreporting of Income. Questions of interpretation will arise and tax litigation on this issue may increase.

(ii) As stated earlier, the recommendation of Justice Eshwar Committee has not been fully implemented while drafting the new Section 270A. The committee has specifically stated that no penalty should be levied where the A.O. takes a view which is different from the bona fide view adopted by the assessee on any issue involving the interpretation of any provision and is supported by any judicial ruling. It is unfortunate that this concept is not introduced in the new section 270A.

22. OTHER PROVISONS :

22.1 TAX ON DEEMED INCOME U/S 68 – SEC 115 BBE

Section 115 BBE is amended w.e.f. A.Y 2017-18. At present this section provides that deemed income u/s 68, 69, 69A, 69B, 69C and 69D is taxable at the rate of 30%. Further, no deduction for any expenditure or allowance relatable to such income is allowed. It is now provided that no set off of any loss shall be allowable from such deemed income u/s 68, 69, 69A to 69D.

22.2 ASSESSEE DEEMED TO BE IN DEFAULT – SECTION 220: Section 220 provides that an assessee shall be deemed to be in default if the taxes due are not paid. Interest is payable u/s 220(2) for the delay in payment of tax. If the assessee applies for waiver or reduction of interest to the Commissioner u/s 220(2A), the same can be waived or reduced. Section 220(2A) is now amended, effective from 1.6.2016, to provide that the commissioner should pass the order accepting or rejecting such application within a period of 12 months of the end of the month when application for waiver or reduction of interest is made. In respect of all pending applications, the order will have to be passed by the commissioner on or before 31.5.2017.

22.3 PROVISION TO GIVE BANK GUARANTEE – SECTION 281B:

(i) At present, the AO may provisionally attach an assessee’s property if he considers it necessary for protecting revenue’s interest during the pendency of assessment or reassessment proceedings. Section 281B is amended w.e.f. 1.6.2016.

(ii) Based on Justice Easwar Committee’s recommendation, this amendment provides that the assessee may provide bank guarantee of sufficient amount. In such a case the AO has to revoke the provisional attachment if the guarantee is for more than the fair market value of the property attached or it is sufficient to meet the revenue’s interest. The AO may refer to the Valuation Officer for valuing the property. The AO should pass an order revoking provisional attachment within 15 days from the date of receipt of the bank guarantee or within 45 days if reference is made to Valuation Officer. The AO may invoke the bank guarantee if the assessee fails to pay tax demand or if he fails to renew or furnish new bank guarantee at least 15 days prior to the expiry of the bank guarantee.

22.4 AUTHENTICATION OF NOTICE – SECTION 282A: To facilitate e-assessment, it has now been provided from 1.6.2016 that the notice and other documents issued by the department can be either in paper form or in electronic form. The detailed procedures for this purpose will be prescribed.

22.5 SECURITIES TRANSACTION TAX (STT ): Section 98 of the Finance (No.2) Act, 2004 has been amended w.e.f. 1.6.2016. The present rate of 0.017% STT on sale of option on securities, where option is not exercised, is increased to 0.05%. It is also provided that STT will not be payable on securities transactions entered into on a recognized Stock Exchange located in International Financial Service Centre.

23. THE INCOME DECLARATION SCHEME – 2016:

23.1 As stated by the Finance Minister in Para 159 to 161 of his Budget Speech, in Chapter IX (Sections 178 to 196) of the Finance Act, 2016, “The Income Declaration Scheme, 2016”, has been announced. This scheme is akin to a Voluntary Disclosure Scheme. The scheme will come into force on 1st June, 2016. The declaration for undisclosed domestic income or assets can be made in the prescribed form within 4 months i.e on or before 30th September, 2016. The tax at the rate of 30% of the disclosed income will be payable with surcharge called Krishi Kalyan Surcharge at 7.5% and penalty at 7.5%. Hence, total amount payable will be 45% of the income declared by the assessee under the scheme. This tax, surcharge and penalty will be payable within two months (i.e. on or before 30th November, 2016)

23.2 WHO CAN MAKE DECLARATION UNDER THE SCHEME:

Any Individual, HUF, AOP, BOI, Firm, LLP or company can make a declaration of undisclosed income or assets during the specified period (1.6.2016 to 30.09.2016). However, Section 193 of the Finance Act, Provides that the provisions of the Scheme shall not apply to following persons.

(i) Any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

(ii) Any person in respect of whom prosecution has been launched for an offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act 1967 and the Prevention of Corruption Act, 1988.

(iii) Any person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

(iv) The scheme is not applicable in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

(v) Any undisclosed income chargeable to tax under the Income tax Act for any previous year relevant to Assessment Year A. Y. 2016-17 or earlier years where (a) N otice u/s 142, 143(2), 148, 153A or 153C of the Income tax Act has been issued and the assessment for that year is pending (b) Search u/s 132 or requisition u/s 132A or survey u/s 133A of the Income tax Act has been made in the previous year and notices u/s 143(2), 153A or 153 C have not been issued and the time limit for issue of such notices has not expired and (c) Information has been received by the competent authority under an agreement entered into by the Government u/s 90 or 90A of the Income tax Act in respect of such undisclosed asset.

23.3 WHICH INCOME OR ASSETS CAN BE DECLARED:

Section 180 of the Act provides that every eligible person can make declaration under the Scheme in respect of the undisclosed income earned in any year prior to 1.4.2016. For this purpose income which can be disclosed will be as under.

(i) Income for which the person has failed to furnish return of income u/s 139 of the Income tax Act.

(ii) Income which the person has failed to disclose in the return filed before 1.6.2016.

(iii) Income which has escaped assessment by reason of the failure on the part of the person to furnish return of income or to disclose fully and truly all material facts.

(iv) Where such undisclosed income is held in the form of investment in any asset, the fair market value of such asset as at 1.6.2016 shall be deemed to be the undisclosed income. For the purpose of determination of Fair Market Value of such assets, CBDT has been authorized to prescribe the Rules.

(v) No deduction for any expenditure or allowance shall be allowed against the income which is disclosed under the Scheme.

23.4 MANNER OF DECLARATION:

(i) The declaration under the Scheme is to be made in the prescribed Form. The same is to be submitted to the Principal Commissioner of Income tax or the Commissioner of Income tax who is authorized to receive the same. The declaration is to be signed by the authorized person as provided in Section 183 of the Finance Act. A person who has made a declaration under the scheme cannot make another declaration of his income or income of any other person. If such second declaration is made it will be considered as void. It is also provided that if a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated a void.

(ii) As stated earlier, the tax (including Surcharge and penalty) of 45% of the income declared is to be paid on or before 30.11.2016. The proof of such payment will have to be filed before the due date. If this payment is not made, the declaration will be considered as void. In this case, if any tax is deposited, the same will not be refunded. If the declaration is considered as void, the amount declared by the person will be deemed to be income of the declarant and will be added to the other income of the declarant and assessed under the Income tax Act. If the declarant has paid the tax, Surcharge and penalty due as per the declaration before the due date, the income so disclosed will not be added to the income of any year. There will be no scrutiny or enquiry regarding such income under the Income tax or the Wealth tax Act.

(iii) The declarant shall not be entitled to reopen any assessment or reassessment made under the Income tax or Wealth tax Act or claim any set off or relief in any appeal, reference or other proceedings in relation to such assessment or reassessment. In other words, declaration under the scheme shall not affect the finality of completed assessments.

23.5 IMMUNITY:

(i) The scheme provides for immunity from proceedings under other Acts as under:

(a) Provisions of Benami Transactions (Prohibition) Act, 1988, shall not apply in respect of the assets declared even if such assets exist in the name of ‘Binamidar’.

(b) No Wealth tax shall be payable under the Wealth tax Act in respect of any undisclosed cash, Bank Deposits, bullion, jewellery, investments or any other asset declared under the scheme.

(c) No prosecution will be launched against the declarant under the Scheme in respect of any income/asset declared under the Income tax or Wealth tax Act.

(iii) It is also provided that nothing contained in the declaration made under the Scheme shall be admissible as evidence against the declarant under any other law for the purpose of any proceedings relating to imposition of penalty or for the purposes of prosecution under the Income tax or Wealth tax Act.

(iv) It may be noted that no immunity is provided in the scheme from proceedings under the Foreign Exchange Management Act, Money Laundering Act, Indian Penal Code or any other Act.

23.6 GENERAL:

(i) Section 195 of the Finance Act provides that if any difficulty arises in giving effect to the provisions of the Scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after the expiry of 2 years i.e. after 31.5.2018. Section 196 of the Finance Act authorizes the Government to notify the Rules for carrying out the provisions of the scheme and also prescribe the Form for making the declaration under the scheme.

(ii) Last year an Amnesty Scheme under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, was announced. Under this Scheme it is reported that 644 persons declared income of about Rs.4,164 crore, and paid tax of about Rs.2,428.40 crore.

(iii) In the Finance Act, 2016 in order to give one time opportunity to persons to declare undisclosed domestic income and assets this disclosure scheme has been announced. It appears that under this Scheme the declarant will have to disclose income and specify the year in which it was earned. Further, there is a provision in the scheme that any person in whose case notice u/s 142(1), 143(2), 148, 153A or 153C is issued for any year, and assessment is pending, such person cannot declare undisclosed income of that year. This will be a great impediment in the success of the scheme. It appears that the scheme is announced by the Government with all good intentions. It will be advisable for the persons who have not complied with the provisions of the Income tax Act or the Wealth tax Act to come forward and take advantage of the scheme and buy peace.

24. TO SUM UP:

24.1 The Finance Minister has taken some steps towards his declared objective of granting relief to small tax payers, granting incentives for promotion of affordable housing, reducing tax litigation, affording onetime opportunity to declare undisclosed domestic income and assets etc. In some of the areas the efforts are half hearted and the assessees may not get full advantage from the provisions made in the Financial Act.

24.2 Justice Easwar Committee appointed to make recommendations for simplification of Income tax provisions has submitted its report. Some of the amendments made in the Income tax Act are based on these recommendations. It is rather unfortunate that these recommendations are only partly implemented in this Budget.

24.3 Last year the Government made an attempt to address the issue relating to undisclosed income and assets in Foreign Countries. A “Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” was passed. This year the Finance Act contains “The Income Declaration Scheme, 2016”. Under this Scheme one time opportunity is given to those persons who have not declared their domestic income or assets in the past. 45% tax (including surcharge and penalty) is payable on such undisclosed income. There are some conditions in the scheme which may be difficult to comply with. CBDT has issued some clarifications on various issues. It is reported that the last year’s scheme for declaration of undisclosed Foreign Income and Assets did not get adequate response. Let us hope that the scheme announced this year for declaration of undisclosed domestic income and assets gets adequate response.

24.4 Another step taken by the Finance Minister relates to reduction in tax litigation. For this purpose “Dispute Resolution Scheme – 2016” has been announced. This scheme is similar to “Kar Vivad Samadhen Scheme”, which was introduced in 1998. This scheme is limited to settlement of tax disputes pending on 29.2.2016 before CIT (A). It does not cover tax disputes before ITA Tribunal, High Court or the Supreme Court. Here also the provision for payment of notional penalty @ 25% where disputed tax exceeds Rs. 10 Lakh will be an impediment in the success of the scheme. This Scheme covers Settlement of tax disputes due to retrospective amendments made in the Income tax Act. For such cases tax disputes pending before any appellate authority can be settled on payment of only disputed tax. Interest and penalty will be waived. It will be possible for assessees to settle tax disputes relating to retrospective amendments made in section 9, 14A, 37, 40, etc.

24.5 The introduction of a new chapter XII – EB (Section 115 TD to 115 TF) effective from 1.6.2016 to levy ‘Exit Tax’ on Charitable Trusts is a big blow on Charitable Trusts. In our country Charitable Trusts are working to supplement the work of the Government in the field of education, medical relief, eradication of poverty, relief during calamities such as drought, earthquake etc. For this reason, exemption is given to such charitable trusts: In recent years it is noticed that the provisions relating to the exemption to such trusts are being made more complicated. The attempt of the tax administration is to see how best this benefit to charitable trusts is denied. By levy of “Exit Tax” on cancellation of registration u/s 12AA is one such step. It is the general experience of such trusts that section 12AA Registration is being cancelled on some technical grounds and the trusts have to litigate on this issue. If, ‘Exit Tax’ is levied on cancellation of Registration u/s 12AA, the trustees of such trusts will be put to great hardship.

24.6 Another major amendment made this year is about change in the concept for levy of penalty. The concept of concealment of Income or furnishing of inaccurate particulars of income for levy of penalty is now given up. Now, penalty will be leviable if there is a difference between the assessed income and declared income. Such difference will be divided into two parts viz. “Under Reporting” and “Misreporting” of income. There is a thin line of distinction between the two. This new concept will invite litigation about interpretation whether there is “Under Reporting” where penalty is 50% of tax or “Misreporting” where penalty is 200% of tax. The old concept of concealment or furnishing of inaccurate particulars of income for levy of penalty has been interpreted in several judgments of the High Courts and the Supreme Court in last more than 6 decades. The law on the subject was well settled. This new concept of “Under Reporting” and “Misreporting” introduced this year will unsettle the settled law and assessees will have to face fresh litigation.

24.7 Welcome provision introduced this year on the recommendation of Justice Easwar Committee relates to extension of concept of presumptive taxation in cases of small professionals earning gross receipts not exceeding Rs. 50 Lakh. They will not be required to maintain accounts if they offer 50% of Gross Receipts as their income. Justice Easwar Committee had suggested limit of gross receipts at Rs. 1 Crore and presumptive income at 33 1/3%. This suggestion is only partly implemented. This provision will go a long way in resolving tax disputes in cases of small professionals.

24.8 Taking an overall view of the amendments made this year in the Income tax Act, one can compliment the Finance Minister for his sympathetic approach to the tax payers. Some of the amendments are really tax payer friendly as they grant relief to small tax payers. He has taken measures to promote affordable housing and to boost growth and employment generation.

24.9 While concluding his Budget Speech he has observed in Para 188 and 189 as under:

“188. This Budget is being presented amidst global and domestic headwinds. There are several challenges. We see them as opportunities. I have outlined the agenda of our Government to “Transform India” for the benefit of the farmers, the poor and the vulnerable.

“189. It is said that “Champions are made from something they have deep inside of them – a desire, a dream, a vision. We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor, and the vulnerable; we have a dream to see a more prosperous India, and vision to “Transform India”.

Let us hope he is able to achieve his goal with the cooperation of all citizens of the country.

shailesh.kwebmaker

Post Budget Memorandum 2016

1. Place Of Effective Management [Poem] – Section 6 – Clause 4
2. Deduction u/s 32AC – Clause 14
3. Maintenance of Books of Account by a person carrying on a Profession – Section 44AA – Clause 24
4. Limit for Tax Audit – Section 44AB – Clause 25
5. Presumptive Taxation – Section 44AD – Clause 26
6. Presumptive Taxation – Section 44ADA – Clause 27
7. Conversion of Company into Limited Liability Partnership [LLP] – Section 47(xiiib) – Clause 28
8. Consolidating Plans of a Mutual Fund Scheme – Section 47(Xix) – Clause 28
9. Special provision for full value of consideration – Section 50C – Clause 30
10.
Receipt by an Individual or HUF of sum of money or property without
consideration or for inadequate consideration – Section 56 (2)(Vii) –
Clause 34
11. Deduction of Interest – Section 80EE – Clause 37
12. Deduction for an eligible Start-Up – Section 80-IAC – Clause 41
13. Deduction of profits from housing projects of Affordable Residential Units – Section 80-IBA – Clause 43
14. Deduction for Additional Employee Cost – Section 80JJAA – Clause 44
15. T ax on Income of Certain Domestic Companies – Section 115BA – Clause 49
16. Additional Tax on Dividends from Companies u/s 115BBDA – Clause 50
17. Provisions relating to Minimum Alternate Tax – Section 115JB – Clause 53
18. T ax on Distribution of Income by domestic company on buy-back of shares – Section 115QA – Clause 56
19. Special provisions relating to Tax on Accreted Income
of Certain Trusts and Institutions – Chapter XII-EB – Sections 115 TD To 115 TF – Clause 60
20. Persons having income Exempt u/s. 10 (38) required to file Return u/s 139 – Clause 65
21. Adjustments to Returned Income – Section 143 – Clause 66
22. Advance-Tax – Section 211 – Clause 87
23. Penalty – Section 270A – Clause 97
24. Equalisation levy – Chapter VIII – Clauses 160 to 177
25. Income Declaration Scheme, 2016 – Clauses 178 To 196
26. Shares Of Unlisted Companies – Period Of Holding For Becoming Long-Term Asset – Para 127 Of Budget Speech

1 Place of Effective Management [POEM] – section 6 – clause 4

Section
6(3) is proposed to be amended to bring in the concept of ‘Place of
Effective Management’ (POEM) in case of companies, w.e.f. 1-4-2017.

Section
6(3), as amended by the Finance Act, 2015 provides that a company shall
be resident in India in any previous year if it is an Indian company or
its place of effective management, in that year, is in India. The term
‘Place of Effective Management’ has been defined to mean a place where
key management and commercial decisions that are necessary for the
conduct of the business of an entity as a whole are, in substance made.

It
is submitted that the concept of POEM is a subjective one, and has
different meanings from country to country, as clarified by the OECD
itself. The OECD has, in its Report on BEPS Action Plan 6 – `Preventing
the Granting of Treaty Benefits in Inappropriate Circumstances’,
recognised that the concept of POEM is not an effective test of
residence, by stating that the use of POEM as tie-breaker test was
creating difficulties, and that dual residency should be solved on case
to case basis rather than by use of POEM.

It would also hamper
the efforts of Indian companies to become multinationals, by subjecting
their overseas subsidiaries to be potentially taxed in India, merely
because the holding company is involved in approving decisions of the
overseas subsidiaries.

Further, section 2(10) of the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015
defines ‘resident’ to mean a person who is resident in India within the
meaning of section 6 of the Income-tax Act. This could result into very
harsh and unintended consequences in cases where POEM of company is
subsequently held to be in India.

Suggestions:
a) The earlier provision of ‘management and control being wholly located in India’ should be restored.

b)
The CBDT had on 23rd December, 2015, issued the Draft Guiding
Principles for determination of POEM of a company, for public comments
and suggestions. The said guiding principles have not been finalised so
far.

Hence, it is alternatively suggested that the
applicability of POEM for determination of residential status of
companies should be deferred for 1 more year and should be considered
along with introduction of GAAR provisions.

c) In
the alternate, considering the object of preventing misuse, appropriate
provision should be added in the current section providing that the
criteria of POEM shall apply only in case of shell companies.

d)
Suitable amendments should be made in the Black Money (Undisclosed
Foreign Income and Assets) and Imposition of tax Act, 2015, to obviate
any unintended consequences.

2 Deduction u/s. 32AC – clause 14

The
amendment proposed by the Finance Bill, 2016 effectively provides that
where the acquisition and installation of the plant and machinery is not
in the same year, the deduction under this section shall be allowed in
the year of installation. This amendment is proposed to become effective
from 1st April 2016.

Suggestion:

In
order to settle the controversy and avoid unnecessary litigation on the
issue, the proposed amendment be made effective from 1st April 2014 i.e.
from the date when section 32AC became effective.

3 Maintenance of books of account by a person carrying on a profession – section 44AA – clause 24

Although
it is proposed to introduce section 44ADA providing for presumptive
taxation for professionals referred in section 44AA(1), provision
contained in section 44AA regarding maintenance of books of account has
not been proposed to be amended. Consequentially, such professionals
will continue to be required to maintain books of account.

Suggestion:

Section
44AA be amended to exempt professionals covered by the presumptive
taxation scheme u/s 44ADA from mandatory requirement of maintenance of
books of account.

4 Limit for Tax Audit – section 44ab – Clause 25

(a)
It is proposed to amend section 44AD increasing the limit of being
‘eligible business’ as defined in clause (b) of the Explanation from Rs.
1 crore to Rs. 2 crore. This is welcome. However, the limit for
carrying out Tax Audit u/s. 44AB in case of business continues to be Rs.
1 crore.

Suggestion:

Simultaneously
with the amendment to increase the limit for applicability of
presumptive taxation u/s 44AD, the limit of Rs. 1 crore in clause (a) of
section 44AB be increased to Rs. 2 crore.

(b) A
professional who does not declare 50% of the gross receipts as income
from profession will be required to get his accounts audited u/s 44AB
irrespective of his gross receipts. A small professional needs to be
exempted from the requirement of Tax Audit even if he does not declare
income in accordance with the scheme of presumptive taxation u/s 44ADA.

Suggestion:

A
professional having gross receipts not exceeding Rs. 25 lakh should not
be required to get his accounts audited u/s. 44AB even if he has not
declared his professional income in accordance with the presumptive
taxation scheme u/s 44ADA. The existing limit of Rs. 25 lakh be
continued and where the gross receipts exceed Rs. 25 lakh, the higher
limit of Rs. 50 lakh should apply where the income from profession has
not been declared in accordance with the presumptive taxation scheme u/s
44ADA. Simultaneously, appropriate amendment may also be made in the
sub-section (4) of the proposed new section 44ADA.

5 Presumptive Taxation – Section 44AD – Clause 26

(a)
T he Finance Bill, 2016 proposes to delete the proviso to sub-section
(2) which provides for deduction of salary and interest paid to partners
of a partnership firm from the presumptive income computed under
sub-section (1). The reason given in the Memorandum explaining the
provisions of the Finance Bill is hyper technical. The provision has
been working well without any difficulty. A beneficial provision should
not be deleted for technical reasons.

Suggestion:

The proviso to sub-section (2) should not be deleted.

(b)
The Finance Bill, 2016 proposes to substitute subsection (4) by new
sub-section (4) which effectively provides that where an assessee does
not declare profit in accordance with the provisions of subsection (1)
in an assessment year, he shall not be eligible to claim the benefit of
section 44AD for the next five assessment years.

It is next to
impossible for a person to misuse the provisions of section 44AD by
manipulating the profits for five years. The proposed provision only
complicates the section. There is no reason to show lack of trust in
assessees.

Suggestion:

The proposed subsection (4) should not be introduced.

6 Presumptive Taxation – Section 44ada – Clause 27

(a)
The proposed new section 44ADA provides for presumptive taxation for
assessees carrying on a profession referred to in section 44(1) and
whose total gross receipts do not exceed Rs. 50 lakh. The Memorandum
explaining the provisions of the Finance Bill states that this provision
shall not apply to Limited Liability Partnership although the section
does not indicate so.

Suggestion:

There
is no reason why the presumptive taxation scheme u/s 44ADA should not
apply to a Limited Liability Partnership. The proposed section should
also apply to a Limited Liability Partnership.

In fact,
clause (a) of the Explanation to section 44AD should also be amended
making a Limited Liability Partnership an eligible assessee for the
presumptive taxation u/s 44AD.

(b) In the proposed section
44ADA, there seems to be no bar of deduction of salary and interest paid
to partner’s u/s 40(b) for firms rendering professional services. At
the same time, proviso similar to the existing proviso to sub-section
(2) of section 44AD is absent.

Suggestion:

A proviso similar to the proviso to sub-section (2) of section 44AD be introduced in the proposed new section 44ADA.

7 Conversion of company into limited liability partnership [LLP] – section 47(xiiib) – clause 28

For
conversion of a private company or an unlisted public company into an
LLP to be tax neutral the conditions mentioned in section 47(xiiib) of
the Act are to be satisfied.

The Finance Bill has proposed to
add one more condition viz., that the total value of the assets, as
appearing in the books of account of the company, in any of the three
previous years preceding the previous year in which the conversion takes
place does not exceed Rs. 5 crore.

The limit of Rs. 60 lakh on
the turnover of the company to be eligible for tax neutrality has made
the provisions of section 47(xiiib) a non-starter. Now, the insertion of
the proposed condition regarding total value of the assets, in the name
of rationalisation, will act as further dampener and would defeat the
very purpose of insertion of the section.

Suggestion:

It
is therefore suggested that in order to encourage conversion of
companies into LLPs by making the same tax neutral, the condition that
the company’s gross receipts, turnover or total sales in any of the
preceding three years did not exceed Rs. 60 lakh, should be withdrawn.

Further
the proposed amendment inserting the condition that the total value of
the assets, as appearing in the books of account of the company, in any
of the three previous years preceding the previous year in which the
conversion takes place does not exceed Rs. 5 crore, should be omitted.

8 Consolidating plans of a Mutual Fund Scheme – Section 47(xix) – Clause 28

Clause
(xix) in section 47 is proposed to be inserted to provide that capital
gain arising on transfer of a capital asset being unit or units in a
consolidating plan of a mutual fund scheme (Original Units) in
consideration of allotment of unit or units in the consolidated plan of
that scheme of the mutual fund (New Units) will not be chargeable to
tax.

Corresponding provision in section 2(42A) providing that in
the case of New Units, there shall be included the period for which the
Original Units were held by the assessee, has remained to be inserted.

Similarly,
corresponding provision in section 49 providing that in the case of New
Units, the cost of acquisition of the asset shall be deemed to be the
cost of acquisition to him of the Original Units, has remained to be
inserted.

Suggestion:

Corresponding amendments in section 2(42A) and section 49, as mentioned above, should be carried out.

9 Special provision for full value of consideration –

Section
50C – Clause 30 Section 50C is proposed to be amended to provide that
where the date of the agreement fixing the amount of consideration for
the transfer of immovable property and the date of registration are not
the same, the stamp duty value on the date of the agreement may be taken
for the purposes of computing the full value of consideration. The
proposed amendment is effective from 1-4-2017.

Suggestion:

Since
this is a clarificatory beneficial amendment, the same should be made
applicable from the date of the insertion of the section i.e. 1-4-2003.

10
Receipt by an individual or huf of sum of money or property without
consideration or for inadequate consideration – Section 56 (2) (vii) –
Clause 34

Section 56(2)(vii) charges to tax receipt by an
individual or an HUF of any sum of money or property without
consideration or for inadequate consideration. Second Proviso to section
56(2)(vii)(c) states that the clause does not apply to receipt of
property from persons mentioned therein or in circumstances mentioned
therein.

Second proviso is proposed to be amended to expand the
scope of non-applicability of the section and accordingly, this section
will also not apply to the receipt of shares of by way of transaction
not regarded as transfer under clause (vicb) or clause (vid) or clause
(vii) of section 47.

Suggestion:

Since
this is a clarificatory beneficial amendment, the same should be made
applicable from the date of the insertion of the section i.e. w.e.f.
1-10-2009.

11 Deduction of interest – section 80EE – clause 37

(a)
A new section 80-EE is proposed to be inserted providing for deduction
of Rs. 50,000 in respect of interest payable on loan borrowed from a
financial institution by an individual assessee for acquiring a
residential house.

One of the conditions for this deduction is that the value of the residential house property should not exceed Rs. 50 lakh.

Suggestion:

In
case of cities of Chennai, Delhi, Kolkata and Mumbai or within the area
of 25 km from the municipal limits of these cities, the limit on the
value of property should be Rs. 1 crore instead of Rs. 50 lakh. Further,
with a view to avoid possible dispute, in clause (iii) of sub-section
(3), instead of using the term ‘value of residential house property’ the
term ‘consideration for the residential house property’ may be used.

(b)
The proposed section provides that the amount of loan sanctioned should
not exceed Rs. 35 lakh. There is no reason for having this condition
for availing the deduction under this section. The financial
institutions have their own well set norms for sanctioning of the loans.

Suggestion:

The condition that the sanctioned loan should not exceed Rs. 35 lakh should be omitted from the proposed section.

12 Deduction for an eligible start-up – section 80-iac – Clause 41

A
new section 80-IAC is being introduced providing tax holiday to
eligible start-ups. The deduction is available only to companies. One of
the conditions for being an eligible start-up is that the total
turnover of its business does not exceed Rs. 25 crore in any of the
previous years beginning on or after 1st April 2016 and ending on the
31st March, 2021.

Suggestions:

(a) The
condition that the turnover of the assessee company should not exceed
Rs. 25 crore in any of the previous years specified in this section
should be omitted.

(b) If at all this condition is
to be retained, the assessee company should only become disentitled to
the deduction from the previous year commencing after the previous year
in which its turnover for the first time exceeds Rs. 25 crore. The
assessee company should get the deduction for all the previous years
including the previous year in which its turnover for the first time
exceeds Rs. 25 crore.

(c) The deduction should not
be restricted only to company assessees but should also be allowed to
partnership firms including a Limited Liability Partnership.

13 Deduction of profits from housing projects of affordable residential units – Section 80-iba – Clause 43

Section
80-IBA is proposed to be inserted to provide for hundred per cent
deduction of the profits of an assessee engaged in developing and
building housing projects approved by the Competent Authority after 1st
June, 2016 but on or before 31st March, 2019 subject to fulfilment of
prescribed conditions.

One of the proposed condition is that the area of the residential unit does not exceed the specified limit.

Suggestion:

a)
The desirability of the proposed deduction to the developers engaged in
building affordable residential units, should be reconsidered in the
light of the objective of the government to reduce the deductions and
exemptions, as the same will benefit the developers and the benefit may
not be passed on to the home buyers.

b) Necessary
clarificatory amendment regarding the sizes of the residential units of
30 square meters or 60 square meters, that the same are based on the
carpet area, should be made.

14 Deduction for additional employee cost – Section 80jjaa – Clause 44

(a)
Section 80JJAA is being substituted providing for deduction in respect
of additional employee cost. Second proviso to clause (i) to Explanation
in sub-section (2) provides that in the first year of a new business,
emoluments paid or payable to employees employed during the previous
year shall be deemed to be the `additional employee cost’. Accordingly,
while determining the additional employee cost total emoluments paid or
payable to all employees including those drawing more than Rs. 25,000
shall be considered.

Suggestion:

If the
above provision is unintended, then to avoid future litigation
appropriate modification may be made providing that in the first year of
a new business while computing emoluments paid or payable to employees
employed during the previous year, emoluments of employees referred to
in sub-clauses (a) to (d) of clause (ii) of the Explanation, shall not
be considered.

(b) Clause (a) of sub-section (2) provides
that no deduction shall be allowed if the business is formed by
splitting up, or the reconstruction, of an existing business or to the
business has been acquired by the assessee by way of transfer from any
other person or as a result of any business reorganisation (collectively
referred to as reorganisation or reorganised business). This indicates
that if a business has been split up or reconstructed or acquired or
reorganised in the past, (even distant past), the assessee will not be
entitled to deduction under this section. This seems to be unintended
and is unjustified.

Suggestion:

In case
of reorganisation of business, the assessee whose business comes into
existence due to the reorganisation should not be entitled to deduction
under this section for the year in which the reorganisation takes place.
In the subsequent years the assessee should be entitled to the
deduction based on additional employee cost as contemplated in the
Explanation to sub-section (2).

15 Tax on income of certain domestic companies – section 115BA – clause 49

The
proposed section 115BA provides for a concessional rate of tax of 25%,
only in case of a newly setup and registered domestic company on or
after 1st March, 2016, subject to fulfilment of prescribed conditions.

Suggestion:

a.
The concessional rate should be extended to all the companies whether
set up and registered before or after 1st March, 2016, which fulfil the
conditions laid down.

b. Further, the provision should be extended to all non-corporate entities which fulfil these conditions as well.

16 Additional tax on dividends from companies u/s 115bbda – Clause 50

New
section 115BBDA is proposed to be introduced levying 10% tax on
dividends in excess of Rs. 10 lakh received from `a domestic company’ by
certain assessees. Sub-section (1) uses the term ‘a domestic company’.

Suggestion:

If
it is intended that tax u/s 115BBDA is to be levied if the aggregate
dividends received from various domestic companies exceed Rs. 10 lakh,
then the proposed section should be appropriately modified in order to
avoid disputes and potential litigation.

17 Provisions relating to minimum alternate tax – Section 115jb – Clause 53

The Finance Bill 2016 has proposed to insert Explanation 4 to section 115JB.

As
per clause (ii) of the proposed Explanation 4, the provisions of
section 115JB would be applicable to foreign company that require to
seek registration under any law if it is resident of a non-treaty
country.

Section 386 of Companies Act, 2013 defines “place of
business” very broadly to mean a place which includes share transfer or
registration office. Therefore, as per provisions of Companies Act, 2013
any foreign company having any place of business shall have to register
with ROC. Thus, in case of non-treaty countries, any company having any
type of business presence in India would result in applicability of
provision of section 115JB.

Foreign companies now require
registration and need to comply with other requirements under the
Companies Act, 2013 even if they operate in India through agents. In
such cases, they would also get covered by clause (ii) of Explanation 4
to section 115JB above.

Suggestions:

A
clarification should be inserted that unless the assessee has a
permanent establishment in India, the provisions of section 115JB will
not be applicable. Simultaneously, `permanent establishment’ should be
exhaustively defined for this purpose.

In
addition, an exception can be made in cases of airlines, shipping
companies, etc. where even if there is a PE in India but if the income
of such assessee is exempt pursuant to the provisions of respective DTAA
, the provisions of section 115JB will not be applicable.

18 Tax on distribution of income by domestic company on buy-back of shares – Section 115qa – Clause 56

Section
115QA is proposed to be amended to provide that the provisions of this
section shall apply to any buy back of unlisted share undertaken by the
company in accordance with the provisions of the law relating to the
Companies and not necessarily restricted to section 77A of the Companies
Act, 1956. It is further proposed to provide that for the purpose of
computing distributed income, the amount received by the company in
respect of the shares being bought back shall be determined in the
prescribed manner.

Suggestion:

Suitable
amendments should be made for nonapplicability of the section in cases
where buyback of a company’s shares is financed out of share premium or
an issue of shares of a different category.

Provisions
of Chapter XII-DA should be made applicable only to non-resident
shareholders, as resident shareholders would, in any case, be subjected
to tax u/s 46A.

19 Special provisions relating to tax on
accreted income of certain trusts and institutions – chapter xii-eb –
Sections 115 td to 115 tf – Clause 60

The new Chapter XII-EB
proposed to be inserted by the Finance Bill, 2016 provides for levy of
tax on market value of assets of a charitable trust or institution under
certain circumstances.

While appreciating the need for making
provision for an `exit tax’ when a charitable entity ceases to be so,
the provisions of the new Chapter are draconian and will cause extreme
hardship in many cases, particularly those falling under the deeming
fiction of sub-section (3) of the new section 115TD. These are
enumerated below along with our suggestions.

(a) Section 2(15)
defines ‘charitable purpose’. This definition has been undergoing
changes repeatedly. There are a large number of entities which due to
the operation of the provisos to section 2(15), may not be eligible for
exemption u/s 11. These entities have not changed their activities and
they continue to be charitable under the general law. It is not fair and
justified that such entities are levied tax on the market value of
their assets.

Suggestion:

It is
therefore suggested that the deeming fictions of sub-section (3) should
be deleted. Alternatively, mere cancellation of registration u/s 12AA of
the Act should not trigger the provisions of Chapter XII-EB. If an
entity ceases to be a charitable entity for the purposes of the Act due
to the operation of proviso to section 2(15), such an entity should not
be charged tax on the market value of its assets as contemplated by
Chapter XII-EB, so long as it continues to apply its corpus and income
for charitable purposes as defined u/s. 2(15) without having regard to
the provisos to the said section.

(b) The new Chapter
XII-EB proposes that the charitable entity will have to pay tax on the
accreted income within 15 days from the date of cancellation of
registration u/s 12AA of the Act.

Cancellation of registration
u/s 12AA of the Act has become common in recent times. Invariably the
charitable entity prefers an appeal and often the order cancelling the
registration of the charitable entity is set aside and the registration
is restored. In such circumstances, the proposed provision requiring
such entity to pay tax under Chapter XII-EB within 15 days of the date
of cancellation of registration will put the entity to extreme hardship
and cause irreversible damage.

Suggestion

The
levy of tax under Chapter XII-EB should be postponed till the order
cancelling the registration becomes final, where such cancellation is
the subject matter of an appeal.

Suggestion:

A period of six months may be permitted for payment of the tax on the accreted income.

(d)
Section 115TD(3) provides that when there is modification of objects of
a charitable entity, and the modified objects do not confirm to the
conditions of registration, and the entity has not applied for fresh
registration u/s 12AA within the previous year or the application for
the registration has been rejected, the entity will be deemed to have
been converted into any form not eligible for registration u/s 12AA.

Suggestions:

A reasonable period of one year should be permitted for the entity to make an application for registration u/s 12A/12AA .

Further,
if the entity has filed an appeal against the order rejecting its
application for registration u/s 12AA , the levy of tax should be
postponed till the order rejecting the application for registration
becomes final.

Presently, there is no provision in
the Act for seeking fresh registration u/s 12A/12AA on modification of
objects of the trust. In order to bring clarity, appropriate provisions
may be made for seeking fresh registration u/s 12A/12AA on modification
of objects of the trust.

(e) The new Chapter
provides that the principal officer, the trustee and the
trust/institution shall be liable to pay the tax on the accreted income.

Suggestion:

It should be clarified that the liability is only in the representative capacity and not in the personal capacity.

(f) It is not clear how the provisions of the new Chapter will be implemented.

Suggestion

Appropriate provisions should be made for assessment, appeal and stay in the new Chapter.

20 Persons having income exempt u/s 10 (38) required to file return u/s 139 – clause 65

Sixth
proviso to section 139(1) is proposed to be amended making it mandatory
for a person to file return of income if his total income without
giving effect to the provisions of section 10(38) exceeds the maximum
amount not chargeable to income tax.

Suggestion:

In
order to avoid potential litigation and unintended default by assessees
in filing the return, appropriate explanation should be inserted under
the proviso being amended to clarify that for this purpose, the capital
gains should be computed based on indexed cost of acquisition.

21 Adjustments to returned income – section 143 – clause 66

The
proposal to increase the scope of adjustments that can be made to the
returned income while processing the same u/s 143(1) is fraught with
difficulties. The insertion of sub-clauses (iv) and (vi) in particular
are highly objectionable as these would lead to unprecedented litigation
and hardship to assessees.

In the Form No. 3CD of the tax audit
report, the assessee reports several matters where there could be a
difference of opinion between the assessee and the tax auditor. Many
times due to early completion of tax audit and payment of various
section 43B dues or TDS payable before the due date of filing the
returns u/s 139(1), may also lead to differences. In addition, in some
cases, the issues may remain debatable and the tax auditor out of
abundant caution mentions the same in the tax audit report. However,
this cannot be made a subject matter of automatic adjustment to the
income u/s 143(1). The very objective of section 143(1) is to permit the
income-tax department to make adjustments on account of prima facie
incorrect claims and of arithmetical mistakes in the return.

When
a tax payer takes a particular stand based on judicial decisions or
interpretation of law or a legal opinion, the same cannot by any stretch
of imagination be placed in the same basket as prima facie
mistakes/incorrect claims.

Similarly, the proposal to add income
appearing in Form 26AS / 16 / 16A to the returned income if that income
has not been reported in the return, is also extremely unfair and
unwarranted. The issue of comparing the returned figures with the Form
26AS has already resulted in massive problems across the country for a
large number of tax payers. Now, if the income is also sought to be
adjusted in line with the Form 26AS then it will create unprecedented
chaos.

At present, once the CPC processes the returns, if there
is an issue of granting credit for TDS and such issue arises on account
of differences in the method of accounting followed by the deductor and
the deductee, the CPC transfers the file to the jurisdictional assessing
officer. In such cases, the tax payer is caught between the CPC and the
jurisdictional assessing officer. Despite running from pillar to post,
rectification of wrong demands takes months to get rectified and that
too after a lot of stress and tension for the concerned tax payer.

In
this back ground, adding to the tax payer’s problems would not be the
right thing to do and would create mistrust in the whole system.

Suggestion:

The proposed sub clauses (iv) and (vi) be deleted.

22 Advance-tax – Section 211 – clause 87

The
due dates of payment of advance tax by a noncorporate assessee are
proposed to be brought in alignment with the due dates applicable to
corporate tax assessees i.e. non-corporate assessees are also required
to pay advance tax, 4 times in a year.

Suggestion:

The due dates for advance tax payments should be kept as per the original provisions for the noncorporate assessees.

23 Penalty – Section 270A – clause 97

Section
270A is proposed to be inserted w.e.f. A.Y. 2017-18 in order to
rationalise and bring objectivity, certainty and clarity in the penalty
provisions.

It is submitted that the present penalty provisions
u/s. 271 have been on the statute book for a fairly long time and the
law on penalty has by and large been settled with significant certainty.

The new concepts of “under-reporting” and “misreporting” for
levy of penalty are going to be matters of serious debate and
litigation.

Suggestions:

Instead of changing the
entire scheme of levy of penalty, suitable amendments could be made to
existing provisions, retaining the concepts of “furnishing of inaccurate
particulars of income” and “concealment of income”.

Alternatively, if the proposed provisions of section 270A are retained, the following points may be noted:

i.
There is no specific amendment in section 246A of the Act, providing
for right of appeal against any penalty order u/s 270A. In all fairness
and in the interest of justice, penalty order should be appealable.

ii.
Section 270A(3)(i)(b) provides that in a case where no return is
furnished, the amount of under reported income shall be (a) in case of a
company, firm or local authority, the entire amount of income assessed
and (b) in other cases, the difference between amount of income assessed
and the maximum amount not chargeable to tax. The provisions are too
harsh and drastic.

Suggestions:

a) Specific right of appeal in section 246A of the Act should be provided by suitable amendment; and

b)
necessary amendments should be made in section 270A(3)(i)(b) to provide
for relief in cases having bonafide reasons for non-filing of returns
of income, where full / substantial portion of the taxes have been
deducted / paid.

c) For the sake of clarity, an Explanation may
be added to define, as to what would constitute a bona fide explanation
for the purposes of clause (b) of sub-section (6) of section 270A.

For
this purpose, ‘bona fide explanation’ should include claim under wrong
section(s), facts disclosed prior to issue of notice u/s. 143(2), agreed
addition to buy peace and / or end litigation and reliance on judicial
decisions/interpretation in case of conflicting decisions.

24 Equalisation Levy – Chapter viii – Clauses 160 to 177

Based
on the reading of Chapter VIII, it is understood that the Equalisation
levy is not a “tax” on income but a “levy”, therefore all other normal
provision of the Act will not apply, unless specifically mentioned in
Chapter VIII.

It is necessary to have specific mechanism for the purpose of collection of the Equalisation levy.

Further,
it also needs to be clarified whether section 147/ 263 can be invoked
for purpose of levy, as the provisions of clause 175 of the Finance
Bill, 2016, do not mention anything in this regard.

Suggestions:

A
clarification needs to be issued as to whether the Equalisation levy is
to be paid on the payments made for advertisement at combined cost in
both electronic media and print media, and on what amount.

Further,
clarification needs to be issued that levy is not applicable to
payments made for advertisement on international radio and television
networks.

An appeal also needs to be provided for, where an
Assessing officer takes a view that equalisation levy is chargeable,
while the assessee is of the view that he is not liable for such levy.

25 Income Declaration Scheme, 2016 – Clauses 178 to 196

The
Finance Bill, 2016 proposes to introduce The Income Declaration Scheme,
2016 (Declaration Scheme). We believe that notwithstanding the name,
the Declaration Scheme, in substance, is an Amnesty Scheme. One may
recall that the previous government had given assurances in the Supreme
Court of India that in future no scheme providing amnesty to tax evaders
shall be introduced.

Various provisions make the Declaration Scheme an Amnesty Scheme.

Therefore, in principle, we oppose the Income Declaration Scheme.

Presuming that the Declaration Scheme will be enacted along with the Finance Bill, 2016 our suggestions are as under:

(a)
Clause 194(c) provides for taxation of any income or an asset acquired
prior to the commencement of the Declaration Scheme (and in respect of
which no declaration has been made under the Declaration Scheme) in the
year in which a notice u/s 142 or 143(2) or 148 or 152A or 153C is
issued. By deeming provision, time of accrual of such income is
modified.

In effect, any undisclosed income of any past year
will be chargeable to tax in future year without any limitation as to
the time. Such a provision completely overrides the time-limit specified
in section 149.

Suggestion:

Clause 194(c) should be omitted.

(b)
Appropriate clarifications by way of circulars and instructions be
issued well in time so that there is clarity about its implementation.

26 Shares of unlisted companies – period of holding for becoming long-term asset – para 127 of budget speech

The
Finance Minister in paragraph 127 of the Budget Speech had stated that
the period for getting an effect of long-term capital gain regime in
case of unlisted companies is proposed to be reduced from three years to
two years. However, the necessary amendment to this effect does not
appear in the Finance Bill, 2016.

Suggestion:

Section 2(42A) be amended to give effect to the proposal in the speech of the Honourable Finance Minister

shailesh.kwebmaker

Oxford Softech P. Ltd. vs. ITO ITAT Delhi `E’ Bench Before J. Sudhakar Reddy (AM) and Beena A. Pillai (JM) ITA No. 5100/Del/2011 A.Y.: 2004-05. Date of Order: 7th April, 2016. Counsel for assessee / revenue: Salil Kapoor, Vinay Chawla & Ananya Kapoor / P. Damkanunjna

Section 271(1)(c) – Making a claim for deduction under the provisions of section 80 IA of the Act which has numerous conditions attached, is a complicated affair. Since the assessee claimed deduction u/s. 80IA, based on legal advice, and filed the report of Chartered Accountant in Form No. 10CCB along with return of income and all details were also filed along with the return of income, it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Facts
The assessee company, engaged in providing certain services including air conditioning, generator backup, interiors, electric, wooden fixtures and fittings etc., claimed deduction of 100% of its gross total income of Rs. 36,80,723 u/s. 80IA of the Act. The report of the Chartered Accountant in Form No. 10CCB was filed along with return of income.

The Assessing Officer denied claim of deduction u/s. 80IA of the Act. on the ground that the assessee was merely providing certain interiors, furniture, fixtures and generator back up power services etc., for BPO/Software companies which were lessees of the building owned by its director and that the assessee was not engaged in business of developing, operating and maintaining the infrastructure facilities as was specified in section 80IA of the Act.

Aggrieved by the denial of deduction u/s. 80IA of the Act, the assessee preferred an appeal to CIT(A) but when the appeal came up for hearing it withdrew the appeal filed.

The AO levied penalty u/s 271(1)(c) on the ground that the assessee had furnished inaccurate particulars.

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

Aggrieved by the order passed by CIT(A), the assessee preferred an appeal to the Tribunal.

Held
The Tribunal observed that a perusal of audit report filed by the assessee along with his return of income, to support the claim of deduction u/s. 80IA(7), demonstrates that the auditors of the assessee also believed that the assessee was eligible for deduction u/s. 80 IA of the Act. It was a conscious claim made by the assessee supported by an audit report. It also noted that the assessee had also made an application to STPI for setting up the infrastructure facilities under the STPI Scheme. All details of the claim made u/s. 80 IA were filed by the assessee, along with the return of income. The Tribunal held the assessee was under a bonafide belief that it is entitled to the claim for deduction under provisions of section80 IA of the Act.

The provisions under the Income-tax Act are highly complicated and its different (sic, it is difficult) for a layman to understand the same. Even seasoned tax professionals have difficulty in comprehending these provisions. Making a claim for deduction under the provisions of section 80 IA of the Act which has numerous conditions attached, is a complicated affair. It is another matter that the assessing authorities have found that the claim is not admissible. Under these circumstances, the Tribunal held that it cannot be said that this is a case of furnishing of inaccurate particulars of income.

Applying the propositions laid down by the Delhi High Court in the case of CIT vs. Shyama A. Bijapurkar (ITA No. 842/2010; order dated 13.7.2010) and CIT vs. Smt. Rita Malhotra 154 ITR 550 (Del), the Tribunal cancelled the penalty levied u/s 271(1)(c) of the Act.

The Tribunal allowed the appeal filed by the assessee

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Capital gain vs. Business income – A. Y. 2006-07 – Profit from purchase and sale of shares – Assessee not registered with any authority or body to trade in shares – Entire investment made out of assessee’s own funds – Purchase and sale of shares were for investment accepted by Department for earlier years – Gain from purchase and sale of shares cannot be taxed as business income

CIT vs. SMAA Enterprises P. Ltd.; 382 ITR 175 (J&K):

The
assessee company was incorporated in the year 1996 and the assessments
for the A. Ys. 2001-02 to 2005-06 had attained finality with the
Department, accepting the declaration made by the assessee, that it was
engaged in purchase and sale of shares as an investment. For the A. Y.
2006-07, the assessing Authority treated the short term capital gains
from purchase and sale of shares as income from business, and levied tax
at 30% instead of 10%, on the ground that the assessee was engaged in
the business of general trading in shares. The Tribunal allowed the
assessee’s claim that it is short term capital gain.

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

“i)
The assessee was not registered with any authority or body, such as
the Securities and Exchange Board of India to carry on trading in
shares. The entire investments were made out of the assessee’s own funds
and no material was placed on record by the Department to come to a
different conclusion.

ii) The factual finding by the Tribunal
was on a proper appreciation of facts. The Department could not change
its stand in subsequent years without change in material. The order was
passed by the Tribunal based on appreciation of documents and recording
reasons, which were not considered by the Assessing Authority as well as
the first Appellate Authority. The contention of the Department that
the assessee was dealing in stockin- trade and not investment, could not
be accepted and no substantial question of law arose for
consideration.”

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Business expenditure – Section 37(1) – A. Y. 2001- 02 – Payment to Port Trust by way of compensation for encroachment of land by assessee – Is business expenditure allowable u/s. 37(1)

Mundial Export Import Finance (P) Ltd. vs. CIT; 284 CTR 87(Cal):

The assessee had acquired a plot of land by way of lease from CPT. By a letter dated 28/06/2000, CPT informed the assessee that about 855.7 sq. mtrs. of land belonging to the trust adjacent to the demised plot had been encroached by the assessee, in violation of the terms and conditions of the lease agreement. The assessee paid an amount of Rs. 6,67,266/- by way of damages to the CPT, in respect of such additional land. The assessee claimed this amount as business expenditure. The Assessing Officer disallowed the claim relying on Explanation to section 37(1). The Tribunal upheld the disallowance.

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

“i) Payment was made by assessee, to compensate the loss suffered by port trust due to occupation of land in excess of what was demised to the assessee. Therefore, the payment did not partake the character of penalty.

ii) The payment could not partake the character of a capital expenditure, because the contention of the port trust was that the prayer for lease of the land unauthorisedly occupied could not be examined before payment of the compensation. Therefore, the payment was altogether compensatory for the benefit already received by the assessee by user of the land.

iii) Payment was an expenditure incurred wholly and exclusively for the purposes of the business and therefore, allowable as deduction u/s. 37(1). Explanation to section 37(1) was not applicable.”

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Additional depreciation – Section 32(1)(iia) – A. Y. 2008-09 – Manufacture – Broadcasting amounts to manufacture of things – Plant and machinery used in broadcasting entitled to additional depreciation

CIT vs. Radio Today Broadcasting Ltd.; 382 ITR 42 (Del):

The assessee was engaged in the business of FM radio broadcasting. In the A. Y. 2008-09, the assessee claimed additional depreciation on the plant and machinery used for broadcasting, claiming that broadcasting of radio programmes amounted to manufacture or production of articles or things. The Assessing Officer rejected the claim. 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) “Manufacture” could include a combination of processes and broadcasting amounts to manufacture. In the context of “broadcasting”, manufacture could encompass the process of producing, recording, editing and making copies of the radio programme followed by its broadcasting. The activity of broadcasting, in this context, would necessarily envisage all these incidental activities, which are nevertheless integral to the business of broadcasting.

ii) The assessee was entitled to additional depreciation for the machinery used by it to broadcast radio programmes in the FM channel.”

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Business expenditure – Disallowance u/s. 40A(3) – A. Y. 2008-09 – Payments in cash – Agents appointed by assessee for locations to enable dealers of petrol pumps to buy diesel and petrol – No cash payment made directly to agents but cash deposited in respective bank accounts of agents – Rule 6DD(k) applicable – Amount not disallowable u/s. 40A(3)

CIT vs. The Solution; 382 ITR 337 (Raj);
The assessee was engaged in supplying diesel at various sites. The Assessing Officer noticed that the assesee had debited huge expenses on account of purchase of diesel and had made payment in cash exceeding Rs.20,000. The Assessing Officer disallowed the expenditure relying on section 40A(3). The Commissioner (Appeals) and the Tribunal deleted the addition.

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

“i) The findings of the Commissioner (Appeals) and the Tribunal are findings of fact. The assessee had appointed various representatives and agents for 110 locations, wherein diesel and petrol were purchased by dealers of the petrol pumps. No cash payment was made directly to the agents, but was deposited in their respective bank accounts. The case of the assessee fell under exception clause of Rule 6DD(k), as the assessee had made payment to the bank account of the agents, who were required to make payment in cash for buying petrol and diesel at different location.

ii) The assessing Officer did not find any discrepancy in copies of the ledger accounts produced, and no unaccounted transaction had been reported or noticed by him.

iii) The finding arrived at by the Tribunal based on the material, was essentially a finding of fact. No substantial question of law arose for consideration. Appeal is dismissed.”

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Income – Sums collected towards contingent sales tax liability not income especially when it was demonstrated that the same were refunded to the persons from whom the same was collected

CIT vs. Khoday Breweries Ltd. (2016) 382 ITR 1 (SC)

Agreement – The fact that the agreement is with a retrospective effect, would not make it a sham transaction

The assessee, a manufacturer of liquor, in course of business used to sell liquor to dealers in sealed bottles with proper packing. The question whether the assessee was liable to pay sales tax towards bottles and packing material supplied to the dealers was a debatable question. Therefore, in order to safeguard the business interest, the assessee had collected certain amounts towards the doubtful tax liability. The assessing authority for the assessment years 1988-89 and 1989-90 had found that the amounts received from the dealers towards doubtful liability was a disguised collection of additional sale price and that the books of account of the dealers showed that payment of this additional amount was a part of the sales price. Therefore, the assessing authority held that the amount received towards anticipated tax liability was subject to assessment for tax.

The assessee had taken the premises of its sister concern along with machinery, i.e., the boiler (furnace) for manufacture of liquor. The warranty of life span of the boiler was said to be 6 to 7 years. In the term of lease, the rent was agreed at Rs.52,50,000 per annum for the above assessment year. The boiler went out of order. The lessor revamped the equipment and machinery. Accordingly, the assessee entered into a fresh agreement with lessor to enhance the rental to Rs.90,00,000 per annum. The assessing authority found that the enhanced agreement was a sham agreement and rejected the claim for deductions.

In appeal, the Commissioner of Income-tax (Appeals) upheld the order of the assessing authority and held that the amount received towards doubtful tax liability were liable for assessment of tax. With regard to enhancement of lease rent, the Commissioner of Income-tax held that towards part of cost of revamp of equipment, the assessee was entitled for deduction of Rs.12,50,000. The balance of enhanced amount of lease was held as sham and was liable for tax.

The Tribunal in appeal held that on both the questions, the assessee was not liable to tax since the amount received towards doubtful tax liability was refundable to the dealers. Therefore, it was not in the nature of income for tax. So also in respect of enhanced rent, it was found that in view of revamp of the machinery, fresh rent agreement was entered into warranting the payment of higher rent and the said agreement is not a sham transaction. The appeal filed by the assessee was allowed accordingly. The appeal filed by the Revenue before the Tribunal regarding grant of partial deduction in the rental amount was dismissed.

At the hearing of the reference/appeal filed by the Revenue before the High Court, it was a categorical contention of the assessee that the amount in dispute was received from the dealers towards the doubtful tax liability. The asessee had also let in evidence of the dealers before the assessing authority that the advance amounts received had been refunded to them.

The High Court held that the liability to pay sales tax towards bottle and packing material was a doubtful question open for debate. Later on the assessee had refunded the amount to the dealers. In that view, the findings of the Tribunal that the said amount did not attract tax liability was sound and proper. Further, the documentary evidence disclosed that during the assessment year in question, the machinery was revamped. In that view, a fresh agreement was entered into to pay higher rent of Rs.90,00,000 instead of Rs.52,50,000. The fact that the agreement was with retrospective effect, would not make it a sham transaction. The lessor was also an assessee. The amount paid has been accounted by the lessor in installments. Therefore, the assessee was entitled to legitimate deduction towards the enhanced rent.

On a SLP being filed by the Revenue, the Supreme Court held that in view of the factual determination made by the High Court that the amounts realised to meet the contingent sales tax liability of the assessee had since been refunded to the persons from whom the same was collected and also a finding had been reached that the agreement enhancing the lease rent was not a sham document, it found no ground to continue to entertain the present special leave petition

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Deduction of tax at source – Interest paid to the owners of the land acquired – Whether deduction to be made u/s. 194A – Matter remitted to the High Court as no reasons had been given by the High Court in the impugned order

Commissioner, Development Belgaum Urban Authority vs. CIT (2016) 382 ITR 8 (SC)

On gathering information about the payment of interest by the assessee to the owners of the land for delayed payment of compensation consequent upon the acquisition of land, enquiry was conducted and information was obtained by the Income Tax Department and it was found that no deduction has been made u/s. 194A of the Act in respect of the interest paid to the owners of the land acquired and accordingly, after due procedure order was passed by the Tax Recovery Officer, Belgaum u/s. 201(1) and 201(1A) of the Act, holding that the assessee had contravened the provisions of section 194A in not deduction the tax at source in respect of payment of interest for belated payment of compensation for the land acquired. Tax was levied amounting to Rs.1,96,780 and interest of Rs.59,260 was demanded and total demand of Rs.2,56,040 was made. Being aggrieved by the said order, the assessee preferred an appeal before the Commissioner of Income-tax (Appeals), Belgaum and the appellate authority, allowed the appeal. Being aggrieved by the same, the Revenue preferred appeal before the Tribunal. The Tribunal confirmed the order passed by the appellate authority holding that there was no liability and that section 194A was not applicable in respect of payment of interest for belated payment of compensation for the land acquired and accordingly dismissed the appeal of the Revenue.

On further appeal by the Revenue, the High Court reframed the following substantial question of law:

“Whether the finding of the Tribunal confirming the order of the appellate authority holding that there was no liability on the respondent to deduct tax on the interest payable for belated payment of compensation for the land acquired and in holding that section 194A was not applicable for such payment is perverse and arbitrary and contrary to law?”

The High Court allowed the appeal of the Revenue by following the judgment of the Hon’ble Supreme Court in Bikram Singh v Land Acquisition Collector (1997) 224 ITR 551 (SC).

The said judgment read as follows (page 557 of 224 ITR):

“But the question is: whether the interest on delayed payment on the acquisition of the immovable property under the Acquisition Act would not be exigible to income-tax? It is seen that this court has consistently taken the view that it is a revenue receipt. The amended definition of “interest” was not intended to exclude the revenue receipt of interest on delayed payment of compensation from taxability. Once it is construed to be a revenue receipt, necessarily, unless there is an exemption under the appropriate provisions of the Act, the revenue receipt is exigible to tax. The amendment is only to bring within its tax net, income received from the transaction covered under the definition of interest. It would mean that the interest received as income on the delayed payment of the compensation determined u/s. 28 or 31 of the Acquisition Act is a taxable event. Therefore, we hold that it is a revenue receipt exigible to tax under section 4 of the Income-tax Act. Section 194A of the Act has no application for the purpose of this case as it encompasses deduction of the incometax at source. However, the appellants are entitled to spread over the income for the period for which payment came to be made so as to compute the income for assessing tax for the relevant accounting year.”

Being aggrieved, the assessee approached the Supreme Court.

The Supreme Court while issuing notice in these appeals passed the following order:

“Issue notice as to why the matters should not be remitted. In the Impugned order, no reasons have been given by the High Court. Hence, matters need to be sent back. This is prima facie opinion.”

The learned Counsel for the Revenue when confronted with the said position reflected in the order submitted that he had no objection if the matter was remitted to the High Court for fresh consideration.

The impugned order passed by the High Court was, accordingly, set aside and the case are remitted back to the High Court for deciding the issue afresh by giving detailed reasons after hearing the counsel for the parties.

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Charitable Trust – Registration of Trust – Once an application is made u/s. 12A and in case the same is not responded to within six months, it would be taken that the application is registered on the expiry of the period of six months from the date of the application

CIT vs. Society for the Promotion of Education, Adventure Sport and Conversation of Environment (2016) 382 ITR 6 (SC)

The assessee, a society running a school, claimed that up to the assessment years 1998-99, it was exempted u/s. 10(22) of the Income-tax Act, 1961, therefore, it did not seek separate registration u/s. 12A of the Act so as to claim exemption u/s. 11.

Section 10(22), being omitted by the Finance Act, 1998, the assessee applied for registration u/s. 12A of the Act with retrospective effect, that is, since the inception of the assessee-society, i.e., January 11, 1993. An application for the purpose was duly made on February 24, 2003. Inasmuch as u/s. 12A(1)(a) (as it stood at the time of making the application), the application was required to be made within one year from the date of creation of establishment of the trust or institution, therefore, condonation of delay was sought in terms of section 12A(1)(a), proviso (i).

Section 12AA(2) provides that every order granting or refusing registration under clause (b) of s/s. (1) shall be passed before the expiry of six months from the end of the month in which the application was received u/s. 12A(1) (a) or 12A(1)(aa).

No decision was taken on the assessee’s application within the time of six months fixed by the aforesaid provision.

For want of a decision by the Commissioner, the Assessing Officer continued to make assessment denying the benefit u/s. 11.

On a writ being filed to the High Court, the High Court examined the consequence of such a long delay of almost five years on the part of the income-tax authorities in not deciding the assessee’s application dated February 24, 2003.

According to the High Court, after the statutory limitation the Commissioner would become functuous officio and could not therafter pass any order either allowing or rejecting the registration.

The High Court took the view that once an application is made under the said provision and in case the same is not responded to within six months, it would be taken that the application is registered under the provision.

The Revenue appealed to the Supreme Court against the aforesaid order of the high Court. However, when the matter came up for hearing, the learned Additional Solicitor General appearing for the Revenue, raised an apprehension that in the case of the assessee, since the date of application was of February, 24, 2003, at the worst, the same would operate only after six months from the date of the application.

According to the Supreme Court there was no basis for such an apprehension since that was the only logical sense in which the judgment could be understood. Therefore, in order to disabuse any apprehension, it was made clear that the registration of the application u/s. 12AA of the Income-tax Act in the case of the assessee would take effect from August 24, 2003.

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Purchase of immovable property by Central Government – Development Agreement/ Collaboration Agreement and in any case an arrangement which has the effect of transferring or enabling the enjoyment of property falls within the definition of “Transfer” in section 269UA – Order of pre-emptive purchase gets vitiated where the authority fails to record a finding on the relevance of comparable sale instance

Unitech Ltd. vs. Union of India (2016) 381 ITR 456 (SC)

Vidarbha Engineering Industries – appellant No.2 held on lease, three plots of land admeasuring 2595.152 sq. mtrs., i.e., 27934 sq. ft. at Dahipura and Untkhana, Nagpur. This land was comprised of three plots of land, i.e., Plot Nos. 34, 35 and 36 obtained by Vidarbha Engineering from the Nagpur Improvement Trust. Vidarbha Engineering decided to develop the subject land and entered into an agreement for the purpose with Unitech Ltd. The memorandum of understanding between them was formalised into a collaboration agreement dated March 17, 1994. Under this agreement the land holder agreed to allow Unitech to develop and construct a commercial project on subject land admeasuring 2595.152 sq. mtrs. at the technical and financial cost of the latter. The parties to the agreement agreed, upon construction of the multi storied shopping cum commercial complex, that Unitech will retain 78% of the total constructed area and transfer 22% to the share of Vidarbha Engineering Unitech agreed to create an interest-free security deposit of Rs.10 lakhs. 50% of the deposit was made refundable on completion of the RCC structure and the other 50 per cent. on completion of the project. The parties were entitled to dispose of the saleable area of their share. It was specifically agreed that this agreement was not to be construed as a partnership between the parties. In particular, this agreement was not to be construed as a demise or assignment or conveyance of the subject land.

The appellant submitted a statement in form 37-I u/s. 269UC of the Act annexing the agreement dated March 17, 1994.

This form contained only the nomenclatures of the transferor and transferee and contemplated only the transaction of a transfer and not an arrangement of collaboration. Therefore, the appellants were to described themselves as transferor and a transferee. Accordingly, they mentioned that the consideration for the transfer of the subject property was Rs. 100.40 lakhs towards the cost of share of 22% of Vidarbha Engineering, which was to be constructed by Unitech-builder at its own cost.

Upon the submission of the statement under section 269UA of the Act, the Appropriate authority issued a showcause dated July 8, 1994, stating that the consideration for the transaction appeared to be too low and appeared to be understated be more than 15%, having regard to the sale instance of a land in Hanuman Nagar, an adjoining locality, the rates per sq. ft. of FSI of which worked out to Rs 283, whereas the such a rate in case of the appellants worked out to Rs. 184 (1,00,40,000 – 56,473).

In reply to the show-cause notice the appellants raised several objections to the alleged undervaluation including the existence of encumbrances and other aspects. In particular, the appellants pointed out a sale instance of a comparable case approved by the authorities where the FSI cost on the basis of apparent consideration came to Rs. 90 per sq. ft. This was in respect of a property in the very same locality in which the subject land is located.

The appropriate authority considered the objections filed by the appellants and rejected them by an order dated July 29, 1994, passed u/s. 269UD of the Income-tax Act. The authority rejected all the objections taken by the appellants. The authority validated the sale instance relied on in the show-cause notice without giving any finding on the specific objections raised. It rejected the sale instance relied on by the appellants of a property in the same locality on the ground that that property does not have road on the three sides like the property under consideration there is a nallah carrying waste water near that property and it has a frontage of only 12.5 mtrs. It took into account the consideration of Rs.1,00,40,000 and deducted from it an amount of Rs. 24,09,600 being discount calculated at the rate of 8% per annum since the consideration had been deferred for a period of three years. It, therefore, determined the consideration for purchase of the subject property at Rs.76,30,400.

By a writ petition before the High Court challenging the compulsory pre-emptive purchase, the appellants raised several contentions. They maintained that the impugned order did not contain any finding that the consideration for the transaction was undervalued by the parties in order to evade taxes, which is the mischief sought to be prevented. The High Court, however, dismissed the petition of the appellants. Being aggrieved, the appellants approached the Supreme Court.

The Supreme Court noted that Vidarbha Engineering itself is a lessee holding the land on lease of 30 years from Nagpur Improvement Trust. It has no authority to transfer the land. Further, no clause in the agreement purported to transfer the subject land to Unitech. On the other hand, clause 4.6 specifically provided that nothing in the agreement shall be construed to be a demise, assignment or a conveyance. The agreement thus created a licence in favour of Unitech under which the latter may enter upon the land and at its own cost build on it and thereupon handover 22% of the built-up area to the share of Vidarbha Engineering as consideration and retain 78% of the built up area. The Supreme Court observed that it may appear at first blush that the collaboration agreement involved an exchange of property in the sense that the land holder transferred his property to the developer and the developer transferred 22% of the constructed area to the land holder but on a closer look this impression was quickly dispelled.

The Supreme Court noted that the word “Exchange” was defined vide section 118 of the Transfer of Property Act, 1882 as a mutual transfer of the ownership of one thing for the ownership of another. But it was not possible to construe the license created by Vidarbha Engineering in favour of Unitech as a transfer or acquisition of 22% share of the constructed building as a transfer in exchange. Vidarbha Engineering was not an owner but only a lessee of the land. As such, it could not convey a title which it did not possess itself. In fact, no clause in the agreement purported to effect a transfer. Also in consideration of the license Unitech had agreed that the Vidarbha Engineering will have a share of 22% in the constructed area. Thus it appeared that what was contemplated was that upon construction Unitech would retain 78% and the share of Vidarbha Engineering would be 22% of the built-up area vide clause 4.6 of the agreement . Thus the transaction could not be construed as a sale, lease or a licence.

The Supreme Court noted that in terms of section 269UA(d) of the Act “Immovable property” consisted of : (a) not only land or building vide sub-clause (i) but also (b) any rights in or with respect to any land or building Including building which is to be constructed.

“Transfer” of such right in or with respect to any land or building was defined in clause (f) of section 269UA of Act as the doing of anything which had the effect of transferring, or enabling the enjoyment of, such property. According to the Supreme Court, the question whether the collaboration agreement constituted transfer of property, therefore, should be answered with reference to clauses (d) and (f) which defined immovable property and transfer. The Supreme Court held that it was clear from the agreement that the transfer of rights of Vidarbha Engineering in its land did not amount to any sale, exchange or lease of such land, since only possessory rights had been granted to Unitech to construct the building on the land. Nor was there any clause in the agreement expressly transferring 22 per cent. of the building to Vidarbha after it is constructed by Unitech. Clause 4.6 only mentioned that as a consideration for Unitech agreeing to develop the property it shall retain 78 per cent. and the share of Vidarbha Engineering would be 22 per cent .

The Supreme Court observed that in fact Parliament had defined “transfer” deliberately wide enough to include within its scope such agreements or arrangement which have the effect of transferring all the important rights in land for future considerations such as part acquisition of shares in buildings to be constructed, vide sub-clause (ii) of clause (f) of section 269UA. There was no doubt that the collaboration agreement could be construed as an agreement and in any case an arrangement which has the effect of transferring and in any case enabling the enjoyment, of such property. Undoubtedly, the collaboration agreement enabled United to enjoy the property of Vidarbha Engineering for the purpose of construction. There was also no doubt that an agreement was an arrangement. The Supreme Court therefore held that the collaboration agreement effectuated a transfer of the subject land from Vidarbha Engineering to Unitech within the meaning of the term in section 269UA of the Act. It appeared tocover all such transactions by which valuable rights in property are in fact transferred by one party to another for consideration, under the word “transfer”, for fulfilling the purpose of pre-emptive purchase, i.e. prevention of tax evasion. The supreme Court approved the judgment of the Patna High Court in Ashis Mukerji vs. Union of India (1996) 222 ITR 168 (Pat) which took the view that a development agreement was covered by the definition of transfer in section 269UA.

The Supreme Court however further noted that the authority took the consideration for the land to be Rs. 1,00,40,000 which was the consideration stated by the appellant in the statement as a consideration for the transfer of subject property, i.e. plot Nos. 34, 35 and 36 admeasuring 2595.152 sq. mtrs. = 27,934 sq ft. According to the Supreme Court, it was however, difficult to imagine how or why the authority had considered the consideration to be for 56,473 sq. ft. (of available FSI). This had obviously resulted in showing a lower price of Rs. 184 per sq. ft. of FSI and enabling the authority to draw a prima facie conclusion that the consideration was understated by more than 15% in comparison to the sale instance for which the price appears to be Rs.283 per sq. ft. of FSI. If the authority had to take into a account the consideration of Rs.1,00,40,000 for 27,934 sq.ft. to a piece of land as stated by the appellants the rate would have been Rs. 359.41 per sq. and the rate of the sale instance would have been Rs. 246.14 per. sq. ft. According to the Supreme Court, the authorities had thus committed a serious error in taking the consideration quoted by the appellants for the entire subject land, i.e. 27,934 sq. ft. as consideration for the transfer of the available FSI i.e., 56,473 sq ft. thus showing an unwarranted undervaluation. The Supreme Court further noted that the authorities had treated the consideration for subject land, which was an industrial plot, as understated by more than 15% on the basis of a sale instance of a land which is in a residential locality and also that the area of the sale instance was of much smaller plot of 736 sq mtrs whereas the subject land was 2,024 sq. mtrs.

According to the Supreme Court, the authority fell into a gross and an obvious error while conducting this entire exercise of holding that the consideration for the subject property was understated in holding that Vidabha Engineering had transferred property to the extent of 78% to Unitech. There was no warrant for this finding since Vidabha Engineering was never to be the owner of the entire built-up area. It only had a share of 22% in it. Unitech., which had built from its own funds, was to retain 78% share in the built-up area. And in any case the appellants had never stated that the consideration for Rs. 1,00,40,000 was in respect of the built-up area but on the other hand had clearly stated that it was for transfer of the subject land.

The Supreme Court held that the High Court had failed to render a finding on the relevance of comparable sale instances, particularly, why a sale instance in an adjoining locality had been considered to be valid instead of a sale instance in the same locality. Also, it had missed the other aspects referred hereinbefore.

The Supreme Court therefore, allowed the appeal of the appellants and set aside the orders of the High Court and that of the appropriate authority.

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Date & Cost of Acquisition of Capital Asset Converted from Stock in Trade

For the purpose of computation of capital gains under the Income-tax Act, 1961, the period of holding of a capital asset is important. The manner of computation of long term capital gains and the rate at which it is taxed differs from that of short term capital gains, and it is the period of holding of the capital assets which determines whether the capital gains is long term or short term. For determination of the period of holding, the date of acquisition of a capital asset and the date of transfer thereof are relevant.

Explanation 1 to section 2(42A), vide its various clauses, provides for inclusion and exclusion of certain period, in determining the period for which any capital asset is held, under the specified circumstances. There is however, in the Explanation 1, no specific provision to determine the period of holding of the capital asset in a case where the asset is first held as stock in trade, and is subsequently converted into a capital asset.

Similarly, qua cost of acquisition, section 55(2)(b) permits substitution of the fair market value as on 1 April 1981 for the cost of acquisition, where the capital asset became the property of the assessee before 1st April, 1981. Where an asset is held as stock in trade as on 1st April, 1981 and subsequently converted into a capital asset before its transfer, is substitution of the fair market value as on 1st April, 1981 permissible? In cases where the asset in question is acquired on or after 01.04.1981, difficulties arise for determining the cost thereof. Should it be the cost on the date of acquiring the stock or should it be the market value prevailing on the date of conversion?

There have been differing views of the tribunal on the subject. While the Calcutta, Delhi and Chennai benches of the tribunal have taken the view that only the period of holding of an asset held as a capital asset has to be considered for the purposes of determination of the period of holding and that the asset has to have been held as a capital asset as on 1st April, 1981 in order to get the benefit of substitution of fair market value as on that date, the Pune bench of the tribunal has taken the view that the period of holding commences from the date of acquisition of the asset as stock in trade, and that even if the asset is held as stock in trade as on 1st April, 1981, the benefit of substitution of fair market value as on the date is available. Yet again, the Mumbai bench has held that the adoption of the suitable cost is at the option of the assessee.

B. K. A. V. Birla’s case
The issue first came up before the Calcutta bench of the tribunal in the case of ACIT vs. B K A V Birla (1990) 35 ITD 136.

In this case, the assessee was an HUF, which acquired certain shares of a company, Zenith Steel, in 1961, and held them as investments till 1972, when the shares were converted into stock in trade. While the shares were held as stock in trade, the assessee received further bonus shares on these shares. The shares were again converted into investments on 9th September 1982, and all the shares were sold in August 1984.

The assessee claimed that the capital gains on sale of the shares was long term capital gains, and claimed deductions u/ss. 80T and 54E. The assessing officer treated the shares as short term capital assets, since they were sold within 2 years of conversion into capital assets, and therefore denied the benefit of deductions u/ss. 80T and 54E. The Commissioner (Appeals) held that since the shares were held since 1961, they were long-term capital assets.

On behalf of the revenue, it was argued that the definition of “capital asset” in section 2(14) excluded any stock in trade, held for the purposes of business or profession. It was claimed that to qualify as a long-term capital asset, the asset must be held as a capital asset for a period of more than 36 months. In calculating that period, the period during which the asset was held as stock in trade could not be considered, since the asset was not held as a capital asset during that period.

On behalf of the assessee, while it was agreed that so long as the shares were held as stock in trade, they were not capital assets, it was argued that while it was necessary as per section 2(42A) that the asset should be held as capital asset at the time of sale, it was not necessary that it should be held as a capital asset for a period exceeding 36 months to qualify as a long-term capital asset. According to the assessee, the only thing necessary was that the assessee should hold the assets for a period exceeding 36 months. Therefore, according to the assessee, the period for which the assets were held as stock in trade was also to be taken into account for determining whether the assets sold were short term or long term capital assets.

The Tribunal was of the view that the definition of the term “short term capital asset” as per section 2(42A) made it clear that it was a capital asset, which be held for a period of less than 36 months, and not any asset. The use the words “capital asset”, in the definition, and the word “capital” in it could not be ignored. According to the tribunal, the scale of time for determining the period of holding was to be applied to a capital asset, and not to an ordinary asset. The Tribunal noted that the word ”asset” was not defined, and the term “short term capital asset” was defined only for computing income relating to capital gains. Capital gains arose on transfer of a capital asset, and therefore, according to the tribunal, period during which an asset was held as a stock was not relevant for the purposes of computation of capital gains. For the Tribunal, the clear scheme of the Act required moving backward in time from the date of transfer of the “capital asset” to the date when it was first held as a capital asset, to determine whether the gain or loss arising was long term or short term.

If the capital asset was held for less than 36 months, it was short term, otherwise it was long term. The Tribunal therefore did not see any justification for including the period for which the shares were held as stock in trade for determining whether those were held as long term capital assets or not. The Tribunal therefore held that the shares had been held for a period of less than 36 months as capital assets, and were therefore short term capital assets.

Recently, the Delhi bench of the tribunal in the case of Splendour Constructions, 122 TTJ 34 held, on similar lines, that the period of holding of a capital asset, converted from stock-in-trade, should be reckoned from the date when the asset was converted into a capital asset and not from the date of acquisition of the asset. The Chennai bench of the tribunal in the case of Lohia Metals (P) Ltd., 131 TTJ 472 held on similar lines that the period of holding would be reckoned from the date of conversion of stock-in-trade into a capital asset.

Kalyani Exports & Investments (P) Ltd .’s case
The issue again came up before the Pune bench of the Tribunal in the case of Kalyani Exports & Investments (P) Ltd/Jannhavi Investments (P) Ltd/Raigad Trading (P) Ltd vs. DCIT 78 ITD 95 (Pune)(TM).

In this case, the assessee acquired certain shares of Bharat Forge Ltd. in March 1977, in respect of which it received bonus shares in June 1981 and October 1989. The shares were initially held by it as stock in trade. On 1st July 1988, the shares were converted into capital assets at the rate of Rs.17 per share, which was the original purchase price in 1977. The assessee sold the shares in the previous year relevant to assessment year 1995- 96. It showed the gains as long term capital gains, taking the fair market value of the shares as at 1st April, 1981 in substitution of the cost of acquisition u/s 55(2)(b)(i).

The assessing officer took the view that the asset should have been a capital asset within the meaning of section 2(14), both at the point of purchase and at the point of sale. Though the assessee had sold a capital asset, when it was purchased it was stock in trade, and since it was converted into a capital asset only in 1988, the assessing officer was of the view that the option of substituting the fair market value of the shares as on 1st April, 1981 was not available to the assessee. According to the assessing officer, since the shares had been converted into capital assets at the rate of Rs. 17 per share, the cost of acquisition would be Rs. 17 per share, with the date of acquisition being 1988. So far as the bonus shares were concerned, according to the assessing officer, the cost (and not the indexed cost) of the original shares was to be spread over both the original and the bonus shares. The Commissioner (Appeals) upheld the view taken by the assessing officer.

Before the tribunal, it was argued on behalf of the assessee that what was deductible from the consideration for computation of the capital gain was the cost of acquisition of the capital asset. It was submitted that an assessee could acquire an asset only once; it could not acquire an asset as a non-capital asset at one time, and later on acquire the same as a capital asset. As per section 55(2)(b), the option for adopting the fair market value as on 1st April, 1981 was available if the capital asset in question became the property of the assessee before 1st April, 1981. It was claimed that since the assessee held the shares as stock in trade before that date, they did constitute the property of the assessee before 1st April 1981.

It was pointed out that even under section 49, when the capital asset became the property of the assessee through any of the mode specified therein such as gift, will, inheritance, etc, the cost of acquisition was deemed to be the cost for which the previous owner acquired it. Even if the previous owner held it as stock in trade, it would amount to a capital asset in the case of the recipient, and the cost to the previous owner would have to be taken as the cost of acquisition. Reliance was placed on the decisions of the Gujarat High Court in the case of Ranchhodbhai Bahijibhai Patel vs. CIT 81 ITR 446 and of the Bombay High Court in the case of Keshavji Karsondas vs. CIT 207 ITR 737. It was further argued that the benefit of indexation was to account for inflation over a period of years. That being so, there was no reason as to why the assessee should be denied that benefit from 1st April, 1981, because whether he held it as stock in trade or as a capital asset, the rise in price because of inflation was the same. It was therefore argued that indexation should be allowed from 1st April, 1981 onwards and not from July 1988.

As regards the bonus shares, on behalf of the assessee, it was argued that the cost of acquisition, being the fair market value as on 1st April, 1981, did not undergo any change on account of subsequent issue of bonus shares. Therefore, the cost of acquisition could not be spread over the original and the bonus shares.

On behalf of the revenue, it was argued that the term “for the first year in which the asset was held by the assessee” found in explanation (iii) to section 48, which defined index cost of acquisition, referred to asset, which meant capital asset. It was argued that the assessee itself had taken the cost of shares at the time of conversion at Rs. 17 in its books of accounts. In fact, the market value of shares on the date of conversion was about Rs. 50 per share, and if the conversion had been at market price, the difference of Rs. 33 on account of appreciation in the value of the shares would have been taxable as business income. However, since the assessee chose to convert the stock in trade into capital asset at the price of Rs. 17, this was the cost of acquisition to the assessee.

There was a conflict of views between the Accountant Member and the Judicial Member. While the Accountant Member agreed with the view taken by the assessing officer, the Judicial Member was of the view that the decisions cited by the assessee applied to the facts of the case before the tribunal, and that the assessee was entitled to substitute the fair market value of the shares as on 1st April, 1981 for the cost of acquisition, since the shares were acquired by the assessee (though as stock in trade) prior to 1st April, 1981.

On a reference to the Third Member, the Third Member was of the view that the issue was covered by the decision of the Bombay High Court in the case of Keshavji Karsondas (supra) in which case, it was held that an asset could not be acquired first as a non-capital asset at one point of time and again as a capital asset at a different point of time. In the said case, according to the Bombay High Court, there could be only one acquisition of an asset, and that was when the assessee acquired it for the first time, irrespective of its character at that point of time and therefore, what was relevant for the purposes of capital gains was the date of acquisition and not the date on which the asset became a capital asset. The Bombay High Court in that case, had followed the decision of the Gujarat High Court in the case of Ranchhodbhai Bhaijibhai Patel (supra), where the Gujarat High Court had held that the only condition to be satisfied for attracting section 45 was that the property transferred must be a capital asset on the date of transfer, and it was not necessary that it should also have been a capital asset on the date of acquisition. According to the Bombay High Court, in the said case, the words “the capital asset” in section 48(ii) were identificatory and demonstrative of the asset, and intended only to refer to the property that was the subject of capital gains levy, and not indicative of the character of the property at the time of acquisition.

The Third Member therefore held in favour of the assessee, holding that the option of substituting the fair market value as on 1st April 1981 was available to the assessee, since the shares had been acquired in March 1977. The Third Member agreed with the Judicial Member that explanation (iii) to section 48 came into play only after the cost of acquisition has been ascertained. Once the cost of acquisition in 1977 was allowed to be substituted by the fair market value as on 1st April, 1981, it followed that the statutory cost had to be increased in the same proportion in which cost inflation index had increased up to the year in which the shares were sold.

The Third Member also agreed with the view of the Judicial Member that there was no double benefit to the assessee if it was permitted the option of adopting the fair market value of the shares as on 1st April, 1981. According to him, the difference between the market value and the conversion price could not have been brought to tax in any case, in view of the law laid down by the Supreme Court in the case of Sir Kikabhai Premchand vs. CIT 24 ITR 506, to the effect that no man could make a profit out of himself. If the assessee was not liable to be taxed in respect of such amount according to the law of the land as declared by the Supreme Court, no benefit or concession could be said to have been extended to him. If he could not have been taxed at the point of conversion, tax authorities could not claim that he got another benefit when he was given the option to substitute the market value as on 1st April, 1981, amounting to a double benefit. The right to claim the fair market value as on 1st April 1981, was a statutory right which could be exercised when the prescribed conditions were fulfilled.

The Tribunal therefore held that the shares would be regarded as having been acquired on the date when they were purchased as stock in trade, and that the assessee therefore had the right to substitute the fair market value as on 1st April, 1981 for the cost of acquisition.

A similar, though slightly different, view was taken by the Mumbai bench of the Tribunal in another case, ACIT vs. Bright Star Investment (P) Ltd 120 TTJ 498, in the context of the cost of acquisition. In that case, the assessing officer sought to bifurcate the gains into 2 parts – business income till the date of conversion of shares from stock in trade to investment, by taking the fair market value of the shares as on the date of conversion, and capital gains from the date of conversion till the date of sale. The assessee claimed the difference between the sale price of the shares and the book value of shares on the date of conversion, with indexation from the date of conversion, as capital gains. The Tribunal took the view that where 2 formulae were possible, the formula favourable to the assessee should be accepted, and accepted the assessee’s claim that the entire income was capital gains, with indexation of cost from the date of conversion.

Observations
The important parameters in computing capital gains are the cost of acquisition and the date of acquisition besides the date of transfer and the value of consideration. They together decide the nature of capital gains; long term or short term vide section 2(42A), the benefit of indexation u/s 48, the benefit of exemption u/s 10 or 54,etc. and the benefit of concessional rate of tax u/s 112,etc.

Whether a capital gains on transfer of a capital asset is a short term gain or a long term gain is determined w.r.t its period of holding. Usually, this period is identified w.r.t the actual date of acquisition of an asset and the date of its transfer. This simple calculation gets twisted in cases where the asset under transfer is acquired in lieu of or on the strength of another asset. For example, liquidation, merger, demerger, bonus, rights, etc. These situations are taken care of by fictions introduced through various clauses of Explanation 1 to section 2(42A). Similar difficulties arising in the context of cost of acquisition are taken care of either by section 49 or 55 of the Act by providing for the substitution of the cost of acquisition in such cases.

The provisions of section 2(42A) and of section 55 or 49 do not however help in directly addressing the situation that arise in computation of capital gains on transfer of a capital asset that had been originally acquired as a stockin- trade but has later been converted in to a capital asset. All the above referred issues pose serious questions, in computation of capital gains of a converted capital asset.

It is logical to concede that an asset in whatever form acquired can have only one cost of acquisition and one date of acquisition. This date and cost cannot change on account of conversion or otherwise, unless otherwise provided for in the Act. No specific provisions are found in the Act to deem it otherwise to disturb this sound logic. This simple derivation however is disturbed due to the language of section 2(42A), which had in turn helped some of the benches of tribunal to hold that the period should be reckoned from the date of conversion and not the date of acquisition.

An asset cannot be acquired at two different points of time and that too for one cost alone. A change in its character, at any point of time, thereafter cannot change its date and cost of acquisition. Again, for the purposes of computation of capital gains it is this date and cost that are relevant, not the date of conversion. For attracting the charge of capital gains tax, what is essential is that the asset under transfer should have been a capital asset on the date of transfer; that is the only condition to be satisfied for attracting section 45 and whether the property transferred had been a capital asset on the date of acquisition or not is not material at all as has been held by the Gujarat high court in Ranchhodbhai Bhaijibhai Patel (supra)’s case.

It is true that a lot of confusion could have been avoided had the legislature, in section 2(42A), used the words “ ‘short term capital asset’ means an asset held by an assessee……” instead of “ ‘short term capital asset’ means a capital asset held by an assessee……” . While it could have avoided serious differences, in our considered opinion, the only way of reconciling the difference is to read the wordings in harmony with the overall scheme of taxation of capital gains which envisages one and only one date of acquisition and one cost of acquisition. Reading it differently will not only be unjust but will give absurd results in computation of gains. Any different interpretation might lead to situations wherein a part of the gains arising on conversion of stock would go untaxed. If the idea is to tax the whole of the surplus i.e the difference between the sale consideration and the cost, the only way of reading the provisions is to read them harmoniously in a manner that a meaning which is just, is given to them.

The view taken by the Pune bench of the tribunal in Kalyani Exports case (supra) is supported by the view taken by the Gujarat and Bombay High Courts, in cases of Ranchhodbhai Bhaijibhai Patel (supra) and Keshavji Karsondas (supra) as to when a capital asset can be held to have been acquired, when it was not a capital asset at the time of acquisition. As observed by the Third Member, those decisions cannot be distinguished on the grounds that they related to agricultural land, which was not a capital asset at the time of its acquisition, but became a capital asset subsequently, on account of a statutory amendment. The ratio of the said decisions apply even to the case of conversion of stock in trade into capital asset though it is on account of an act of volition on the part of the assessee. The issue is the same, that the asset was not a capital asset on the date of acquisition, but becomes a capital asset subsequently before its transfer.

The Mumbai bench of the Tribunal in Bright Star Investments case proceeded on the fact that the assessee itself did not claim indexation from the date of acquisition of the asset as stock in trade, but claimed it only from the date of conversion into capital asset. Therefore, the issue of claiming indexation from the earlier date of acquisition as stock in trade was not really the subject matter of the dispute before the tribunal.

Section 55(2)(b), uses both the terms “capital asset” and “property”. Section 55(2)(b) does not require that the capital asset should have been held as the capital asset of the assessee as at 1st April. 1981; it simply requires that the capital asset should have become the property of the assessee prior to that date. This conscious use of different words indicates that so long as the asset was acquired before that date, the benefit of substitution of fair market value for cost is available.

The decision of the Pune bench of the Tribunal in Kalyani Exports’ case has also subsequently been approved of by the Bombay High Court, reported as CIT vs. Jannhavi Investments (P) Ltd 304 ITR 276. In that case, the Bombay High Court reaffirmed its finding in Keshavji Karsondas’ case that cost of acquisition could only be the cost on the date of the actual acquisition, and that there was no acquisition of the shares when they were converted from stock in trade to capital assets and clarified that the amendment in section 48 for introducing the benefit of indexation did not in any way nullify or dilute the ratio laid down in Keshavji Karsondas’ case.

Therefore, clearly, the view taken by the Pune and Mumbai benches of the Tribunal and approved by the Bombay high court seems to be the correct view of the matter, and the date of conversion is irrelevant for the purpose of computing the period of holding, or substitution of the fair market value as on 1st April 1981 for the cost of acquisition.

shailesh.kwebmaker

RULES FOR INTERPRETATION OF TAX STATUTES – PART – II

Introduction
In the April issue of the BCAJ, I had discussed the basic rules of interpretation of tax statutes.This article continues to explain each rule extensively and elaborately, supported by binding precedents.

1. Interpretation of Double Taxation Avoidance Agreements :

The principles set out in Vienna Convention as agreed on 23rd May, 1969 are recognised as applicable to tax treaties. Rules embodied in Articles 31, 32 and 33 of the Convention are often referred to in interpretation of tax treaties.S Some aspects of those Articles are good faith; objects and purpose and intent to enter into the treaty. Discussion papers are referred to resolve ambiguity or obscurity. These basic principles need to be kept in mind while construing DTAA .

1.1. Maxwell on the Interpretation of Statutes mentions the following rule, under the title ‘presumption against violation of international law’: “Under the general presumption that the legislature does not intend to exceed its jurisdiction, every statute is interpreted, so far as its language permits, so as not to be inconsistent with the comity of nations or the established rules of international law, and the court will avoid a construction which would give rise to such inconsistency, unless compelled to adopt it by plain and unambiguous language. But if the language of the statute is clear, it must be followed notwithstanding the conflict between municipal and international law which results”.

2.2. In John N. Gladden vs. Her Majesty the Queen, the Federal Court observed:”Contrary to an ordinary taxing statute, a tax treaty or convention must be given a liberal interpretation with a view to implementing the true intentions of the parties. A literal or legalistic interpretation must be avoided when the basic object of the treaty might be defeated or frustrated insofar as the particular item under consideration is concerned.” The Federal Court in N. Gladden vs. Her Majesty the Queen 85 D.T.C. 5188 said : “”The non-resident can benefit from the exemption regardless of whether or not he is taxable on that capital gain in his own country. If Canada or the U.S. were to abolish capital gains completely, while the other country did not, a resident of the country which had abolished capital gains would still be exempt from capital gains in the other country.”

1.3. An important principle which needs to be kept in mind in the interpretation of the provisions of an international treaty, including one for double taxation relief, is that treaties are negotiated and entered into at a political level and have several considerations as their bases. Commenting on this aspect of the matter, David R. Davis in Principles of International Double Taxation Relief, points out that the main function of a Double Taxation Avoidance Treaty should be seen in the context of aiding commercial relations between treaty partners and as being essentially a bargain between two treaty countries as to the division of tax revenues between them in respect of income falling to be taxed in both jurisdictions.

1.4. The benefits and detriments of a double tax treaty will probably only be truly reciprocal where the flow of trade and investment between treaty partners is generally in balance. Where this is not the case, the benefits of the treaty may be weighted more in favour of one treaty partner than the other, even though the provisions of the treaty are expressed in reciprocal terms. This has been identified as occurring in relation to tax treaties between developed and developing countries, where the flow of trade and investment is largely one way. Because treaty negotiations are largely a bargaining process with each side seeking concessions from the other, the final agreement will often represent a number of compromises, and it may be uncertain as to whether a full and sufficient quid pro quo is obtained by both sides.” And, finally, “Apart from the allocation of tax between the treaty partners, tax treaties can also help to resolve problems and can obtain benefits which cannot be achieved unilaterally.

1.5. The Supreme Court in Vodafone International Holdings B.V. vs. Union of India (2012) 341-ITR-1 (SC) observed: “The court has to give effect to the language of the section when it is unambiguous and admits of no doubt regarding its interpretation, particularly when a legal fiction is embedded in that section. A legal fiction has a limited scope and cannot be expanded by giving purposive interpretation particularly if the result of such interpretation is to transform the concept of chargeability. It also reiterated and declared “All tax planning is not illegal or illegitimate or impermissible”. McDowell ‘s case has been explained and watered down.

1.6. Tax treaties are intended to grant tax relief and not to put residents of a contracting country at a disadvantage vis-a-vis other taxpayers. Section 90(2) of the Income-tax Act lays down that in relation to the assessee to whom an agreement u/s. 90(1) applies, the provisions of the Act shall apply to the extent they are more beneficial to that assessee. Circular No. 789 dated April 13, 2000 (2000) 243-ITR-(St.) 57 has been declared as valid in Vodafone International Holdings B.V. vs. UOI (2012) 341 ITR 1 ) SC) at 101. The Supreme Court in C.I.T. vs. P.V.A.L. Lulandagan Chettiar (2004) 267-ITR-657 (SC) has held : “In the case of a conflict between the provisions of this Act and an Agreement for Avoidance of Double Taxation between the Government and a foreign State, the provisions of the Agreement would prevail over those of the Act.

1.7. The Jaipur Bench of I.T.A.T. (TM) in Modern Threads Case 69-ITD-115 (TM) relying on the Circular dated 2.4.1982 held that the terms of DTAA prevail. It also observed: “The tax benefits are provided in the DTAA as an incentive for mutual benefits. The provisions of the DTAA are, therefore, required to be construed so as to advance its objectives and not to frustrate them. This view finds ample support from the decision of the Hon’ble Supreme Court in the case Bajaj Tempo Ltd. vs. CIT 196-ITR-188 and CIT vs. Shan Finance Pvt. Ltd. 231-ITR-308”. The Bangalore Bench in IBM World Trade Corp. vs. DIT (2012) 148 TTJ 496 held that the provisions of the Act or treaty whichever is beneficial are applicable to the assessee.

2. Explanation :

The normal principle in construing an Explanation is to understand it as explaining the meaning of the provision to which it is added The Explanation does not enlarge or limit the provision, unless the Explanation purports to be a definition or a deeming clause. If the intention of the Legislature is not fully conveyed earlier or there has been a misconception about the scope of a provision, the Legislature steps in to explain the purport of the provision; such an Explanation has to be given effect to, as pointing out the real meaning of the provision all along. If there is conflict in opinion on the construction of a provision, the Legislature steps in by inserting the Explanation, to clarify its intent. Explanation is normally clarificatory and retrospective in operation. However, the rule governing the construction of the provisions imposing penal liability upon the subject is that such provisions should be strictly construed. When a provision creates some penal liability against the subject, such provision should ordinarily be interpreted strictly.

2.1. The orthodox function of an Explanation is to explain the meaning and effect of the main provision. It is different in nature from a proviso, as the latter excepts, excludes or restricts, while the former explains or clarifies and does not restrict the operation of the main provision. An Explanation is also different from rules framed under an Act. Rules are for effective implementation of the Act whereas an Explanation only explains the provisions of the section. Rules cannot go beyond or against the provisions of the Act as they are framed under the Act and if there is any contradiction, the Act will prevail over the Rules. This is not the position vis-à-vis the section and its Explanation. The latter, by its very name, is intended to explain the provisions of the section, hence, there can be no contradiction. A section has to be understood and read hand in hand with the Explanation, which is only to support the main provision, like an example does not explain any situation, held in N. Govindaraju vs. I.T.O. (2015) 377-ITR-243 (Karnataka).

2.2. Ordinarily, an Explanation is introduced by the Legislature for clarifying some doubts or removing confusion which may possibly arise from the existing provisions. Normally, therefore, an Explanation would not expand the scope of the main provision and the purpose of the Explanation would be to fill a gap left in the statute, to suppress a mischief, to clear a doubt or as is often said to make explicit what was implicit as held in Katira Construction Ltd. vs. Union of India (2013) 352-ITR-513 (Gujarat).

3. Proviso :

A proviso qualifies the generality of the main enactment by providing an exception and taking out from the main provision, a portion, which, but for the proviso would be part of the main provision. A proviso, must, therefore, be considered in relation to the principal matter to which it stands as a proviso. A proviso should not be read as if providing by way of an addition to the main provision which is foreign to the principal provision itself. Indeed, in some cases, a proviso may be an exception to the main provision though it cannot be inconsistent with what is expressed thereinand, if it is, it would be ultra vires the main provision and liable to be struck down. As a general rule, in construing an enactment containing a proviso, it is proper to construe the provisions together without making either of them redundant or otiose. Even where the enacting part is clear, it is desirable to make an effort to give meaning to the proviso with a view to justifying its necessity.

3.1. A proviso to a provision in a statute has several functions and while interpreting a provision of the statue, the court is required to carefully scrutinise and find out the real object of the proviso appended to that provision. It is not a proper rule of interpretation of a proviso that the enacting part or the main part of the section be construed first without the proviso and if the same is found to be ambiguous only then recourse maybe had to examine the proviso. On the other hand, an accepted rule of interpretation is that a section and the proviso thereto must be construed as a whole, each portion throwing light, if need be, on the rest. A proviso is normally used to remove special cases from the general enactment and provide for them specially.

3.2. A proviso must be limited to the subject-matter of the enacting clause. It is a settled rule of construction that a proviso must prima facie be read and considered in relation to the principal matter to which it is a proviso. It is not a separate or independent enactment. “Words are dependent on the principal enacting words to which they are tacked as a proviso. They cannot be read as divorced from their context” (Thompson vs. Dibdin, 1912 AC 533). The rule of construction is that prima facie a proviso should be limited in its operation to the subject-matter of the enacting clause. To expand the enacting clause, inflated by the proviso, is a sin against the fundamental rule of construction that a proviso must be considered in relation to the principal matter to which it stands as a proviso. A proviso ordinarily is but a proviso, although the golden rule is to read the whole section, inclusive of the proviso, in such manner that they mutually throw light on each other and result in a harmonious construction” as observed in: Union of India & Others vs. Dileep Kumar Singh (2015) AIR 1421 at 1426-27.

4. Retrospective or Prospective or Retroactive :
It is a well-settled rule of interpretation hallowed by time and sanctified by judicial decisions that, unless the terms of a statute expressly so provide or necessarily require it, retrospective operation should not be given to a statute, so as to take away or impair an existing right, or create a new obligation or impose a new liability otherwise than as regards matters of procedure. The general rule as stated by Halsbury in volume 36 of the Laws of England (third edition) and reiterated in several decisions of the Supreme Court as well as English courts is that “all statutes other than those which are merely declaratory or which relate only to matters of procedure or of evidence are prima facie prospective” and retrospective operation should not be given to a statute so as to effect, alter or destroy an existing right or create a new liability or obligation unless that effect cannot be avoided without doing violence to the language of the enactment. If the enactment is expressed in language which is fairly capable of either interpretation, it ought to be construed as prospective only.

4.1. In Hitendra Vishnu Thakur vs. State of Maharashtra, AIR 1994 S.C. 2623, the Supreme Court held: (i) A statute which affects substantive rights is presumed to be prospective in operation, unless made retrospective, either expressly or by necessary intendment, whereas a statute which merely affects procedure, unless such a construction is textually impossible is presumed to be retrospective in its application, should not be given an extended meaning, and should be strictly confined to its clearly defined limits. (ii) Law relating to forum and limitation is procedural in nature, whereas law relating to right of action and right of appeal, even though remedial, is substantive in nature; (iii) Every litigant has a vested right in substantive law, but no such right exists in procedural law. (iv) A procedural statute should not generally speaking be applied retrospectively, where the result would be to create new disabilities or obligations, or to impose new duties in respect of transactions already accomplished. (v) A statute which not only changes the procedure but also creates new rights and liabilities, shall be construed to be prospective in operation, unless otherwise provided, either expressly or by necessary implication. This principle stands approved by the Constitution Bench in the case of Shyam Sunder vs. Ram Kumar AIR 2001 S.C. 2472.

4.2. It has been consistently held by the Supreme Court in CIT vs. Varas International P. Ltd. (2006) 283-ITR-484 (SC) and recently, that for an amendment of a statute to be construed as being retrospective, the amended provision itself should indicate either in terms or by necessary implication that it is to operate retrospectively. Of the various rules providing guidance as to how a legislation has to be interpreted, one established rule is that unless a contrary intention appears, a legislation is presumed not to be intended to have a retrospective operation. The idea behind the rule is that a current law should govern current activities. Law passed today cannot apply to the events of the past. If we do something today, we do it keeping in view the law of today and in force and not tomorrow’s backward adjustment of it. Our belief in the nature of the law is founded on the bedrock, that every human being is entitled to arrange his affairs by relying on the existing law and should not find that his plans have been retrospectively upset. This principle of law is known as lex prospicit non respicit : law looks forward not backward. As was observed in Phillips vs. Eyre3, a retrospective legislation is contrary to the general principle that legislation by which the conduct of mankind is to be regulated, when introduced for the first time to deal with future acts, ought not to change the character of past transactions carried on upon the faith of the then existing laws as observed in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 486.

4.3. If a legislation confers a benefit on some persons, but without inflicting a corresponding detriment on some other person or on the public generally, and where to confer such benefit appears to have been the legislators’ object, then the presumption would be that such a legislation, giving it a purposive construction, would warrant it to be given a retrospective effect. This exactly is the justification to treat procedural provisions as retrospective. In the Government of India & Ors. vs. Indian Tobacco Association, (2005) 7-SCC-396, the doctrine of fairness was held to be a relevant factor to construe a statute conferring a benefit, in the context of it to be given a retrospective operation. The same doctrine of fairness, to hold that a statute was retrospective in nature, was applied in the case of Vijay vs. State of Maharashtra (2006) 6-SCC-289. It was held that where a law is enacted for the benefit of community as a whole, even in the absence of a provision the statute may be held to be retrospective in nature. Refer CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 487. In my view, in such circumstances, it would have a retroactive effect.

4.4. In the case of CIT vs. Scindia Steam Navigation Co. Ltd. (1961) 42-ITR-589 (SC), the court held that as the liability to pay tax is computed according to the law in force at the beginning of the assessment year, i.e., the first day of April, any change in law affecting tax liability after that date though made during the currency of the assessment year, unless specifically made retrospective, does not apply to the assessment for that year. Tax laws are clearly in derogation of personal rights and property interests and are, therefore, subject to strict construction, and any ambiguity must be resolved against imposition of the tax.

4.5. There are three concepts: (i) prospective amendment with effect from a fixed date; (ii) retrospective amendment with effect from a fixed anterior date; (iii) clarificatory amendments which are retrospective in nature; and (iv) an amendment made to a taxing statute can be said to be intended to remove “hardships” only of the assessee, not of the Department. In ultimate analysis in CIT vs. Township P. Ltd. (2014) 367-ITR-466 at 496-497 (SC), surcharge was held to be prospective and not retrospective.

4.6. The presumption against retrospective operation is not applicable to declaratory statutes. In determining, the nature of the Act, regard must be had to the substance rather than to the form. If a new Act is ‘to explain’ an earlier Act, it would be without object unless construed retrospectively. An explanatory Act is generally passed to supply an obvious omission or to clear up doubt as the meaning of the previous Act. It is well settled that if a statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. An amending Act may be purely declaratory to clear a meaning of a provision of the principal Act, which was already implicit. A clarificatory amendment of this nature will have retrospective effect. It is called as retroactive.

5 May or Shall :
The use of the word “shall” in a statutory provision, though generally taken in a mandsssatory sense, does not necessarily mean that in every case it shall have that effect, that is to say, unless the words of the statute are punctiliously followed, the proceeding or the outcome of the proceeding would be invalid. On the other hand, it is not always correct to say that where the word “may” has been used, the statute is only permissive or directory in the sense that non-compliance with those provisions will not render the proceedings invalid. The user of the word “may” by the legislature may be out of reverence. The setting in which the word “may” has been used needs consideration, and has to be given due weightage.

5.1. When a statute invests a public officer with authority to do an act in a specified set of circumstances, it is imperative upon him to exercise his authority in a manner appropriate to the case, when a party interested and having a right to apply moves in that behalf and circumstances for exercise of authority are shown to exist. Even if the words used in the Statute are prima facie enabling, the courts will readily infer a duty to exercise power which is invested in aid of enforcement of a right – public or private – of a citizen. When a duty is cast on the authority, that power to ensure that injustice to the assessee or to the revenue may be avoided must be exercised. It is implicit in the nature of the power and its entrustment to the authority invested with quasi-judicial functions. That power is not discretionary and the Officer cannot, if the conditions for its exercise were shown to exist, decline to exercise power conferred as held by the Supreme Court in L. Hirday Narain vs. I.T.O. (1970) 78 I.T.R. 26.

5.2. Use of the word “shall” in a statute ordinarily speaking means that the statutory provision is mandatory. It is construed as such, unless there is something in the context in which the word is used which would justify a departure from this meaning. Where an assessee seeks to claim the benefit under a statutory scheme, he is bound to comply strictly with the conditions under which the benefit is granted. There is no scope for the application of any equitable consideration when the statutory provisions are stated in plain language. The courts have no power to act beyond the terms of the statutory provision under which benefits have been granted to a tax payer. The provisions contained in an Act are required to be interpreted, keeping in view the well recognised rule of construction that procedural prescriptions are meant for doing substantial justice. If violation of the procedural provision does not result in denial of fair hearing or causes prejudice to the parties, the same has to be treated as directory notwithstanding the use of word ‘shall’, as observed in Shivjee Singh vs. Nagendra Tiwary AIR 2010 S.C. 2261 at 2263.

5.3. In certain circumstances, the word ‘may’ has to be read as ‘shall’ because an authority charged with the task of enforcing the statute needs to decide the consequences that the Legislature intended to follow from failure to implement the requirement. Hence, the interpretation of the two words would always depend on the context and setting in which they are used.

6. Mandatory or Directory :

It is beyond any cavil that the question as to whether the provision is directory or mandatory would depend upon the language employed therein. (See Union of India and others vs. Filip Tiago De Gama of Vedem Vasco De Gama, (AIR 1990 SC 981 : (1989) Suppl. 2 SCR 336). In a case where the statutory provision is plain and unambiguous, the Court shall not interpret the same in a different manner, only because of harsh consequences arising therefrom. In E. Palanisamy vs. Palanisamy (Dead) by Lrs. And others, (2003) 1 SCC 122), a Division Bench of the Supreme Court observed: “The rent legislation is normally intended for the benefit of the tenants. At the same time, it is well settled that the benefits conferred on the tenants through the relevant statutes can be enjoyed only on the basis of strict compliance with the statutory provisions. Equitable consideration has no place in such matter.”

6.1. The Court’s jurisdiction to interpret a statute can be invoked when the same is ambiguous. It is well known that in a given case, the Court can iron out the fabric but it cannot change the texture of the fabric. It cannot enlarge the scope of legislation or intention when the language of provision is plain and unambiguous. It cannot add or subtract words to a statue or read something into it which is not there. It cannot rewrite or recast legislation. It is also necessary to determine that there exists a presumption that the Legislature has not used any superfluous words. It is well settled that the real intention of the legislation must be gathered from the language used. It may be true that use of the expression ‘shall or may’ is not decisive for arriving at a finding as to whether statute is directory or mandatory. But the intention of the Legislature must be found out from the scheme of the Act. It is also equally well settled that when negative words are used, the courts will presume that the intention of the Legislature was that the provisions are mandatory in character.

7. Stare Decisis :

To give law a finality and to maintain consistency, the principle of stare decisis is applied. It is a sound principle of law to follow a view which is operating for a long time. Interpretation of a provision rendered years back and accepted and acted upon should not be easily departed from. While reconsidering decisions rendered a long time back, the courts cannot ignore the harm that is likely to happen by unsettling the law that has been settled. Interpretation given to a provision by several High Courts without dissent and uniformly followed; several transactions entered into based upon the said exposition of the law; the doctrine of stare decisis should apply or else it will result in chaos and open up a Pandora’s box of uncertainty.

7.1. The Supreme Court referring to Muktul vs. Manbhari, AIR 1958 SC 918; and relying upon the observations of the Apex Court in Mishri Lal vs. Dhirendra Nath (1999) 4 SCC 11, observed in Union of India vs. Azadi Bachao Andolan (2003) 263 ITR at 726: “A decision which has been followed for a long period of time, and has been acted upon by persons in the formation of contracts or in the disposition of their property, or in the general conduct of affairs, or in legal procedure or in other ways, will generally be followed by courts of higher authority other than the court establishing the rule, even though the court before whom the matter arises afterwards might be of a different view.”

8. Subject to and Non-obstante :
It is fairly common in tax laws to use the expression ‘Notwithstanding anything contained in this Act or Other Acts” or “Subject to other provisions of this Act or Other Acts”. The principles governing any non obstante clause are well established. Ordinarily, it is a legislative device to give such a clause an overriding effect over the law or provision that qualifies such clause. When a clause begins with “Notwithstanding anything contained in the Act or in some particular provision/provisions in the Act”, it is with a view to give the enacting part of the section, in case of conflict, an overriding effect over the Act or provision mentioned in the non obstante clause. It conveys that in spite of the provisions or the Act mentioned in the non-obstante clause, the enactment following such expression shall have full operation. It is used to override the mentioned law/provision in specified circumstances.

8.1 The Apex court in Union of India vs. Kokil (G.M.) AIR 1984 SC 1022 stated : “It is well known that a non -obstante clause is a legislative device which is usually employed to give overriding effect to certain provisions over some contrary provisions that may be found either in the same enactment or some other enactment, that is to say, to avoid the operation and effect of all contrary provisions.” In Chandavarkar Sita Ratna Rao vs. Ashalata S. Guram, AIR 1987 SC 117, it observed : “A clause beginning with the expression ‘notwithstanding anything contained in this Act or in some particular provision in the Act or in some particular Act or in any law for the time being in force, or in any contract’ is more often than not appended to a section in the beginning with a view to give the enacting part of the section, in case of conflict an overriding effect over the provision of the Act or the contract mentioned in the non obstante clause. It is equivalent to saying that in spite of the provision of the Act or any other Act mentioned in the non-obstante clause or any contract or document mentioned in the enactment following it will have its full operation, or that the provisions embraced in the non-obstante clause would not be an impediment for an operation of the enactment. The above principles were again reiterated in Parayankandiyal Eravath Kanapravan Kalliani amma vs. K. Devi AIR 1996 SC 1963 and are well settled.

8.2 The distinction between the expression “subject to other provisions’ and the expression “notwithstanding anything contained in other provisions of the Act” was explained by a Constitution Bench of the Supreme Court in South India Corporation (P.) Ltd. vs. Secretary, Board of Revenue (1964) 15 STC 74. About the former expression, the court said while considering article 372: “The expression ‘subject to’ conveys the idea of a provision yielding place to another provision or other provisions to which it is made subject.” About the non obstante clause with which article 278 began, the court said : “The phrase ‘notwithstanding anything in the Constitution’ is equivalent to saying that in spite of the other articles of the Constitution, or that the other articles shall not be an impediment to the operation of article 278.”

To be continued in the next issue.

shailesh.kwebmaker

Interest-tax Act – Reassessment – Where there is no assessment order passed; there cannot be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

Standard Chartered Finance Ltd. vs. CIT [2016] 381 ITR 453 (SC)

On the return of chargeable interest filed by the appellant/assessee under the Interest-tax Act, 1974 for the assessment year 1997-98, no assessment order was passed. However, much after the last date of the assessment year was over, the Assessing Officer sought to reopen the assessment by issuing notice u/s. 10 of the Act and thereafter proceeded to reassess the interest chargeable under the aforesaid Act. The matter was carried in appeal by the assessee. The main contention of the assessee was that when there was no assessment order passed in the original proceedings there was no question of reopening the so-called assessment and make the reassessment. The Commissioner of Incometax (Appeals) accepted the aforesaid contention and set aside the reassessment order. This order was upheld by the Income-tax Appellate Tribunal (“the Tribunal”) as well. However, in further appeal by the Revenue before the High Court, the High Court reversed the view taken by the Tribunal holding that even if there was no original assessment order passed u/s.10 of the Act, there could be a reassessment. The assessee had relied upon various judgments in support including the judgment of the Supreme Court in Trustees of H.E.H. the Nizam’s Supplemental Family Trust vs. CIT [2000] 242 ITR 381 (SC). The High Court held that the said judgment would not govern the case at hand.

The Supreme Court after hearing the learned counsel for the parties, was of the opinion that the High Court had wrongly ignored upon the ratio laid down in Trustees of H. E. H. the Nizam’s Supplemental Family Trust’s case which squarely applied in the instant case in favour of the assessee. The ratio of the said judgment was that in those situations where there is no assessment order passed, there could not be a notice for reassessment inasmuch as the question of reassessment arises only when there is an assessment in the first instance.

The Supreme Court allowed the appeal and set aside the order passed by the High Court.

shailesh.kwebmaker

Receipt of Interest and Full Value of Consideration

Issue for consideration
In recent times, many cases have surfaced involving the receipt of interest by a shareholder for delay in making a public offer for sale. The magnitude becomes considerably higher where the transfer of shares is by a Foreign Institutional Investor. In many cases, the interest is paid under an order of the regulator or a court.

The issue under taxation that arises for consideration, in the hands of the recipient, is about the treatment of such interest, received by him for the delayed offer for sale.

Whether such a receipt would lead to increase the value of consideration and would enter into computation of the capital gains or would it be separately taxable as income from other sources. Conflicting decisions are available on the subject that requires consideration, due to sheer magnitude of the receipt.

Morgan Stanley Mauritius Co.’s case
The issue recently arose before the Mumbai bench of the Tribunal in the case of Morgan Stanley Mauritius Co. Ltd., ITA No.1625/Mum/2014 adjudicated under an order dated 29.01.2016.

The assessee company, incorporated in Mauritius, was registered with SEBI as a sub-account of Morgan Stanley and Company International Ltd. (MSCIL). It had transferred 13,79,979 shares of I-flex Solution Ltd. held by it, to Oracle Global (Mauritius) Ltd.(Oracle) under the open offer for sale made by Oracle for an agreed consideration. In addition to the said consideration, it had received an additional consideration of Rs.2.20 crore from Oracle over and above the sales consideration. The assessee had treated the said additional consideration as the part of the full value of consideration and had accordingly computed the capital gains for which it had claimed exemption from Indian taxation as per the DTAA with Mauritius. The AO held that;

the additional consideration was not linked to original consideration and hence it was to be treated and taxed separately,

the amount received by the assessee was penal in nature,

while making the payment of additional consideration the deductor i.e., Oracle had deducted TDS,

the deduction of tax proved that it was not part of sales consideration, and

the ‘penal interest’ had to be taxed @ 41.82 %.

The Commissioner (Appeals) confirmed the action of the AO.

In the appeal by the company to the Tribunal, it was contended that that the original and revised schedule to the offer proved that the additional compensation @ Rs.16 per share was paid by Oracle for a period up to January 2007 and that the compensation paid was for the delay in making the offer and not for delay in making payment and was not interest. In addition, it was contended that the additional consideration was not received in respect of any monies borrowed or debt incurred or for use of money by Oracle; that the additional consideration was also not a service fee/charge in respect of money borrowed/credit facility which was not utilised by Oracle; that the amount in question would not fall within the definition of ‘interest’ as per section 2(28A) of the Act; that for a receipt to be taxed as interest, existence of a debtor/creditor relationship was a must as per Article-11 of the DTAA ; that there was no Debtor/Creditor relationship between the assessee and Oracle; that the assessee had not made available any capital/funds to Oracle; that the money received by it constituted an integral part of the sales receipts of the shares; that the consideration and sale price arose from the same source i.e., the shares transferred to Oracle under the open offer. In the alternative, it was contended that the additional consideration could not be taxed as capital gains under Article-13 of the Treaty; that it was also not covered under any of the specific Articles of the Treaty; that it would fall under the head ‘income from other sources’ under Article-22 of the Treaty; that the assessee had no Permanent Establishment (PE) in India; that the income from other sources would not be taxable in India as per the provisions of the Act. In a further alternative, with regard to rate of tax to be levied, it was contended that AO had erred in not taxing the additional consideration in accordance with the provisions of section 115AD of the Act; that he should have applied the rate of 20.91% as against the rate of 41.82%. The assessee relied upon the order of the Tribunal dated 14.8.2013 in the case of Genesis Indian Investment Company Ltd. (ITA/2878/Mum/2006) in support of its main contention and also referred to the decisions in the cases of Sainiram Doongarmal, 42 ITR392, (SC) ; Sahani Steel Works & Press Works Ltd. 152 ITR 39(AP); K.G. Subramaniam, 195 ITR 199 (Karn.) and Hindustan Conductors P. Ltd., 240 ITR 762 (Bom).

In reply, the Department contended that the additional consideration was received for delay in making the payment of sales consideration; that it could not be taken as part of total sale value; that Oracle had deducted TDS while making payment to the assessee; that deduction of tax at source indicated that the amount was not part of sale consideration but represented the interest portion for delayed payments; that same had to be treated as income from other sources; that the letter of offer made by Oracle talked about interest payment of Rs.11.35 per share; that the assessee had accepted the open offer; that there was debtor/creditor relationship between the assessee and Oracle; that the buyer of the share should have paid the whole amount as per the scheduled dates of payments; that the nature of all consideration received by assessee was in the nature of interest; that it was governed by Article-11 of the India Mauritius DTAA ; that it could not be taxed under Article-22 of the treaty under the head “other income’; that the additional consideration was interest for late payment of the sale proceeds; that the interest income taxable in the hands of the assessee could not be treated as income from securities; and that the provisions of section 115AD were not applicable in the case under consideration.

The Tribunal found that an open offer was made by Oracle to the share holders of I-flex at the price of Rs.1,475/- per share; that the open offer indicated that additional offer of Rs.11.35 per share was to be payable to the share holders; that as per the letter of open offer the additional consideration per share was to be paid due to delay in making the open offer and in dispatching the letter of the offer based on the time line prescribed by SEBI; that later on, the consideration of open offer was revised to Rs.2,084/- per share; that the additional consideration for delay was revised to Rs.16/- per share; that the open offer letter and public announcement indicated that a revised offer of Rs.2,100/- per share (including additional consideration of Rs.16/-) was to be payable for the shares tendered by the share holders under the open offer; that in response to the open offer, the assessee tendered its holding of 13,97,879 shares of I-flex and received Rs.2,89,77,45,900/- which sum included additional consideration of Rs.2.20 crore.

The Tribunal found that the offer letter contained two schedules, original and revised, and the revised schedule contained the details of additional consideration to be paid by Oracle, which in the opinion of the Tribunal could not be treated as penal interest or interest for late payment of consideration by Oracle. It found that initially the additional consideration was fixed at Rs.11.35 per share, but, because of the delay in making the open offer and dispatching the letter of the offer, was later enhanced to Rs.16.00 per share and thus, there was increase in the offer price of the shares; it was a fact that the regulatory authority i.e. SEBI had approved the transaction; that the transaction could not be completed in due time because of certain reasons; that Oracle had revised the offer price. Considering all the factors, the Tribunal held that the additional consideration received by the assessee was part and parcel of the total consideration that could not be segregated under the heads ‘original sale consideration’ and ‘penal interest received from Oracle’. It observed that the business world was governed by its own rules and conventions and on due consideration of the time factor, if Oracle decided to increase the share price in the offer letter, it had to be taken as a part of original transaction. The Tribunal appreciated that in the original offer interest @ Rs.11.35 per share was offered by Oracle and after considering the delay in dispatch letter and other relevant factors, it decided to increase the interest @ of Rs.16 per share which was a business decision and the assessee had no control over the decision making process of Oracle. Importantly, it noted that the transaction did not have any debtor/creditor relationship between the assesse and Oracle and the sale of shares of I-flex in response to the open offer by Oracle was a pure and simple case of selling of shares; that the assessee had not entered into any negotiations with Oracle and transferred the shares as per a scheme that was approved by SEBI; that the assessee had not advanced any sum to Oracle and had not received any interest from it for delayed repayment of principal amount and in short, the additional consideration received by the assesse from Oracle was not penal interest and was part of the original consideration and was not taxable. The Tribunal noted with approval that in the decision in the case of Genesis Indian Investment Company Ltd.(ITA/2878/Mum /2006 / dated 14.08.2013) a similar issue had been decided by the Tribunal in favour of the assessee.

Dai Ichi Karkaria Ltd .’s case
The issue in the past had arisen in the case of Dai Ichi Karkaria Ltd, ITA No. 5584/Mum/2010 for A.Y. 2006- 07 decided on 28th December 2011. In that case, the assessee had raised the following issues in the appeal ;

“On the facts and in the circumstances of the case and in law, the ld CIT(A) erred in confirming the amount of Rs. 1,00,57,681/- as interest income and not allowing it as part of full value of consideration in computing long term capital gains in respect of buy back of shares and consequently erred in confirming long term capital gains at Rs.2,16,52,094/- as against Rs. 3,16,12,208 as claimed by the appellant.”

“On the facts and circumstances of the case, it is contended that the amount of interest of Rs. 1,00,57,681/- assessed by the Assessing Officer is not chargeable to tax under any provision of the I T Act.”

In that case, the assessee had computed the long term capital gains of Rs. 3,16,12,208 on transfer of shares under a scheme of buy back of shares of Colour Chem Ltd. The assessee had sold 71,233 shares @ Rs. 318 per share and had also received interest @ Rs.149.62 per share. In computing the capital gains, the assessee had added interest received as a part of sale consideration. The AO asked the assessee to explain as to why the interest of Rs. 1,06,57881, received on the investment, should not be treated as Income from other sources and taxed as such. In response, the assessee submitted that the said interest was paid by the company to eligible shareholders, including the assessee, pursuant to the order of the Supreme Court. It was explained that Colour Chem Ltd. had not deducted tax while making payment of the same, u/s. 194A of the Act, for the reason that the said payment was considered as part of sale consideration for calculating the Long Term Capital Gains.

The AO held as under: “The assessee has received interest in terms of the Supreme Court Order mentioned in the para 4.1 of the Letter of Offer to buy the shares of Colour Chem Ltd by EBITO Chemiebetelligungen AG, Claraint International Ltd and Clariant AG. The Supreme Court in its order has worked out interest at Rs. 149.62 per share. Assessee’s case falls under income by way of interest on securities which is specifically covered u/s 56(2)(id) of Income Tax Act. In fact the matter has been discussed in detail by the Hon’ble Madras High Court in the case of South India Shipping Corporation Ltd. (240 ITR 24), wherein, it has been held that the ratio of the decision of Supreme Court is applicable for existing Company also.” On appeal, the CIT(A) concurred with the view of the AO.

In an appeal to the Tribunal, it was contended by the assesseee company that the assessee had no statutory right to receive the interest or any compensation; the amount of interest received by the assessee was for the period prior to the time of the payments as well as actual transfer of the shares; the amount therefore was a part of the sale consideration and not a separate income of the assessee; there was no agreement or statutory rights to receive such interest; there was no mercantile practice to receive the interest and the amount was only compensatory in nature and could not be treated as a separate income.

It was contended that the interest paid by the acquirer of the shares was treated as the part of purchase consideration in the case of Burmah Castrol Plc., 307 ITR 324 (AAR) wherein interest paid by the acquirer was held as cost of acquisition of shares and on similar analogy, the interest received by the assessee on buyback of share, should be part of the sale consideration.

Highlighting the decision of the Supreme Court in the case of CIT vs. Ghanshyam (HUF), 315 ITR 001(SC), it was submitted that the court in that case held that the interest payable prior to the possession taken over shall be part of the compensation. Reliance was placed on the decision in the case of Manubhai Bhikhabhai vs. CIT, 205 ITR 505(Guj).

Narrating the litigation history of the case of acquiring the shares, it was explained that the purpose of the Supreme Court in awarding interest of Rs. 149.62 per share (net of dividends) was to compensate the shareholders of the target company for the loss of time or delay in making the offer and hence, such interest could under no stretch of imagination be construed to be interest income accruing in the hands of the assessee. Attention was drawn to the provisions of section 2(28A) of the Act, defining the term ‘interest’ to contend that for a receipt to be considered as interest the amount should arise from money borrowed or debt incurred and that in the given case, the assessee had invested in shares of the target company i.e. CCL and had not given any loans and that the scope of definition could not be expanded to include in itself something which by its very basic nature, did not amount to interest.

The facts of the case, it was explained, confirmed that the compensation was not on the grounds that the acquirer delayed the payment of the consideration to the shareholders but was awarded for making good the loss caused to the shareholders of CCL, due to the delay in making the offer of buy back by the acquirer.

It was pointed out that while deciding the issue of interest, the Supreme Court had clearly held that the shareholder did not have any right to get interest and the shareholders were only to be compensated for the loss of interest and nothing more ; therefore, when there was no right or any agreement to receive the interest then, the amount received by the assessee was only a part of the sale consideration.

Lastly, it was submitted that when there was no right to receive the interest and there was no source of income then, there was no provision to tax the same, as there was no source. CIT vs. Chiranji Lal Multani Mal Rai Bahadur (P) Ltd.,179 ITR 157(P&H).

On the other hand, the Department submitted that interest was received by the assessee for delay in payment of offer price; that ‘income’ included any amount received by the assessee and would fall u/s. 56 of the I. T. Act, since the money was lying with the acquirer and the interest was a compensation for such loss; that as per the provision of section 46A, only the consideration received by the shareholder, after adjustment of the cost of the acquisition of shares was deemed as capital gains arising to such shareholder.

The Tribunal considered the rival contentions and perused the relevant material on record. It examined in detail the factual background giving rise to the dispute of interest payment and transfer of the shares under buy-back scheme. It noted that the Supreme Court while deciding the issue of rate of interest, observed that “by reason of Regulation 44, as substituted in 2002, the discretionary jurisdiction of the Board is curtailed. In terms of Regulations 1997 could award interest by way of damages but by reason of Regulation 2002, its power is limited to grant interest to compensate the shareholders for the loss suffered by them arising out of the delay in making the public offer.” The tribunal noted that it was clear from the observations of the court that interest payable as per Regulations 44 was to compensate the shareholders for loss suffered by them for delay in making the public offer and that it was not penal in nature and was not towards a statutory right or a right arising from contract but the nature of payment of interest was to compensate the loss due to the delay in the payment by the acquirer and thus, the interest was paid to compensate the shareholder who were deprived of interest payable on difference of offer price and market price.

Importantly, the tribunal extensively quoted from the decision in the case of CIT vs. Ghanshyam (HUF) (supra) wherein the court after analysing the provisions of Land Acquisition Act, 1894 had given a detailed finding on the issue of interest payable u/s. 23, 28 as well as section 34 of the Land Acquisition Act. The Supreme Court in that case had addressed the issue whether the interest paid on enhanced compensation u/s. 23,28 and section 34 would be treated as part of compensation u/s. 45(5) of the I. T. Act 1961. The Tribunal quoted the following paragraph form the said decision;

“It is to answer the above questions that we have analysed the provisions of sections 23, 23(1A), 23(2), 28 and 34 of the 1894 Act. As discussed hereinabove, section 23(1A) provides for additional amount. It takes care of increase in the value at the rate of 12 per cent. per annum. Similarly, under section 23(2) of the 1894 Act, there is a provision for solatium which also represents part of enhanced compensation. Similarly, section 28 empowers the court in its discretion to award interest on the excess amount of compensation over and above what is awarded by the Collector. It includes additional amount under section 23(1A) and solatium under section 23(2) of the said Act. Section 28 of the 1894 Act applies only in respect of the excess amount determined by the court after reference under section 18 of the 1894 Act. It depends upon the claim, unlike interest under section 34 which depends on undue delay in making the award. It is true that “interest” is not compensation. It is equally true that section 45(5) of the 1961 Act refers to compensation. But, as discussed hereinabove, we have to go by the provisions of the 1894 Act which awards ” interest” both as an accretion in the value of the lands acquired and interest for undue delay. Interest under section 28 unlike interest under section 34 is an accretion to the value, hence it is a part of enhanced compensation or consideration which is not the case with interest under section 34 of the 1894 Act. So also additional amount under section 23(1A) and solatium under section 23(2) of the 1894 Act forms part of enhanced compensation under section 45(5)(b) of the 1961 Act. ”

In the opinion of the Tribunal, there was a fine distinction between the additional amount payable u/s. 23, award of interest u/s. 28 and interest payable u/s. 34 of the Land Acquisition Act which had led the court to hold that the additional amount u/s. 23 (1A) and solatium u/s. 23(2) of Land Acquisition Act formed a part of enhanced compensation u/s. 45(5)(b) of the I. T. Act, 1961 and when the amount was paid as a compensation for enhancement in the value of the asset transferred, the same would be part of full consideration; but when the interest was paid as a compensation to loss of interest, then it could not be treated as a part of sale consideration.

The Tribunal held that the interest received by the assessee, as was held by the court, while deciding the dispute of rate of interest was only a compensation for loss of interest, which was akin to payments made due to delay in public offer and delayed payments and was not the compensation for enhancement in the value of the asset. The fact that the offer price was more than the value of the share from 24.2.1998 till 7.4.2003 weighed heavily with the Tribunal. The Tribunal accordingly held that the interest received by the assessee as per the directions of the SEBI and in pursuance of the decision of the Supreme Court could not be treated as part of sale consideration of shares and accordingly, the lower authorities had rightly treated the same as taxable under the head ‘income from other sources’.

The Tribunal noted that merely by reason that the interest paid by the acquirer would be a part of acquisition of shares would not ipso facto conclude that the said interest in the hands of the shareholder would be part of sale consideration.

Observations
The issue though moving in a narrow circle has multiple dimensions;

Does the amount go to increase the ‘full value of consideration’ for the purposes of the Income-tax Act?

Does the additional amount, received in addition to the sale consideration, represent interest or can be classified as in the nature of interest?

Can such amount be treated as ‘interest’ within the meaning of the term as defined in section 2(28A) of the Act?

Do the provisions of section 46A alter the treatment of receipt? and

Can such an amount be classified as a capital receipt not liable to tax?

The issue on hand becomes more twisted when it is examined in the context of the provisions of Double Taxation Avoidance Agreements and in particular w.r.t. certain Articles that deal with the ‘capital gains’, ‘interest’ and ‘other income’. Issue also arises as to the applicability of rate of tax and the liability to deduct tax at source under the domestic laws. But then, these are the issues that are not intended to be discussed here for the sake of focusing on the issue under debate.

There is no dispute that the amount in question in both the cases, that has been received by the shareholder, is for compensating him for the delay made by the acquirer company in making a public offer for sale. The payment is made as per the SEBI regulations to compensate the shareholder for the delay in making the offer and is calculated as per the rules of SEBI. In the matters of dispute as to the quantification and the period, the courts have the jurisdiction to intervene and provide the finality to the dispute. There is also not a dispute that the shareholders have not lent any money to the acquirer company nor is there a debtor-creditor relationship between the company and the shareholder. It is also not anyone’s case that the company had delayed the payment of the offer price or even the additional payment ordered by the SEBI.

In computing the income under the head ‘capital gains’, an assessee, to begin with, is required to reduce the cost of acquisition from the full value of consideration. The term ‘full value of consideration’ is not defined under the Income-tax Act, but is largely held to represent the sale consideration or the consideration for transfer of a capital asset. It is immaterial whether the said consideration is received in part or in full at the time of transfer, and it is also not relevant whether such consideration is received from the transferee or not.

Obviously,the compensation paid, in our respectful opinion cannot be a part of the sale consideration simply, because it is not an ‘interest’ or that it is paid for the delay in making an offer. On a first blush, the consideration moving from the company to a shareholder can be taken to be the offer price, i.e. the price at which the company has agreed to purchase or buy the shares. However, when one takes in to account the event that has preceded the actual offer, on account of which event the company has been made to offer and pay an additional amount for delaying the offer, it is appropriate to say that the shareholder in question has accepted the said offer with full knowledge of the total receipt which he is likely to receive at the time of accepting the offer and in that view of the matter, it is apt to hold that the ‘full value of consideration’ in his case represents the acceptance price, i.e the total price. It is a settled position in law that the full value of consideration referred to in section 48 does not necessarily mean the apparent consideration. It rather is the price bargained for by the parties to the transaction. ‘Full value’ is the whole price and in its whole should be capable of including the additional amount agreed to be paid before the offer is accepted.

We do not think the receipt in any manner could ever be held to be representing interest. Interest is a compensation for delay in tendering the payment of the consideration. In the case under consideration, no consideration ever became payable before the offer for sale was made and was accepted. Importantly, once it was accepted, there was no delay in the payment thereof. These aspects of the facts are even confirmed by the Tribunal in the case of Dai Ich Karkaria Ltd.(supra). It is true that the compensation for the delay is measured in terms of the period of delay and is linked to the rate of interest but the methodology adopted for quantifying the damages can not be held to change the character of the payment which remains to be compensation, and not interest.

A bare reading of section 2(28A) confirms that the receipt inn question cannot be termed as ‘interest’. Not much will turn on section2(28A) in support of the case that it represents interest. None of the parameters help the case in favour of treating the receipt as interest.

Before we deal with the last part, it is relevant to examine whether provisions of section 46A of the I. T. Act, have any implication in deciding the issue. Apparently, the scope of section 46A is restricted to the buy back of shares by the issuing company and it’s scope cannot be extended to the case of public offer by a raiding company or any person other than the issuing company. Secondly, the provision requires the difference between the cost of acquisition and the value of consideration to be taxed under the head ‘capital gains’. The ‘value of consideration’ cannot be largely different than the ‘full value of consideration’ and as such the discussion in the earlier paragraphs will largely apply to section 46A with the same force.

Lastly, whether the receipt in question could be held to be a capital receipt, not liable to taxation, is an issue that was not before the Tribunal in any of the cases, but in our opinion is a possibility worth considering, in view of the fact that the receipt is in the nature of damages and represent compensation for an injury, which can be presented to represent a capital receipt not liable to taxation.

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RULES FOR INTERPRETATION OF TAX LAWS – PAR T 1

1.Introduction:
No enactment has been enacted by the Legislature for Interpretation of Statues including on Tax Laws. However, in many an acts, definition clause is inserted to mean a ‘word’ or ‘expression’. Explanations and Provisos are inserted to expand or curtail. No codified rules have been made by the rule making authority or the Legislature. Rules are judge made, keeping due regard of the objects, intent and purpose of the enacted provision. Interpretation is the primary function of a court of law. The Court interprets the provision whenever a challenge is thrown before it. Interpretation would not be arbitrary or fanciful but an honest continuous exercise by the Courts.

1.1. The expression “interpretation” and “construction” are generally understood as synonymous even though jurisprudentially both are distinct and different. “Interpretation” means the art of finding out of true sense of the enactment whereas “Construction” means drawing conclusions on the documents based on its language, phraseology clauses, terms and conditions. Rules for Interpretation of “Tax Laws” are to some extent different than the General Principles of Interpretation of Common Law. Rules of Interpretation which govern the tax laws are being dealt in this series of articles.

2. Particulars in a Statute:
Every enactment normally contains Short title; Long title; Preamble; Marginal notes; Headings of a group of sections or of individual sections; Definition of interpretation clauses; Provisos; Illustrations; Exceptions and saving clauses; Explanations; Schedules; Punctuations; etc. Title may be short or long. Preamble contains the main object. Marginal notes are given. Chapters and Headings are group of sections. In the Finance Bill, Memorandum containing explanation on every clause, intent and purpose for the proposal is given. Central Board of Direct Taxes issues Circulars explaining each clause. Finance Minister in his speech refers to the proposed insertions, amendments, alterations, modifications etc. It is highly desirable to go through such material apart from unmodified provision for proper understanding, pleadings and arguments.

3. Classification of the Statute:
Statute can be of various classifications. Providing date of commencement, territorial jurisdiction, mandatory or directory, object, whether codifying or consolidating or declaratory or remedial or enabling or disabling, penal, explanatory, amending retrospective or retroactive or repeal with savings or curative, corrective or validating. Applicability can be on all the subjects or class of persons or specified territorial area or specified industries etc. Assent of the President is a requisite condition. Rules have to be framed by the rule making authority and to be operative from specified date or notified date.

4. The General Principles of Interpretation:
Broadly, the general principles, as applied from time to time by the Courts are : The literal or grammatical interpretation; The mischief rule; The golden rule; Harmonious construction; The statute should be read as a whole; Construction ut res magis valeat quam pereat; Identical expressions to have same meaning; Construction noscitur a sociis; Construction ejusdem generis; Construction expression unius est exclusion alterius; Construction contemporanea exposition est fortissimo in lege; etc. Taxation statutes collecting taxes, duty, cess, levies, etc. from the subjects, have to be beneficially and liberally construed in favour of the tax payers. Penal statutes have to be construed strictly and the benefit of doubt to go to the culprit. Penalty provisions are a civil liability, but have to be construed reasonably. Penalty is corrective and not revenue earner. Levy of interest is compensatory and is treated as mandatory. Charge should be specific and there must be satisfaction of the authority issuing show-cause and levying penalty.

4.1. Other statutes in pari-materia have to be cautiously applied and if phraseology and intent is identical, may apply. Ratio decendai may also apply. Amending statutes are normally prospective unless specifically stated as retrospective. There are mandatory and directory or conjunctive and disjunctive enactments. There exist internal or external aids to interpretation. There can be retrospective, prospective or retroactive operation of a provision. Many maxims are used for interpretation. While interpreting tax laws ‘Double Taxation Avoidance Agreements’ have to be considered as supreme and would prevail even if meaning and language in the statute is different and there exists a confrontation. No provision should be in infringement of the Constitution and it should not be violative or unconstitutional but intravires – not ultravires. Certain issues may be resintegra or nonintegra.

4.2. There are binding precedents under articles 141 and 226 – 227 of the Constitution of India. Even order of the Income Tax Appellate Tribunal and High Court, other than the jurisdictional High Court, have to be respected. Judgment of larger bench as well as co-ordinate bench has to be followed unless and until raised issue is referred to the President of the Income Tax Appellate Tribunal or the Chief Justice, as the case may be, for constituting a larger bench. Judgment of the Constitutional Bench prevails over judgments of lower authorities and single benches. However recently it has been noticed that even orders of the Income Tax Appellate Tribunal or Single or Division Bench of High Courts have been referred and considered, if no appeal has been filed by the Revenue and their ratio has been accepted impliedly or explicitly.

4.3. The General Clauses Act, 1897, contains definitions, which are applicable to all common laws including tax laws, unless and until any repugnant or different definition is contained in the definition section of the tax laws. It also contains general rules of construction, which are applied on common law as well as tax laws. Provisions of Civil Law, Criminal Law, Hindu Law, Evidence Act, Transfer of Property Act, Partnership Act, Companies Act and other specific, relevant and ancillary laws equally apply unless until a different provision is enacted in tax statute and such laws expressly excluded. As analysed, about 108 Acts other than tax statutes need be read, referred and relied upon to make an effective representation, knowledge whereof is imperative.

4.4. Ordinances are also issued, which have limited life, till the statute is enacted or for the specified period. Its purpose is to be operative during the intervening period, where after it automatically lapses. Circulars, instructions, directions are issued statutorily as well as internally, which are binding on tax administration, but not on a tax payer. By such circulars, scope of exemption, deduction or allowance can be expanded, even though literal meaning of the relevant provision may be to the contrary; being beneficial to the tax payer.

5. The Tax and Litigation:
Return is filed. Assessment is framed by the assessing authority. First appeal lies with the Commissioner of Income-tax (Appeals), a superior assessing authority. Second appeal lies, and lis commences, on appeal to the Income Tax Appellate Tribunal. Income Tax Appellate Tribunal is final fact finding body. Third appeal lies with the Division Bench of the jurisdictional High Court, on substantial question of law and finality is given by the Supreme Court, where an appeal as well as a Special leave Petition can be filed. Appeal is statutory and S.L.P. is discretionary. Scope is larger on SLP. Revisional power is with the Commissioner of Income-tax u/s. 263 as well as 264. Writ remedy can be availed before the jurisdictional High Court, if there is no alternative, effective, efficacious remedy of appeal or if there is lack of jurisdiction or violation of principles of natural justice or perversity or arbitrariness, disturbing conscious of the Court. The Hon’ble High Courts are slow in permitting writ jurisdiction. Even notice u/s.148 can be challenged by writ, on lack of jurisdictional requirements. Substantial disputes can be settled through the medium of Income Tax Settlement Commission and Dispute Resolution mechanism. Interpretation of documents is a substantial question of law as held by the Apex Court in Unitech Ltd. vs. Union of India (2016) 381-ITR-456 (S.C.).

5.1. Eminent Jurist Cardozo states, “You may say that there is no assurance that judges will interpret the mores of their day more wisely and truly than other men. I am not disposed to deny this, but in my view it is quite beside the point. The point is rather that this power of interpretation must be lodged somewhere, and the custom of the Constitution has lodged it in the Judges. If they are to fulfill their function as Judges, it could hardly be lodged elsewhere. Their conclusions must, indeed, be subject to constant testing and retesting, revision and readjustment; but if they act with conscience and intelligence, they ought to attain in their conclusions a fair average of truth and wisdom.”

5.2. Article 265 of the constitution mandates that no tax shall be levied or collected except by the authority of law. It provides that not only levy but also the collection of a tax must be under the authority of some law. The tax proposed to be levied must be within the legislative competence of the Legislature imposing the tax. The validity of the tax is to be determined with reference to the competence of the Legislature at the time when the taxing law was enacted. The law must be validly enacted i.e. by the proper body which has the legislative authority and in the manner required to give its Acts, the force of law. The law must not be a colourable use of or a fraud upon the legislative power to tax. The tax must not violate the conditions laid down in the constitution and must not also contravene the specific provisions of the constitution.

5.3. No tax can be imposed by any bye-law, rule or regulation unless the ‘statute’ under which the subordinate legislation is made specifically authorises the imposition and the authorisation must be express not implied. The procedure prescribed by the statute must be followed. Tax is a compulsory exaction made under an enactment. The word tax, in its wider sense includes all money raised by taxation including taxes levied by the Union and State Legislatures; rates and other charges levied by local authorities under statutory powers. Tax includes any ‘impost’ general, special or local. It would thus include duties, cesses or fees, surcharge, administrative charges etc. A broad meaning has to be given to the word “tax.”

5.4. Taxes are levied and collected to meet the cost of governance, safety, security and for welfare of the economically weaker sections of the Society. It is well established that the Legislature enjoys wide latitude in the matter of selection of persons, subject-matter, events, etc., for taxation. The tests of the vice of discrimination in a taxing law are less rigorous. It is well established that the Legislature is promulgated to exercise an extremely wide discretion in classifying for tax purposes, so long as it refrains from clear and hostile discrimination against particular persons or classes. In Jaipur Hosiery Mills (P.) Ltd. vs. State of Rajasthan (1970) 26-STC-341; the apex court while upholding the classification made on the basis of the value of sold garments, held that the statute is not open to attack on the mere ground that it taxes some persons or objects and not others. The same view has been taken in State of Gujarat vs. Shri Ambica Mills Ltd., (1974) 4-SCC-916. In ITO vs. N. Takin Roy Rymbai (1976) 103-ITR-82 (SC); (1976) 1 SCC 916, the apex court held that the Legislature has ample freedom to select and classify persons, districts, goods, properties, incomes and objects which it would tax, and which it would not tax.

5.5. With National litigation policy of the Government of India, the Central Board of Direct Taxes issued Instruction No. 5 dated July 10, 2014 and lately in exercise of powers conferred u/s. 268(A) of the Income-tax Act issued Circular dated December 10, 2015 bearing No. 21 of 2015, enhancing monetary limits for an appeal before the Tribunal exceeding tax Rs. 10 lakh, before the High Court exceeding tax Rs. 20 lakh and before the Hon’ble Supreme Court exceeding tax Rs. 25 lakh with specified exceptions. Tax would not include interest. Same limit for penalty appeals. It applies to pending appeals and references. Writs have been excluded. The instruction will apply retrospectively to pending appeals and appeals to be filed henceforth in High Courts/Tribunals. Pending appeals below the specified tax limits may be withdrawn or not pressed. Appeals before the Supreme Court will be governed by the instructions on this subject, operative at the time when such appeal was filed.

5.6. The Hon’ble Bombay High Court in C.I.T. vs. Sunny Sounds Pvt. Ltd. (2016) 281-ITR-443 (Bom.) at 452 observed: “The need for the Central Board of Direct Taxes to issue the December 15, 2015, Circular and to clarify that it would apply retrospectively to govern even pending appeals arose on account of the enormous increase in the number of appeals being filed by the Revenue over the years”. It also observed: “This policy of non-filing and of not pressing and/or withdrawing admitted appeals having tax effect of less than Rs. 20 lakh has been specifically declared to be retrospective by the Circular dated December 10, 2015. There is no reason why the circular4 should not apply to pending references where the tax effect is less than Rs. 20 lakh as the objective of the Circular would stand fulfilled on its application even to pending references”. Ultimately reference application of the Revenue was returned unanswered. The Ahmedabad Bench of I.T.A.T. in Dy. Commissioner vs. Some Textiles & Industries Ltd. and Others (2016) 175-TTJ (Ahd.) 1 by Order dated 15.12.2015 have also held so for pending appeals. Thus cost of the Government has been saved. Fairly large number of pending appeals have been / are being withdrawn. Appeals / References which fall under the Circular as interpreted by the Courts and Tribunals need be brought to the notice of the relevant forum or the concerned Commissioner for its expeditious withdrawal. It is ‘Professional Social Responsibility’ of each one of us. I have noticed department is slack and is not filing withdrawal applications or providing lists to the I.T.A.T./ High Courts. It is improper.

5.7. Regularly at short intervals, Voluntary Disclose or Declaration Schemes and Schemes to reduce / waive outstanding demands like Kar Vivad Samadhan Scheme etc. are introduced. The Finance Bill, 2016 also introduces (1) The Income Declaration Scheme, 2016; (2) The Direct Tax Dispute Resolutions Scheme, 2016, benefit whereof deserves to be availed of by the eligible persons. It is advisable to cut down tax disputes, purchase peace and concentrate on earning income after developing tax culture. Our duty is to guide clients for payment of due and legitimate taxes.

5.8. In tax administration, accountability is absent, work culture is missing and slackness is apparent. High pitched additions are made, arbitrarily, capriciously, with perversity and malafides. Corruption is flagrant. The Raja Chelliah report suggested that black marks be given to such officers, whose additions do not stand test of appeal. But the same was not accepted. However, by the Finance Bill, 2016 some steps towards accountability and expeditious are proposed. Such steps need to be implemented vigorously to usher in discipline. Many more measures are necessary and expedient in the interest of just collection.

6. Charging and Machinery Provision :

The rule of construction of a charging section is that before taxing any person, it must be shown that he falls within the ambit of the charging section by clear words used in the section. No one can be taxed by implication. A charging section has to be construed strictly. If a person has not been brought within the ambit of the charging section by clear words, he cannot be taxed at all. The Supreme Court in CWT vs. Ellis Bridge Gymkhana and Others (1998) 229 ITR 1 held: “The Legislature deliberately excluded a firm or an association of persons from the charge of wealth-tax and the word “individual” in the charging section cannot be stretched to include entities which had been deliberately left out of the charge.

6.1. The charging section which fixes the liability is strictly construed but that rule of strict construction is not extended to the machinery provisions which are construed like any other statute. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat the same. (See Whitney vs. Commissioner of Inland Revenue (1926) AC 37, Commissioner of Income-tax vs. Mahaliram Ramjidas (1940) 8-ITR-442 (PC), India United Mills Ltd. vs. Commissioner of Excess Profits Tax, Bombay (1955) 27-ITR-20 (SC); and Gursahai Saigal vs. Commissioner of Income-tax, Punjab (1963) 48-ITR-1 (SC).

6.2. The choice between a strict and a liberal construction arises only in case of doubt in regard to the intention of the Legislature, manifest on the statutory language. Indeed, the need to resort to any interpretative process arises only when the meaning is not manifest on the plain words of the statute. If the words are plain and clear and directly convey the meaning, there is no need for any interpretation. Liberal and strict construction of an exemption provision are, as stated in Union of India vs. Wood Papers Ltd. (1991) 83-STC-251 (SC) “to be invoked at different stages of interpreting it. When the question is whether a subject falls in the notification or in the exemption clause then it being in the nature of exception is to be construed strictly and against the subject. But once ambiguity or doubt about applicability is lifted and the subject falls in the notification then full play should be given to it and it calls for a wider and liberal construction.”

6.3. The Apex Court in C.I.T. vs. Calcutta Knitwears (2014) 362-ITR-673 (S.C.) stated: “The courts, while interpreting the provisions of a fiscal legislation, should neither add nor subtract a word from the provisions. The foremost principle of interpretation of fiscal statutes in every system of interpretation is the rule of strict interpretation which provides that where the words of the statute are absolutely clear and unambiguous, recourse cannot be had to the principles of interpretation other than the literal rule”. It also observed: “Hardship or inconvenience cannot alter the meaning of the language employed by the Legislature if such meaning is clear and apparent. Hence, departure from the literal rule should only be in very rare cases, and ordinarily there should be judicial restraint to do so” and : It is the duty of the court while interpreting machinery provisions of a taxing statute to give effect to its manifest purpose. Wherever the intention to impose liability is clear, the courts ought not to be hesitant in espousing a common sense interpretation of the machinery provisions so that the charge does not fail. The machinery provisions must, no doubt, be so construed as would effectuate the object and purpose of the statute and not defeat it”.

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Depreciation – Carry forward and set off – Amendment to section 32(2) by the Finance (No.2) Act, 1996 – Effect – Unabsorbed Depreciation as on 1-4-1997 can be set off against income from any head for assessment year immediately following 1-4-1997 and thereafter unabsorbed depreciation if any to be set off only against business income for a period of eight assessment years.

Peerless General Finance and Investment Co. Ltd. vs. CIT [2016] 380 ITR 165 (SC)

The Tribunal had held that under the provisions of section 32(2)(iii)(a) and (b) the amount of unabsorbed depreciation allowance shall be set off against the profits and gains, if any, of any business or profession carried on by him and assessable for that assessment year; if not wholly so set off, the amount of unabsorbed depreciation allowance not so set off shall be carried forward to the following assessment year not being more than eight assessment years immediately succeeding the assessment year for which the aforesaid allowance was first computed.

The Tribunal further held that since in this case, business income after adjusting brought forward business loss had been determined at nil, therefore, in the absence of any other business income, the amount of brought forward unabsorbed depreciation allowance shall not be set off from the other income, i.e., income from “house property” and “Other Sources” and shall be carried forward to the following assessment year(s) as per the provisions of section 32(2)(iii)(a) and (b) of the Income-tax Act, 1961.

The High Court admitted the appeal on the following questions:

(i) Whether, on the facts and in the circumstances of the case, the Tribunal erred in construing the amendment of section 32(2) by the Finance (No.2) Act, 1996, as retrospective in effect so as to preclude the assessee’s claim for adjustment of accumulated unabsorbed depreciation allowance brought forward as on the 1st April, 1997, from earlier years against income from house property and income from other sources for the assessment year 1998-99 ?

(ii) Whether the assurance of the Finance Minister in Parliament that set off of the cumulative unabsorbed depreciation brought forward from earlier years as on April 1st, 1997, can be set off against the profits and gains of a business or profession or any other income of the taxpayer for the assessment year 1997-98 and subsequent year forms part of the legislative intent and any construction contrary thereto is erroneous?

The High Court held that the provisions introduced suggest that where the unabsorbed depreciation allowance could not be wholly set off against the profits and gains, if any, of any business or profession carried on by the assessee, the unabsorbed depreciation allowance could be set off from the income under any other head during the assessment year 1997-98. If the unabsorbed depreciation allowance could only be wholly set off during the assessment year 1997-98, the left over could only be set off against the profits and gains, if any, of the business or profession in the assessment year 1998-99.

The High Court therefore answered both the question in the negative and in favour of the Revenue.

On further appeal, the Supreme Court dismissed the SLP subject to the observation that the unabsorbed depreciation as on April 1, 1997, can be set off against the income from any head for the immediate assessment year following April 1, 1997 and thereafter if there still is any unabsorbed depreciation the same can be set off only against the business income for a period of eight assessment years.

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ACIT vs. Rupam Impex ITAT, Rajkot bench, Rajkot Before Pramod Kumar (A.M.) and S S Godara (J.M.) I.T.A. No.: 472/RJT/2014 A.Y.: 2008-09 Date of Order: 21st January, 2016 Counsel for Assessee / Revenue : Vimal Desai / Yogesh Pandey and C S Anjaria

Section 154 – Who is responsible for the mistake is not material for the purpose of proceedings u/s. 154; what is material is that there is a mistake – AO directed to rectify the mistake even though it was alleged to have been made by the assessee.

Facts
In the assessment order passed by the AO u/s. 143(3) of the Act, the assessee noted that the AO had erred in computing its assessed income on account of the following discrepancies in the order passed:

The AO was, accordingly, urged to rectify the mistake which was apparent on record. However, the AO rejected this request primarily on the ground that the assessee himself had computed the income on the basis of these figures. On appeal, the CIT(A) held the action of the AO as incorrect and directed the AO to rectify the mistakes u/s. 154.

Before the Tribunal, the revenue justified the stand of the AO and submitted that since the claim of the assessee, as made in the income tax return, was accepted, the assessee could not make a fresh claim without a revised return.

Held
According to the Tribunal, a lot of emphasis was placed by the AO on the fact that the mistake was committed by the assessee ignoring the fact of the complete non-application of mind by him to the facts of the case and making a mockery of the scrutiny assessment proceedings. According to the Tribunal who is responsible for the mistake was not material for the purpose of proceedings u/s. 154; what is material is that there is a mistake – a mistake which is clear, glaring and which is incapable of two views being taken. According to the Tribunal, the fact that mistake has occurred was beyond doubt. It is attributed to the error of the assessee does not obliterate the fact of mistake or legal remedies for a mistake having crept in. According to it, the income liable to be taxed has to be worked out in accordance with the law as in force. In this process, it is not open to the Revenue authorities to take advantage of mistakes committed by the assessee. Tax cannot be levied on an assessee at a higher amount or at a higher rate merely because the assessee, under a mistaken belief or due to an error, offered the income for taxation at that amount or that rate. It can only be levied when it is authorised by the law, as is the mandate of Article 265 of the Constitution of India. According to it, a sense of fair play by the field officers towards the taxpayers is not an act of benevolence by the field officers but it is call of duty in a socially accountable governance.

Dismissing the appeal of the revenue the Tribunal made it clear that it was not awarding any costs but put in a word of caution. It pointed out that there has to be proper mechanism to ensure that such frivolous appeals are not filed. And if that does not happen and the frivolous appeals continue to clog the system, it is only a matter of time that the Tribunal would start awarding costs, as a measure to deterrence to the officers concerned.

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[2016] 67 taxmann.com 65 (Hyderabad ) Virtusa (India)(P.) Ltd. vs. DCIT A.Y.: 2012-13 Date of Order: 4th March, 2016

Section 115JAA – Reliance by the assessee on ITR-6 format to arrive at the total liability as well as MAT credit calculations, for payment of tax, is proper. Addition made by the AO by making calculations applying his own interpretation which is not in line with ITR 6 needs to be deleted.

Facts
The assessee company filed its return of income for assessment year 2012-13 on 30.11.2012 admitting a total income of Rs. 42,87,89,690. The return of income was processed by CPC, Bangalore u/s. 143(1) raising a demand of Rs. 32,06,700. The difference in computation of tax by the assessee and the AO was on account of the Assessing Officer (AO) computing MAT credit without including surcharge and education cess while arriving at the amount of tax payable under normal provisions of the Act and u/s. 115JB of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who relying on the decision of the Tribunal in the case of Richa Global Exports Pvt. Ltd. confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held
The Tribunal held that as per section 115JAA(2A), tax credit to be allowed shall be the difference of tax paid for any assessment year under sub-section (1) of section 115JB and the amount of tax payable on his total income computed in accordance with the other provisions of the Act. The important word used is tax paid and as per the Hon’ble Apex Court decision in the case of K. Srinivasan vs. CIT [1972] 83 ITR 346 (SC), the term `tax’ includes surcharge.

The Tribunal observed that sub-section (5) of section 115JAA grants set off in respect of brought forward tax credit to the extent of the difference between tax on his total income and the tax which would have been payable u/s 115JB, as the case may be for that assessment year. It noted that the term used is `tax’ and not `income-tax’ or any other term. It held that the term `tax’ includes surcharge.

The Tribunal noted that the provisions of sub-section (5) of section 115JAA are applied in ITR-6. It observed that ITR-6 form is designed and approved by the apex body CBDT and this form is universally used by all the company assessees. It observed that these are standard forms which are expected to be followed by all the assessees. It noted that the format of ITR-6 was amended w.e.f. AY 2012-13 by CBDT. It held that the AO cannot overlook these formats and (interpret in his own method of calculating tax credit while making assessment u/s. 143(1) of the Act) proceed to calculate the MAT credit to compute assessment u/s. 143(1) applying different methods when the proper and correct method is proposed by CBDT in ITR-6. The AO is expected to follow ITR-6 format to complete the assessment u/s. 143(1) or 143(3) of the Act.

As regards the decision of the Delhi Bench of ITAT in the case of Richa Global Exports Pvt. Ltd., the Tribunal held that the decision of Apex Court in the case of K. Srinivasan may not have been brought to the knowledge of the Delhi Bench.

It noted that earlier judgments in the cases of Universal Medicare, Valmet India and Wyeth Limited were decided relying on ITR-6 as applicable in those assessment years. Applying the ITR-6 format, which was applied by the assessee as well, the Tribunal deleted the addition made.

This ground of appeal filed by the assessee was allowed.

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(2016) 156 ITD 524 (Delhi ) ITO (Exemption) v. Satyug Darshan Trust A.Y.: 2009-10. Date of Order: 4th November, 2015

Section 115BBC – Where assessee established for charitable and religious purposes receives anonymous donation without any specific direction that such donation is for any university or other educational institutions or any hospital or other medical institutions run by the assessee, then such donation cannot be taxed by invoking provisions of section 115BBC(1).

Facts
The assessee was a religious and charitable trust registered u/s. 12AA and its income was exempt u/s.11. The assessee was running Satyug Darshan Sangeet Kala Kendra and also running a school under the name and style of Satyug Darshan Vidhyalaya.

The AO noticed certain sum under the head ‘Donation Golak’. The explanation of the assessee that the said amount was less than 5 per cent of the total receipt was not accepted by the AO and the AO invoking the provisions of section 115BBC(1) taxed the said sum as the income of the assessee.

On appeal, the CIT(A) deleted the addition holding that the assessee was a charitable and religious trust and provisions of section 115BC would not be applicable to it. Aggrieved, the revenue preferred an appeal before the Tribunal.

Held
The AO while framing the original assessment had categorically stated that the activities of the assessee are charitable within the meaning of section 2(15) and there was no change in the aims and objects of the assessee as compared to the earlier years.

The provisions of section 115BBC(1) are applicable for the anonymous donations received by any university or other educational institution or any hospital or any trust or institution referred to in sub-clauses (iiiad) or (vi) or (iiiae) or (via) or (iv) or (v) of clause (23C) of section 10. However, sub-section (2) of section 115BBC carves out exceptions to provisions of section 115BBC(1).

In the present case, the assessee is established for religious and charitable purposes and the anonymous donation was received without any specific direction that such donation is for any university or other educational institution or any hospital or other medical institution run by the assessee trust and therefore, the ld. CIT(A) had rightly deleted the said addition in view of the provisions of section 115BBC(2)(b) of the Act.

In the result, the appeal filed by the department is dismissed.

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Salary – Section 17(3) – A. Y. 1994-95 – Premature termination of service in terms of service rules – Payment of sum by employer to employee voluntarily with a view to bring an end to litigation – No obligation on employer to make such payment – Payment not compensation – Not profits in lieu of salary – Not liable to tax

Arunbhai R. Naik vs. ITO; 379 ITR 511 (Guj):

The assessee was discharged from his services. Against the order of termination, he preferred an appeal to the higher authority in the company but did not succeed. In writ petition filed by the assessee the Single Judge directed reinstatement of his services. During the pendency of the appeal preferred by the employer against the order of the single judge, the assessee and the employer arrived at a settlement, in terms whereof, the amount was to be computed in the manner stated therein and was to be paid to the assessee. The assessee claimed that the amount of Rs. 3,51,308/- so received was capital receipt and was not liable to tax. The Assessing Officer did not accept the claim and the amount was added to the total income. The Tribunal held that the amount was taxable u/s. 17(3) of the Income-tax Act, 1961.

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

“i) The services of the assessee were terminated in terms of the service rules and the amount was paid only in terms of the settlement, without there being any obligation on the part of the employer to pay any further amount to the assessee with a view to bring an end to the litigation.

ii) There was obligation upon the employer to make such payment and, therefore, the amount would not take the character of compensation as envisaged u/s. 17(3)(i). The amount would, therefore, not fall within the ambit of the expression “profits in lieu of salary” as contemplated u/s. 17(3)(i). The Tribunal was, therefore, not justified in holding that the amount of Rs. 3,51,308 received by the appellant pursuant to the judgment of the High Court was income liable to tax u/s. 17(3) of the Act.”

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References and appeals to High Court – Sections 256 and 260A – Revised monetary limit of tax effect of Rs.20 lakh in CBDT’s Circular No. 21/2015 shall apply to pending references in High Courts u/s. 256 as they apply to pending appeals u/s. 260A as the objective of the Circular would stand fulfilled on application to references u/s. 256 pending in HCs where tax effect is less than Rs.20 lakh

CIT vs. Sunny Sounds (P.) Ltd.; [2016] 65 taxmann.com 162 (Bom):

By a Circular No. 21/2015, CBDT prescribed tax limit of Rs.20 lakh for filing appeals before the High Court and the said limit is applicable for pending appeals also. The Bombay High Court has clarified that the circular is equally applicable to the pending references. The High Court held as under:

“Revised monetary limit of tax effect of Rs.20 lakh in CBDT’s Circular No. 21/2015 shall apply to pending references in High Courts u/s. 256 as they apply to pending appeals u/s. 260A as the objective of the Circular would stand fulfilled on application to references u/s. 256 pending in HCs where tax effect is less than Rs.20 lakh. Accordingly, since tax effect less than Rs.20 lakh, instant reference application returned unanswered and question of law raised left open to be considered in an appropriate case.”

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Appeal – A. Y. 2006-07 – CIT(A) can consider the claim though not made in the return or the revised return

Principal CIT vs. Western India Shipyard Ltd.; 379 ITR 289 (Del):

For the A. Y. 2006-07, the Assessing Officer rejected the assessee’s claim made by way of a letter, during the assessment proceedings, for deduction of the bad debts written off by it on the ground that it could have only been made by way of revised return u/s. 139(5). CIT(A) accepted the claim and granted the deduction. The Tribunal held that the CIT(A) could have considered such claim even during the course of appellate proceedings otherwise than by way of a revised return, he did not examine whether, in fact, the assessee had taken such debts into consideration while computing its total income. For that purpose, the Tribunal remanded the matter to the Assessing Officer for a decision afresh.

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

“i) The Tribunal was right in holding that while there was a bar on the Assessing Officer entertaining such claim without a revised return being filed by the assessee, there was no such restraint on the CIT(A) during the appellate proceedings. However, while permitting such a claim he ought to have examined whether in fact the bad debts were written off by the assessee in the first instance in the accounts and then taken into consideration while computing the income.

ii) Remand of the matter to the Assessing Officer for that purpose was, therefore, justified.”

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Charitable purpose – Exemption – Sections 2(15), proviso, 11 – A. Y. 2009-10 – Object of trust to provide training to needy women in order to equip or train them in skills and make them self reliant – Nursing training provided at centre of Trust free of cost – Occasional sales or generation of funds for furthering objects but not indicative of trade, commerce or business – Proviso to section 2(15) not applicable – Trust entitled to exemption

DIT vs. Women’s India Trust; 379 ITR 506 (Bom):

The assessee-trust formed to carry out the object of education and development of natural talents of people having special skill, more particularly women. It trained them to earn while learning. It educated them in the field of catering, stitching, toy making, etc. While giving them training, it used material brought from the open market. In the process some finished product such as pickles, jam, etc., were produced and which the assessee sold through shops, exhibitions and personal contacts. The Director of Income-tax held that the assessee has shown sales to the tune of 69,72,052/-. He accordingly held that the proviso to section 2(15) is applicable and hence the assessee was not entitled to exemption. The Tribunal found that the motive of the assessee was not the generation of profit but to provide training to needy women in order to equip or train them in these fields and make them self confident and self reliant. The Tribunal took the view that occasional sales or the trusts own fund generation were for furthering the objects but not indicative of trade, commerce or business. The proviso did not apply. The Tribunal held that the assessee is entitled to exemption.

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

“i) Considering the fact that the trust had been set up and was functional for the past several decades and it had not deviated or departed from any of its stated objects and purpose, utilisation of the income, if at all generated, did not indicate the carrying on of any trade, commerce or business.

ii) The Tribunal’s view was to be upheld. The view was taken on an overall consideration and bearing in mind the functions and activities of the trust. In such circumstances it was not vitiated by any error of law apparent on the face of the record.”

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Depreciation – Plant – Pond specifically designed for rearing/breeding of the prawns had to be treated as tools of business of the assessee and the depreciation was admissible on these ponds. Judicial Discipline – Division Bench bound by a decision of a co-ordinate Bench – In case of different view, must refer the matter to a larger Bench

ACIT vs. Victory Aqua Farm Ltd. (2015) 379 ITR 335 (SC)

The
question of law that fell for consideration before the Supreme Court
was as to whether ‘natural pond’ which as per the assessee was specially
designed for rearing prawns would be treated as ‘plant’ within section
32 of the Act for the purposes of allowing depreciation thereon. The
Supreme Court, at the outset, noted that one Division Bench of the High
Court of Kerala in the case of the same assessee (271 ITR 528) had on
earlier occasion decided the aforesaid question in the negative holding
that it is not a ‘plant’. However, another Division Bench by the
impugned judgment dated 14.10.2014, (271 ITR 530) even after noticing
the earlier judgment, had not agreed with the earlier opinion and has
rendered contrary decision.

The Supreme Court, therefore, was
constrained to remark that the Division Bench which has given the
impugned judgment dated 14.10.2004 should have referred the matter to a
larger Bench as otherwise it was bound by the earlier judgment of the
coordinate Bench.

However, since appeals were filed against both
the judgments and the validity of the judgment rendered in the first
case was also questioned by the assessee, the Supreme Court was of the
view that it was necessary to decide these appeals on merits, rather
than remanding the case back to the High Court to be considered by a
larger Bench.

The Supreme Court noted that the assessee was a
company doing business of ‘Aqua Culture’. It grew prawns in specially
designed ponds. In the income tax returns filed by the assessee, the
assessee had claimed depreciation in respect of these ponds by raising a
plea that these prawn ponds were tools to the business of the assessee
and, therefore, they constituted ‘plant’ within the meaning of section
32 of the Act. The Assessing Officer disallowed the claim of the
assessee. The two Benches of the High Court took contrary views. The
Supreme Court observed that it was not in dispute that if these ponds
were ‘plants’, then they were eligible for depreciation at the rates
applicable to plant and machinery and case would be covered by the
provisions of section 32 of the Act.

According to the Supreme
Court, it was not even necessary to deal with this aspect in detail with
reference to the various judgments, inasmuch as the Supreme Court in
Commissioner of Income Tax, Karnataka vs. Karnataka Power Corporation
[247 ITR 268] had held that the building which could not be separated
from the machinery and the machinery could not work, without such
special construction had to be treated as plant.

The Supreme
Court recorded that an attempt was made by the learned counsel for the
Revenue to the effect that the pond in question was natural and not
constructed/ specially designed by the assessee. According to the
Supreme Court, it was not so. In the judgment dated 14.10.2004 of the
High Court, which had decided in favour of the assessee, the High Court
had specifically mentioned that the prawns were grown in specially
designed ponds. Further, this very contention that these were natural
ponds had been specifically rejected as not correct. Moreover, from the
order passed by the Assessing Officer, the Supreme Court found that this
was not the reason given by the Assessing Officer to reject the claim.
Therefore, finding of fact on this aspect could not be gone into at this
stage. According to the Supreme Court, the judgment dated 14.10.2004
rightly rested this case on ‘functional test’ and since the ponds were
specially designed for rearing/breeding of the prawns, they had to be
treated as tools of the business of the assessee and the depreciation
was admissible on these ponds. The Supreme Court, therefore, decided the
question in favour of the assessee and as a consequence, appeals of the
Revenue were dismissed and that of the assessee are allowed.

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Income – Accrual – As the amounts of interest earned on the share application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company, only when the trust (in favour of the general body of the applicants) terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.

CIT vs. Henkel Spic India Ltd. (2015) 379 ITR 322(SC)

The assessee, a public limited company, came out with a public issue of shares on January 29, 1992, and the issue was closed on February 3, 1992. The application money received by the company was deposited with collecting banks or the bankers of the company, to which the amounts were transferred for 46 days. The interest earned on such deposits was sought to be taxed by the Assessing Officer as income for the assessment year 1992-93. The assessee’s contention was that the application money which had been received from the applicants for the allotment of shares was required to be and was kept in a separate bank account as required by section 73(3) of the Companies Act and that the interest earned on those moneys could not have been treated as income accrued to the company even before the allotment process was completed. The allotment process was completed only in the following assessment year after receipt of approval for listing the company’s share in Madras, Delhi, Ahmedabad and Bombay Stock Exchanges such approvals having been received on April 27, 1992, May 8, 1992 and July 6, 1992 respectively.

The Assessing Officer, though he had some doubt as to when the interest was credited to the account whether before or after March 31, 1992, counted the period of 46 days from the date of deposit and on that basis, held that the amount of interest accrued for the period prior to March 31, 1992, was liable to be taxed under the head, “Income from other sources” as the assessee had not commenced business in that year.

On appeal, the Commissioner of Income-tax (Appeals) concurred with the view of the Assessing Officer and held that the interest that had accrued on the application money which had been kept in short-term deposits belonged to the assessee and was liable to be taxed in the hands of the assessee on the basis of accrual. The Tribunal, on further appeal by the assessee, upheld the assessee’s view and set aside the orders of the Commissioner as also the Assessing Officer.

On appeal by the Revenue, the High Court held that the company is not, u/s. 73, required to keep the money in a bank account which yields interest. There is, however, no prohibition in sub-section (3) or sub-section (3A) of section 73 against the money being kept in a bank account which yields interest. The interest so earned, however, cannot be regarded as an amount which is fully available to the company for its own use from the time the interest accrued, as that interest is an amount which accrues on a fund which itself is held in trust until the allotment is completed and moneys are returned to those to whom shares are not allotted. No part of this fund, either principal or interest accrued thereon, can be utilised by the company until the allotment process is completed and money repayable to those entitled to repayment has been repaid in full together with such interest as may be prescribed having regard to the length of period of delay in the return of money to them. It is only after the allotment process is completed and all moneys payable to those to whom moneys are refundable are refunded together with interest wherever interest becomes payable, the balance remaining from and out of the interest earned on the application money can be regarded as belonging to the company. The application money as also interest earned thereon will remain within a trust in favour of the general body of the applicants until the process outlined above is completed in all respects. The prohibition contained in sub-section (3A) of section 73 against the moneys standing to the credit in a separate bank account being utilised for purposes other than those mentioned in that sub-section, is absolute and the interest earned on the amounts in such separate bank account will remain a part of that separate bank account and cannot be transferred to any other account. As the amounts of interest earned on the application money to the extent to which it is not required for being paid to the applicants to whom moneys have become refundable by reason of delay in making the refund will belong to the company only when the trust terminates and it is only at that point of time, it can be stated that amount has accrued to the company as its income.

On further appeal, the Supreme Court noted that it was not in dispute that in the year 1993-94, the assessee had shown the income on account of interest received in the income tax returns and paid the tax thereon. The Supreme Court held that there was no error in the order passed by the High Court holding that the interest income accrued only in the assessment year 1993-94 and was taxable in that year only and not in the assessment year 1992-93. The Supreme Court accordingly dismissed the appeal.

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Business Income- Remission or Cessation of Trading Liability – Settlement of deferred Salestax liability by an immediate one-time payment to SICOM – Sales-tax Authorities declining to grant credit of payment made to SICOM – No remission or cessation of liability – Section 41(1) (a) not attracted.

CIT vs. S.I. Group India Ltd. (2015) 379 ITR 326 (SC)

The assessee had an industrial unit in the district of Raigad which was a notified backward area. The Government of Maharashtra issued a package scheme of incentives in 1993 by which a scheme for the deferral of sales tax dues was announced. The assessee had during the period May 1, 1999 and March 31, 2000 collected an amount of Rs.1,79,68,846 towards sales tax. Under the scheme, the amount was payable in five annual installments commencing from April 2010 and the liability was treated as an unsecured loan in the books of account of the assessee. The State Industrial and Investment Corporation of Maharashtra Limited (SICOM) offered to the assessee an option for the settlement of the deferred sales tax liability by an immediate one-time payment. The assessee paid an amount of Rs.50,44,280 to SICOM which, according to the assessee, represented by net present value as determined by SICOM. Payment was made by the assessee to SICOM on June 26, 2000. The difference between the deferred sales tax and its present value amounting to Rs.1.29 crore was treated as a capital receipt and was credited in the books of the assessee to the capital reserve account.

The Assessing Officer in the assessment order for the assessment year 2000-01 brought the aforesaid difference of Rs.1.29 crore to tax u/s. 41(1) of the Incometax Act 1961. The appeal filed by the assessee before the Commissioner (Appeals) for 2000-01 as well as the appeal for 2001-02 came to be dismissed by the appellate authority. The Tribunal dismissed the appeals filed by the assessee for these two assessment years by a common order. The assessee then moved the Tribunal in a miscellaneous application u/s. 254 which was dismissed.

The main contention of the assessee before the High Court was that the principal requirement for the applicability of section 41 of the Act is that the assessee must obtain a benefit in respect of a trading liability by way of a remission or cessation thereof. He argued that in the present case, there was no cessation of the liability of the assessee in respect of the payment of the sales tax dues and even if there was such a cessatioin, no benefit was obtained by the assessee. This contention was supported by the fact that the issue pertaining to the sales tax liability was decided by the Sales Tax Tribunal by its judgment dated February 8, 2008, and the Tribunal had specifically upheld the decision of the assessing authorities declining to grant credit to the assessee of payment which was made to State Industrial and Investment Corporation of Maharashtra Limited (SICOM) of Maharashtra. This contention is accepted by the High Court holding that the net result of the order of the Sales Tax Tribunal dated February 8, 2008, was to uphold the decision of the assessing authority declining to grant credit of the payment made by the assessee to SICOM towards discharge of the deferred sales tax liability. As a matter of fact, on July 22, 2008, a notice of demand was issued under section 38 of the Bombay Sales Tax Act of 1959 to the assessee by the Deputy Commissioner of Sales Tax, Navi Mumbai in the total amount of Rs.1,33,13,555. Having regard both to the order passed by the Sales Tax Tribunal on February 8, 2008, and the notice of demand issued on July 22, 2008, it was not possible for the court to accept the contention that there was a remission or cessation of liability. Since the record before the court did not disclose that there was a remission or cessation of liability, one of the requirements spelt out for the applicability of section 41(1)(a) had not been fulfilled in the facts of the present case.

According to the Supreme Court, the aforesaid facts, clearly demonstrated that the assessee had not been granted the benefit of the said cession for the assessment years in question. According to the Supreme Court, the High Court had rightly held that one of the requirements for the applicability of section 41(1)(a) of the Act had not been fulfilled in the present case.

The Supreme Court did not find any error in the order of the High Court and the appeals were accordingly dismissed.

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